Question 1

Which of the following best describes 'adverse selection' in the context of health insurance?

Accepted Answer

It is a problem that arises before a contract is signed, when individuals with higher risk are more likely to purchase insurance because they know their own risk level.

Question 2

A used car market suffers from asymmetric information. Sellers know whether their cars are 'lemons' or 'good,' but buyers cannot distinguish. What is the term for this situation?

Accepted Answer

Asymmetric information

Question 3

Suppose an insurance company offers two car insurance plans: Plan A with a $$0 deductible at 200/$$month, and Plan B with a $$2,000 deductible at 50/$$month. High-risk drivers choose Plan A, while low-risk drivers choose Plan B. What problem does this illustrate?

Accepted Answer

Adverse selection

Question 4

After purchasing comprehensive health insurance, a person begins engaging in riskier activities, knowing their medical bills will be covered. This is an example of:

Accepted Answer

Moral hazard

Question 5

Which of the following is an example of signaling in the job market?

Accepted Answer

A job applicant earns a college degree to demonstrate their ability.

Question 6

A warranty is considered a credible signal of product quality if:

Accepted Answer

It is costly for sellers of low-quality products to offer, but cheap for sellers of high-quality products.

Question 7

Which of the following best describes screening in the context of asymmetric information?

Accepted Answer

The uninformed party designs mechanisms to elicit information from the informed party.

Question 8

If buyers cannot distinguish between high-quality and low-quality goods, what is the likely effect on consumer and producer surplus?

Accepted Answer

Both consumer and producer surplus decrease.

Question 9

Suppose the government implements universal healthcare, requiring everyone to participate. What is the effect on adverse selection?

Accepted Answer

Adverse selection is eliminated because healthy individuals cannot opt out.

Question 10

Which of the following scenarios best illustrates moral hazard?

Accepted Answer

A person with fire insurance becomes less careful about fire safety.

Question 11

A health insurance company requires applicants to take a medical exam before issuing a policy. This is an example of:

Accepted Answer

Screening

Question 12

Which of the following equations best represents the condition for a warranty to be a credible signal?

Accepted Answer

$$C_{lemon} \u003e P_{warranty}$$ and $$C_{good} \u003c P_{warranty}$$

Question 13

Which of the following is NOT a way to address asymmetric information in markets?

Accepted Answer

Allowing only high-risk individuals to participate

Question 14

If a market for used electronics suffers from adverse selection, what is a likely outcome?

Accepted Answer

Low-quality products drive out high-quality products.

Question 15

Which of the following best describes the difference between adverse selection and moral hazard?

Accepted Answer

Adverse selection is about hidden characteristics before a contract; moral hazard is about hidden actions after a contract.

Question 16

A student earns a degree to show employers their ability. This is an example of:

Accepted Answer

Signaling

Question 17

Which of the following is most likely to reduce the problem of adverse selection in the health insurance market?

Accepted Answer

Requiring all individuals to purchase insurance

Question 18

If an employer uses a test to determine the skills of job applicants, this is an example of:

Accepted Answer

Screening

Question 19

Which of the following is a real-world example of moral hazard?

Accepted Answer

A bank makes riskier loans after receiving government deposit insurance.

Question 20

If the cost to fix a 'lemon' is $$500 and the cost to fix a 'good car' is 10$$, and a warranty costs $100 to offer, which seller is more likely to offer the warranty?

Accepted Answer

Only good car sellers

Asymmetric Information, Adverse Selection, and Moral Hazard in Microeconomics

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