Question 1

Which of the following best describes the concept of 'signaling' in the context of asymmetric information?

Accepted Answer

An action by the informed party to reveal private information to the uninformed party.

Question 2

In the context of health insurance, which of the following is an example of adverse selection?

Accepted Answer

Individuals with a higher risk of illness are more likely to purchase insurance than those with lower risk.

Question 3

Which of the following is an example of screening in the insurance market?

Accepted Answer

An insurance company requires a medical examination before issuing a policy.

Question 4

Moral hazard occurs when:

Accepted Answer

Individuals change their behavior after becoming insured, taking on more risk.

Question 5

Suppose an insurance company offers the same premium to all applicants, regardless of health status. What problem is most likely to arise?

Accepted Answer

Adverse selection

Question 6

Which of the following is a real-world example of signaling?

Accepted Answer

A job applicant obtains a college degree to demonstrate ability to potential employers.

Question 7

If an insurance company requires higher premiums from smokers than non-smokers, this is an example of:

Accepted Answer

Screening

Question 8

Which of the following best describes adverse selection?

Accepted Answer

A situation where individuals with higher risk are more likely to participate in a market.

Question 9

A car insurance company offers discounts to drivers with no accidents in the past five years. This is an example of:

Accepted Answer

Screening

Question 10

Which of the following equations best represents the expected payout for an insurance company facing adverse selection?

Accepted Answer

$$E[P] = p_H L_H + p_L L_L$$

Question 11

If a health insurance company cannot distinguish between high-risk and low-risk applicants, what is a likely outcome?

Accepted Answer

Premiums will be set too high for low-risk individuals, causing them to leave the market.

Question 12

Which of the following is NOT a solution to informational problems in insurance markets?

Accepted Answer

Adverse selection

Question 13

A company offers a warranty on its products to show confidence in their quality. This is an example of:

Accepted Answer

Signaling

Question 14

Which of the following best describes the difference between signaling and screening?

Accepted Answer

Signaling is done by the informed party; screening is done by the uninformed party.

Question 15

Suppose a health insurance company observes that after purchasing insurance, clients visit doctors more frequently. This is an example of:

Accepted Answer

Moral hazard

Solutions to Informational Problems in Microeconomics: Signaling and Screening

Study Guide - Practice Questions