Question 1

People with hidden health problems are more likely to buy health insurance than are other people. This is an example of

Accepted Answer

This is an example of adverse selection because the people who are more likely to purchase health insurance are those with hidden health problems, which increases the risk pool for insurance companies and therefore raises the cost of premiums for all individuals. The healthier individuals are more likely to opt out of purchasing health insurance, resulting in a pool of insured individuals that are at a higher risk of needing medical attention.

Question 2

A brand of wine is priced at only $5 per bottle, far below the market price of most high quality wines. Before any reputation exists for the wine, consumers buy very little of this inexpensive wine because they interpret the low price to mean that the wine is of poor quality. The company decides to change the label on the wine to show that it has won awards for quality. This label change is an example of

Accepted Answer

The label change is an example of signaling, as it is an attempt to convey information about the quality of the wine to consumers who may have initially been deterred by its low price. Screening and selecting refer to the process of choosing individuals or products based on certain criteria, and are not applicable in this scenario.

Question 3

"Signaling" refers to actions by an informed party for the sole purpose of

Accepted Answer

Signaling is when an informed party reveals private information in a credible way, often to convince uninformed parties of their capabilities or intentions.

Question 4

A home has been on the market for an extended amount of time without much interest from buyers. The sellers decide to purchase and include a home warranty insuring against major defects with the home. The warranty is an example of a(n)

Accepted Answer

The purchase and inclusion of a home warranty can be considered a signal to potential buyers that the sellers are confident in the condition of the home and are willing to provide extra assurance. This may increase interest from buyers who were previously hesitant due to concerns about the home's condition.

Question 5

The classic example of adverse selection is the

Accepted Answer

The market for used cars is the classic example of adverse selection because the seller of the car has more information about its condition than the buyer. This information asymmetry can result in the buyer paying more for a car that is in worse condition than they believed.

Question 6

Which of the following is not an example of signaling?

Accepted Answer

The answer of Which of the following is not an...

Question 7

Budweiser typically purchases several 30 second advertising spots during the Super Bowl at a very high cost. Miller Brewing Co. typically does not advertise during the Super Bowl. Which of the following is correct?

Accepted Answer

Budweiser chooses to signal during the Super Bowl, while Miller Brewing Co. does not. This choice is likely based on Budweiser's marketing strategy and the belief that the Super Bowl audience is a valuable target market. Miller Brewing Co. may have a different strategy or believe that advertising during the Super Bowl is not worth the high cost. Option C is incorrect as there is no information to suggest that Miller Brewing Co. believes it has a superior product. Option D is also incorrect as it assumes that Budweiser's advertisements convey no information about the quality of its products, which may not necessarily be true.

Question 8

Which of the following is not an example of signaling?

Accepted Answer

Screening is a method used to select individuals with specific abilities or qualifications for a job or task. It does not involve signaling, which is the process of conveying information about one's abilities or qualities through an action, behavior, or attribute.

Question 9

The Latin term caveat emptor, meaning "let the buyer beware," brings to mind the problem of

Accepted Answer

The term caveat emptor refers to the idea that it is the responsibility of the buyer to be aware and cautious of the risks when purchasing goods or services. This highlights the issue of adverse selection, which occurs when one party has more information about the quality or risk of a transaction than the other party. The buyer may not be fully informed about the product they are purchasing and may end up with a lower quality or undesirable product.

Question 10

Scott's Painting Company paints houses. Since Scott's business does not have the name recognition of some of the bigger painting companies, Scott advertises a "Five-Year Money Back Guarantee" to indicate to buyers that his service is of high quality. This guarantee is an example of

Accepted Answer

The "Five-Year Money Back Guarantee" is a signaling mechanism used by Scott to convey to potential buyers that his service is of high quality.

Question 11

A firm with a very good product

Accepted Answer

A firm with a very good product has more to gain by signaling (advertising) than does a firm with an inferior product. This is because they have the potential to attract more customers and make more sales by effectively communicating their product's superior quality through advertising.

Question 12

Which of the following is an example of signaling?

Accepted Answer

Buying Chaquila chocolates and taking her to dinner at her favorite restaurant are examples of signaling, as they are actions taken by Marcus to communicate his love and commitment to her before proposing marriage. Options A, B, and C are not examples of signaling as they are requirements or precautions taken by third parties (auto mechanic, doctor, firm) before taking an action (buying car, writing policy, hiring).

Question 13

When the buyer knows less than the seller about the characteristics of the good being sold, there is

Accepted Answer

An adverse selection problem occurs when one party has more information than the other party, which can lead to the selection of inferior goods or services. In this case, the buyer knows less than the seller about the characteristics of the good being sold, which can lead to the selection of goods that do not meet their needs or expectations.

Question 14

A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

Accepted Answer

The gift can be seen as a signal of how much the woman cares for her boyfriend. Option A, moral hazard problem, refers to a situation where a person takes greater risks or behaves differently because they are protected from the consequences of their actions. This does not apply in this scenario. Option B, screening device, refers to a method used to separate higher-quality goods or individuals from lower-quality ones. While gift-giving can be a way to learn more about someone's tastes and preferences, it is not necessarily a screening device in this context. Therefore, option C is the best choice.

Question 15

Which of the following is an example of signaling?

Accepted Answer

All of the options provided involve some form of signaling.

Option A involves signaling one's educational background and affiliation with a prestigious university by including it on a resume.

Option B involves signaling that a product or service has been featured on television, which can convey a sense of popularity and legitimacy to potential customers.

Option C involves signaling that a university is recognized and authorized to provide an accredited degree, which can provide assurance to prospective students and employers about the quality of education provided by the institution.

Question 16

Which of the following events best exemplifies the concept of signaling?

Accepted Answer

The answer of Which of the following events best exemplifies...

Question 17

The adverse selection problem is a likely explanation for the fact that

Accepted Answer

Adverse selection refers to the tendency for individuals who are higher risk to be more likely to purchase insurance, while lower-risk individuals are less likely to purchase it. In the case of health insurance, individuals in average health may be discouraged from buying health insurance if they believe the cost of the insurance is higher than their expected medical expenses, and therefore only those who are in poor health or have high risk factors would purchase it, leading to adverse selection.

Question 18

Severe adverse-selection problems may result in

Accepted Answer

Severe adverse-selection problems in the market for used cars may result in too few good used cars being offered for sale. This is because buyers are only willing to pay a price that reflects the average quality of the cars on the market, which means that sellers of high-quality cars will not be able to get a price that reflects their car's actual value. This creates a situation where only low-quality cars are available for sale, since sellers of higher-quality cars will choose not to sell their cars in this market.

Question 19

Effective signals

Accepted Answer

Effective signals are those that convey useful information from informed parties (usually sellers) to uninformed parties (usually buyers). These signals can help to reduce uncertainty and increase efficiency in markets. The cost of signaling can be borne by either party, but effective signals should be designed to impose little or no cost on the signaler. Information asymmetry, where one party has more information than the other, can make it difficult to convey accurate signals, but there are mechanisms, such as warranties or third-party certification, that can help to overcome this problem. Effective signals can raise the quantity sold, but may also increase the price that sellers receive if they are able to differentiate their products from competitors.

Question 20

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

Accepted Answer

A limited warranty is a signal of the quality of the used car being sold, as the seller is willing to assume some responsibility for any problems that may arise after the sale.

Quiz 22: Frontiers of Microeconomics

People with hidden health problems are more likely to buy health insurance than are other people. This is an example of

"Signaling" refers to actions by an informed party for the sole purpose of

A home has been on the market for an extended amount of time without much interest from buyers. The sellers decide to purchase and include a home warranty insuring against major defects with the home. The warranty is an example of a(n)

The classic example of adverse selection is the

Which of the following is not an example of signaling?

Budweiser typically purchases several 30 second advertising spots during the Super Bowl at a very high cost. Miller Brewing Co. typically does not advertise during the Super Bowl. Which of the following is correct?

Which of the following is not an example of signaling?

The Latin term caveat emptor, meaning "let the buyer beware," brings to mind the problem of

Scott's Painting Company paints houses. Since Scott's business does not have the name recognition of some of the bigger painting companies, Scott advertises a "Five-Year Money Back Guarantee" to indicate to buyers that his service is of high quality. This guarantee is an example of

A firm with a very good product

Which of the following is an example of signaling?

When the buyer knows less than the seller about the characteristics of the good being sold, there is

A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

Which of the following is an example of signaling?

Which of the following events best exemplifies the concept of signaling?

The adverse selection problem is a likely explanation for the fact that

Severe adverse-selection problems may result in

Effective signals

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)