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Economics
Chapter 10
| Question | Answer |
|---|---|
| What is moral hazard? | It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off |
| Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured. In other words, the automobile insurance market is subject to | moral hazard |
| She is not supposed to use the Wi-Fi connection provided by the company. However, she often uses the Wi-Fi to access these Web sites because her browsing activities are not monitored by her employer. This is an example of ________. | moral hazard |
| When people who buy insurance change their behavior after the purchase because they are protected from loss by the insurance, the insurance market is said to face the problem of | moral hazard |
| What is the principal-agent problem | It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them |
| In a market with asymmetric information, ________. | buyers and sellers have different information about the good being traded |
| Martha used to pay for her expenses with her own hard-earned money. She always tried to spend as little as she could. However, she started spending more when she received a scholarship. This behavior is an example of ________. | moral hazard |
| Joseph starts driving with much less care after buying car insurance. His behavior is an example of ________. | moral hazard |
| More people started building houses in earthquake-prone regions when the government of Polonia launched an insurance program for houses in this region. This is an example of ________. | moral hazard |
| Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy? | the individual who is applying for the health insurance policy |
| Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should | offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon |
| Information asymmetry in a market can lead to ________. | a market failure |
| What is likely to happen in a used-car market if the buyers feel that the best they can do is to buy a lemon? | The entire market shuts down |
| An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better than the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above? | adverse selection |
| Which of the following is an example of adverse selection? | A customer buying a defective appliance from a used goods market |
| ________ occurs when one agent in a transaction knows about a hidden characteristic of a good | Adverse selection |
| Adverse selection occurs in the market for used cars because used car buyers | have less information than used car sellers |
| Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at this price. Term? | adverse selection |
| What is adverse selection | It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction. |
| In the market for health​ insurance, asymmetric information problems arise because | buyers of health insurance policies always know more about the state of their health than do the insurance companies |
| ________ discourage low-risk individuals from seeking health insurance | High premiums |
| One reason why adverse selection problems arise in health insurance markets is that | sick people are more likely to want health insurance than healthy people |
| State provision of free healthcare may encourage individuals to engage in unhealthy behavior, such as excessive smoking or consumption of alcohol. This is an example of ________. | moral hazard |
| A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem | True |
| Adverse selection is a situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction | True |
| If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of | the principle-agent problem |
| Which of the following helps in reducing the problem of adverse selection in health insurance markets | Insurance mandates |
| Which of the following is a problem that arises in a health insurance market | A disproportionate number of high-risk individuals are attracted to buy insurance |
| Health insurance companies impose deductibles on policies and co-payments on claims | to reduce moral hazard problems |
| Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of inferior quality and it is often impossible to differentiate between a good-quality phone and a poor-quality phone. Problem? | Adverse Selection |
| Which of the following is likely to be used as a signal in the job market? | The degree obtained by the applicant |
| Which of the following is a market-based solution to the problem of adverse selection? | Signaling |
| In order to be useful as a signal in a market with information asymmetry, the signal must be ________. | Difficult to obtain |
| Because warranties are potentially ________, low-quality goods are ________ to have warranties | very expensive; less likely |
| Which of the following is an example of signaling in a market with asymmetric information | Certification of used cars by third parties |
| Martha used to pay for her expenses with her own hard-earned money. She always tried to spend as little as she could. However, she started spending more when she received a scholarship. This behavior is an example of ________. | moral hazard |
| The function of the agent in the principal-agent relationship is | to perform tasks for the principal |
| Signaling takes place in markets with ________. | asymmetric information |
| A warranty is an example of ________. | signaling |
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