Question 1

In the used car market with no warranties, the equilibrium is a ________ and there is ________.

Accepted Answer

In the used car market with no warranties, the equilibrium is a pooling equilibrium where both good quality and low quality (lemons) cars are sold at the same price. This creates inefficiency as the buyers cannot distinguish between the quality of the cars and end up paying the same price for both good and bad quality cars. Additionally, due to the presence of lemons, there is an over-supply of low quality cars in the market. Therefore, option B is the correct answer.

Question 2

In the used car market with warranties, the equilibrium is a ________ and the lemons problem is ________.

Accepted Answer

The answer of In the used car market with warranties,...

Question 3

If Sally drives less carefully after buying auto insurance, she illustrates

Accepted Answer

Moral hazard is the phenomenon where insurance leads to increased risk-taking behavior by the insured. Since Sally is driving less carefully after buying insurance, she is exhibiting moral hazard.

Question 4

Moral hazard is

Accepted Answer

Moral hazard is when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. This occurs because the party does not bear the full consequences of his or her actions, as the other party will incur some or all of the costs.

Question 5

Asymmetric information means that

Accepted Answer

Asymmetric information means that either the buyer has information that the seller does not have or the seller has information that the buyer does not have. In other words, there is an imbalance in the amount of information each party has and this can lead to market failure or inefficiencies.

Question 6

Because Don has health insurance, he is more likely to see the doctor when he has a cold.This is an example of

Accepted Answer

This scenario demonstrates moral hazard, which is when someone with insurance alters their behavior and takes more risks because they know they are protected. In this case, Don is more likely to visit the doctor because he has insurance and does not have to worry about the cost. Adverse selection refers to one party in a transaction having more information than the other, which does not apply in this scenario. The lemons problem refers to the market for used cars and the difficulty buyers have in determining the quality of a car. Private information also does not apply here.

Question 7

In the insurance market, private information

Accepted Answer

Private information in the insurance market creates both moral hazard and adverse selection. Moral hazard occurs because individuals may take more risks or engage in more dangerous behavior knowing they are covered by insurance. Adverse selection occurs because individuals who know they are at a higher risk for needing insurance are more likely to purchase it, leading to a pool of insured individuals who are on average at higher risk. These factors make it difficult for insurance companies to accurately price their policies and can potentially drive up costs for both the insurer and insured.

Question 8

In the insurance market, moral hazard and adverse selection are the result of

Accepted Answer

Moral hazard and adverse selection both result from private information. Moral hazard occurs when individuals change their behavior (take more risks) after getting insurance because they know that they are protected. Adverse selection occurs when individuals with higher risks are more likely to buy insurance because they know they are at greater financial risk if they don't have insurance. Both of these situations result from individuals having private information that the insurance company does not have.

Question 9

In the used car market with warranties, the equilibrium is a ________ and there is ________.

Accepted Answer

The answer of In the used car market with warranties,...

Question 10

JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing.This guarantee is an example of

Accepted Answer

JCPenney's guarantee to refund a customer's money if the customer returns poorly made clothing is an example of signaling. JCPenney is signaling to their customers that they stand behind the quality of their clothing by offering a guarantee. This can attract customers who value quality and are willing to pay more for it, while deterring customers who are only looking for the cheapest option.

Question 11

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

Accepted Answer

The drivers are most likely to have private information about their driving history, habits, and likelihood of accidents, which can lead to adverse selection in the auto insurance market. The insurance company may have access to some of this information, but the drivers have more direct and personal knowledge. The government agency that regulates insurance companies may have some information about industry trends, but they would not have individual-level information about drivers.

Question 12

The idea of an insurance company "pooling" the risk means that

Accepted Answer

Pooling the risk means spreading the risk over a large population, which allows the insurance company to collect premiums from many individuals and pay out claims to the few who experience a loss. This helps to mitigate the financial impact of unexpected events for individuals and society as a whole.

Question 13

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

Accepted Answer

Adverse selection occurs when individuals with higher risk are more likely to purchase insurance, creating an asymmetry of information between the insurer and the insured. In this case, drivers who know they are risky are more likely to purchase auto insurance, indicating adverse selection.

Question 14

If buyers cannot assess the quality of used cars and there are no warranties,

Accepted Answer

Without the ability to assess the quality of used cars and without warranties, buyers cannot distinguish between good and bad cars. This leads to a situation known as adverse selection, where only lemons (bad cars) are sold because the seller knows that they cannot get a higher price for a good car due to the information asymmetry. Therefore, only lemons are sold.

Question 15

In the used car market with warranties, the market for lemons (poor quality used cars)is ________ and the market for good cars is ________.

Accepted Answer

The answer of In the used car market with warranties,...

Question 16

In the used car market, with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

Accepted Answer

In a pooling equilibrium, the market cannot differentiate between good cars and lemons, so they are priced the same. In a separating equilibrium, the market can differentiate between them, so lemons are priced lower than good used cars.

Question 17

In an insurance market, moral hazard exists chiefly because of

Accepted Answer

Moral hazard in insurance markets arises primarily due to private information, where one party has more or better information than the other, leading to behaviors that can increase risks.

Question 18

Dan, age 19, may have trouble buying auto insurance at a low price because insurance companies

Accepted Answer

Insurance companies may fear that Dan has private information that he is a risky driver, which would make him more costly to insure. As a result, they may charge him a higher premium or even refuse to insure him.

Question 19

The lemons problem in the used car market is that

Accepted Answer

The answer of The lemons problem in the used car...

Question 20

In the market for automobile insurance, moral hazard implies that

Accepted Answer

Moral hazard refers to the increased risks taken by those who are insured, knowing that they will not bear the full cost of the negative consequences of their actions. This implies that those who are insured might take greater risks, which increases the likelihood of accidents and claims, and can result in higher premiums for all insured drivers.

Quiz 12: Markets With Private Information

In the used car market with no warranties, the equilibrium is a and there is .

In the used car market with warranties, the equilibrium is a and the lemons problem is .

If Sally drives less carefully after buying auto insurance, she illustrates

Moral hazard is

Asymmetric information means that

Because Don has health insurance, he is more likely to see the doctor when he has a cold.This is an example of

In the insurance market, private information

In the insurance market, moral hazard and adverse selection are the result of

In the used car market with warranties, the equilibrium is a and there is .

JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing.This guarantee is an example of

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

The idea of an insurance company "pooling" the risk means that

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

If buyers cannot assess the quality of used cars and there are no warranties,

In the used car market with warranties, the market for lemons (poor quality used cars) is and the market for good cars is .

In the used car market, with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.

In an insurance market, moral hazard exists chiefly because of

Dan, age 19, may have trouble buying auto insurance at a low price because insurance companies

The lemons problem in the used car market is that

In the market for automobile insurance, moral hazard implies that

Quiz 12: Markets With Private Information

In the used car market with no warranties, the equilibrium is a ________ and there is ________.

In the used car market with warranties, the equilibrium is a ________ and the lemons problem is ________.

If Sally drives less carefully after buying auto insurance, she illustrates

Moral hazard is

Asymmetric information means that

Because Don has health insurance, he is more likely to see the doctor when he has a cold.This is an example of

In the insurance market, private information

In the insurance market, moral hazard and adverse selection are the result of

In the used car market with warranties, the equilibrium is a ________ and there is ________.

JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing.This guarantee is an example of

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

The idea of an insurance company "pooling" the risk means that

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

If buyers cannot assess the quality of used cars and there are no warranties,

In the used car market with warranties, the market for lemons (poor quality used cars) is ________ and the market for good cars is ________.

In the used car market, with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

In an insurance market, moral hazard exists chiefly because of

Dan, age 19, may have trouble buying auto insurance at a low price because insurance companies

The lemons problem in the used car market is that

In the market for automobile insurance, moral hazard implies that

In the used car market with no warranties, the equilibrium is a and there is .

In the used car market with warranties, the equilibrium is a and the lemons problem is .

In the used car market with warranties, the equilibrium is a and there is .

In the used car market with warranties, the market for lemons (poor quality used cars) is and the market for good cars is .

In the used car market, with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.