1) A key difficulty facing insurance companies is that people know more about their health than do insurance companies, and that those people who are seriously ill are the most likely to want to obtain health insurance. What is this phenomenon called? A) moral hazard B) economic irrationality C) asymmetric information D) adverse selection
1) A key difficulty facing insurance companies is that people know more about their health than do insurance companies, and that those people who are seriously ill are the most likely to want to obtain health insurance. What is this phenomenon called?
A) moral hazard
B) economic irrationality
C) asymmetric information
D) adverse selection
2) An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?
A) moral hazard
B) adverse selection
C) asymmetric information
D) economic irrationality
3) The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is
A) inefficient market hypothesis.
B) moral hazard.
C) information disparity.
D) asymmetric information.
4) 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?
A) the company that issues the health insurance policy
B) the individual who is applying for the health insurance policy
C) the employer of the individual who is trying to purchase the health insurance policy
D) All parties in the health insurance market have access to the same level of information.
5) What is adverse selection?
A) It refers to the private, self-interested actions people that people pursue, which when taken collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the other party to the transaction.
6) Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should
A) offer to pay a price equal to the most she would pay for a good car.
B) offer to pay a price equal to the most she would pay for a lemon.
C) 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.
D) save up and buy a new car.
7) Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in
A) an equal proportion of a good cars and lemons being sold in an
B) a larger proportion of good cars being sold and consequently,
C) a larger proportion of lemons being sold and consequently,
D) an equal proportion of good cars and lemons being sold in an inefficient market.
8) Consider a used car market in which half the cars are good and half are bad (lemons). 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 the lemons at this price. What is the term used to describe this situation?
A) moral hazard
B) adverse selection
C) an efficient market
D) economic irrationality
9) Suppose that in a market for used cars, there are good used cars and bad used cars (lemons). Consumers are willing to pay as much as $6,000 for a good used car but only $1,000 for a lemon. Sellers of good used cars value their cars at $5,000 each and sellers of lemons value their cars at $800 each. Buyers cannot tell if a used car is reliable or is a lemon. Based on this information, what is the likely outcome in the market for used cars?
A) Sellers of good used cars will drop out of the market.
B) Sellers of good used cars will incur losses.
C) Sellers of lemons will drop out of the market.
D) Used cars will sell for $3,000.
10) Adverse selection occurs in the market for used cars because used car buyers
A) have more information than used car sellers.
B) have less information than used car sellers.
C) have less incentive to maintain the value of their cars than new car buyers.
D) tend to have more accidents than new car buyers.
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