Deck 10: Information

Question 1

People _____ have access to perfectly complete information.

A)always
B)rarely
C)never
D)often

Answer 1

rarely

Question 2

When the parties to a transaction have access to different information:

A)markets will be efficient.
B)parties will voluntarily share information truthfully in order to achieve efficiency.
C)some markets may fail to exist.
D)parties will blindly trust one another.

Answer 2

some markets may fail to exist.

Question 3

Asymmetric information in a transaction can result in:

A)moral hazard.
B)adverse selection.
C)a lemons problem.
D)All of these can result from asymmetric information.

Answer 3

All of these can result from asymmetric information.

Question 4

When one person knows more than another, it creates a situation:

A)in which the transaction is always regretted.
B)called information asymmetry.
C)in which the transaction will not occur.
D)called information dominance.

Question 5

When a party to a transaction lacks relevant information:no transactions will take place.other parties will voluntarily share the missing information truthfully.the party lacking information will postpone the transaction until full information is obtained.the market outcome will not be efficient.

A)I and IV only
B)II and III only
C)IV only
D)III only

Question 6

Which of the following is an effect of adverse selection?

A)Buyers may gain surplus they would have lost with complete information.
B)Sellers may gain surplus they would have lost with complete information.
C)Buyers and sellers may lose surplus they would have gained with more complete information.
D)Buyers may lose surplus, and sellers may gain surplus, because of the information imbalance.

Question 7

An important type of information asymmetry is:

A)adverse selection.
B)ethical constraint.
C)advantage imbalance.
D)information hazard.

Question 8

Adverse selection arises when:

A)the wants of both parties are aligned with one another.
B)buyers and sellers have different information about the quality of a good or the riskiness of a situation.
C)buyers and sellers with the same information about the quality of a good or the riskiness of a situation seek each other out.
D)people engage in riskier behaviors because they have incomplete information.

Question 9

Problems in a market are most likely to arise if:

A)all parties have complete information.
B)all parties have good enough information to make acceptable choices.
C)one party involved in a transaction knows more than another party.
D)all parties involved in a transaction lack the same information.

Question 10

Which of the following is an example of a transaction made with incomplete information?

A)Joe buys a puppy in hopes that the puppy will be his hiking companion for the next 20 years.
B)Alex buys house insurance and has never filed a claim.
C)Mike saves his money by putting it in a mutual fund.
D)All of these are examples of transactions made with incomplete information.

Question 11

Which of the following is an example of a transaction made with incomplete information?

A)Sue purchased a lottery ticket that did not win her any money.
B)Larry moved to a new apartment but later decided it was too small for his needs.
C)Tim bought products from a seller that knew the products were defective.
D)All of these are examples of incomplete information.

Question 12

Imbalances in information can cause problems between:

A)buyers and sellers.
B)lenders and borrowers.
C)employers and employees.
D)All of these are true.

Question 13

When people are fully informed about the choices that they and other relevant economic actors face, we say they:

A)have complete information.
B)will always try to hide that information to gain advantage.
C)will always be willing to go through with the transaction.
D)have relevant information.

Question 14

Information asymmetry is a situation in which:

A)people have good enough information to make acceptable choices, but not complete information.
B)complete information is not possible to obtain.
C)the lack of information in a market prevents it from existing.
D)one person knows more than another.

Question 15

Which of the following is a case of asymmetric information?

A)The buyer and seller of a used car don't know how long the car will operate.
B)A provider of health insurance does not know whether a specific client is a smoker or not.
C)Neither you nor your home insurance company has perfect information about whether a flood will occur.
D)None of these are examples of asymmetric information.

Question 16

People _____ have _____ when making choices.

A)often; good enough information
B)always; enough information
C)always; access to complete information
D)never; access to complete information

Question 17

Information asymmetry becomes a problem when:

A)a buyer and seller have aligned incentives.
B)a buyer and seller have opposing incentives.
C)a market is highly efficient.
D)a market is highly inefficient.

Question 18

Information asymmetry is present when:

A)one person knows more than another.
B)there is risk in an exchange.
C)both parties are lacking the same information.
D)All of these statements are true.

Question 19

Information asymmetry is not a problem when:

A)the wants of both parties are aligned with one another.
B)the wants of both parties are opposed to one another.
C)the constraints of both parties are identical.
D)both parties lack the same information.

Question 20

Which of the following statements about the role of information in markets is true?

A)Situations involving incomplete information are always problems of asymmetric information.
B)Asymmetric information problems cannot be overcome without government intervention.
C)In the presence of asymmetric information, one party always uses the other party's lack of information to their advantage.
D)Asymmetric information becomes a problem when the parties involved have misaligned incentives.

Question 21

The problem that arises in the used car market can be alleviated by:

A)providing buyers with more complete information on the condition of a used car.
B)offering warranties to buyers.
C)having third parties certify the condition of a used car.
D)All of these statements are true.

Question 22

Adverse selection:

A)relates to actions and occurs after parties have voluntarily entered into an agreement.
B)is always present when moral hazard arises.
C)relates to unobserved characteristics of people or goods and occurs before parties have entered into an agreement.
D)All of these statements are true.

Question 23

The "lemons" problem is used to explain the concept of:

A)complete information.
B)adverse selection.
C)moral hazard.
D)produce markets.

Question 24

The presence of adverse selection in a market causes:

A)some transactions to fail to take place.
B)a deadweight loss.
C)market failure.
D)All of these are true.

Question 25

Because buyers lack information about used cars for sale:

A)buyers will often offer less than what a car is worth, since there is a chance the car is a lemon.
B)sellers of well-functioning used cars will be more likely to enter the market.
C)the market will eventually become saturated with high-quality cars.
D)All of these are true.

Question 26

Which of the following markets is subject to adverse selection?

A)The used car market
B)The insurance market
C)The financial market
D)All of these markets are subject to adverse selection.

Question 27

Suppose there is a used car market with 1,000 cars for sale. Buyers know that 500 of the used cars are of poor quality and are worth only $500, while the other 500 used cars are of good quality and are worth $1,500. However, buyers do not know which individual cars are of poor quality or good quality. The seller of a car knows the worth of the car. Which of the following statements is true?In equilibrium, only poor quality cars will be sold.The asymmetric information in this market will cause adverse selection.The equilibrium price of a used car will be $500.

A)I only
B)I and III only
C)II and III only
D)I, II, and III

Question 28

Because the seller of a used car has more information than the buyer, the problem of _____ occurs.

A)moral hazard
B)information overload
C)adverse selection
D)bargaining imbalance

Question 29

An example of a market subject to adverse selection would be:

A)the video game market.
B)the new appliance market.
C)the used car market.
D)uniform commodity markets, like crude oil.

Question 30

Which of the following is a classic example of adverse selection?

A)People who have health insurance taking poor care of their health.
B)Workers who put in less effort when their effort isn't closely monitored.
C)The imbalance of information that exists between used car buyers and sellers.
D)Drivers with insurance who tend to drive more recklessly.

Question 31

Adverse selection occurs in insurance markets because:

A)the seller has more information than the buyer.
B)the buyer has more information than the seller.
C)both the buyer and the seller have incomplete information.
D)Any of these could be the cause of adverse selection in insurance market.

Question 32

Adverse selection is a problem that arises _____ the parties have entered into an agreement.

A)before
B)after
C)either before or after
D)Adverse selection is not related to an agreement between parties.

Question 33

The presence of adverse selection:

A)reduces the efficiency of markets.
B)increases the efficiency of markets.
C)does not affect the efficiency of markets.
D)makes the buyer less efficient and the seller more efficient.

Question 34

Less skilled drivers are more likely to buy auto insurance with lower deductibles. Economists use this as an example of:

A)adverse selection.
B)moral hazard.
C)asymmetric selection.
D)information optimization.

Question 35

Markets are more likely to be subject to adverse selection problems when:

A)information is easily available to consumers and sellers.
B)there is an imbalance of information between buyers and sellers.
C)the goods sold in the market are highly uniform in quality.
D)the market relies on independent certifiers of quality.

Question 36

Adverse selection:

A)results from unobserved characteristics of people or commodities.
B)relates to the actions of people.
C)occurs after parties have entered into an agreement.
D)All of these statements are true.

Question 37

Which of the following is an effect of adverse selection?

A)Some transactions do not take place, which would have occurred with complete information.
B)Too many transactions of low value occur.
C)Transactions that would not have occurred with complete information now occur.
D)None of these statements are true.

Question 38

The used car market:

A)exemplifies the "lemons" problem.
B)displays asymmetric information.
C)is subject to the problem of adverse selection.
D)All of these are true.

Question 39

Suppose there is a used car market with 500 cars for sale. Buyers know that 250 of the used cars are of poor quality and are worth only $1,000, while the other 250 used cars are of good quality and are worth $3,000. However, buyers do not know which individual cars are of poor quality or good quality. The seller of a car knows the worth of the car. Which of the following statements is true?The equilibrium price of a used car will be $2,000.We expect moral hazard to occur in this market.In equilibrium, only poor quality cars will be sold.

A)I only
B)I and III only
C)III only
D)I and II only

Question 40

Adverse selection occurs in the used car market because:

A)the seller has more information than the buyer.
B)the buyer has more information than the seller.
C)both the buyer and the seller have incomplete information.
D)Any of these could be the cause of adverse selection in the used car market.

Question 41

Consider a hypothetical used car market in which fifty percent of the cars for sale are low-quality cars and fifty percent of the cars for sale are high-quality cars. Buyers know that half of the cars are high quality and half are low quality, but they do not know which individual cars are high quality and low quality. Sellers know whether their cars are high quality or low quality. Buyers would be willing to pay at most $2,000 for a low-quality car and at most $8,000 for a high-quality car. Sellers of low-quality cars have a willingness to sell of $1,500. Sellers of high-quality cars have a willingness to sell of $7,000.If a buyer offers a price of $5,000 for a used car:

A)only the sellers of low-quality cars will sell.
B)the buyer will gain consumer surplus.
C)the sellers of low-quality cars and high-quality cars will sell.
D)total surplus will be maximized.

Question 42

Consider a hypothetical market for health insurance. Fifty percent of the buyers of insurance are low-cost, healthy individuals who incur an average of $3,000 in healthcare costs each year, and the other fifty percent are high-cost, unhealthy individuals who incur an average of $9,000 in healthcare costs each year. Buyers know whether they are a low-cost type or a high-cost type. However, sellers of insurance do not know if a particular parson is a low-cost or high-cost type; they only know that half of the buyers are low-cost types, and half of the buyers are high-cost types. Healthy buyers would be willing to pay at most $4,000 for an insurance policy, and unhealthy buyers would be willing to pay at most $10,000.Which of the following statements is true?

A)Some, but not all, of the healthy individuals will purchase an insurance policy.
B)The maximum price of an insurance policy will be $3,000.
C)The minimum price of an insurance policy will be $9,000.
D)The insurance provider will implement adverse selection to reject the unhealthy individuals.

Question 43

Which of the following statements about moral hazard is true?

A)Individuals engage in risk when making exchanges in the grey market.
B)People tend to behave in a riskier way when they're insured.
C)It occurs when one party acts unethically in a market exchange.
D)It occurs when both parties act unethically in a market exchange.

Question 44

Joshua's boss is out of town for one week, leaving Joshua alone in the office. Joshua decides to spend more time than usual checking his social media accounts during the day instead of working. This is an example of:

A)adverse selection.
B)the observation effect.
C)the principal-agent problem.
D)workplace distortions.

Question 45

An important type of information asymmetry is:

A)information withholding.
B)advantage imbalance.
C)moral hazard.
D)ethical constraint.

Question 46

Consider a hypothetical used car market in which fifty percent of the cars for sale are low-quality cars and fifty percent of the cars for sale are high-quality cars. Buyers know that half of the cars are high quality and half are low quality, but they do not know which individual cars are high quality and low quality. Sellers know whether their cars are high quality or low quality. Buyers would be willing to pay at most $2,000 for a low-quality car and at most $8,000 for a high-quality car. Sellers of low-quality cars have a willingness to sell of $1,500. Sellers of high-quality cars have a willingness to sell of $7,000.Which of the following statements is true?It is efficient for the plums to be sold but not the lemons.Buyers will never buy lemons.The price of a used car will be no more than $2,000.The price of a used car will be no more than $7,000.

A)I only
B)I, II, and IV
C)II and IV only
D)III only

Question 47

Suppose there is a used car market with 1,000 cars for sale. Buyers know that 500 of the used cars are of poor quality and are worth only $500, while the other 500 used cars are of good quality and are worth $1,500. However, buyers do not know which individual cars are of poor quality or good quality. The seller of a car knows the worth of the car. In equilibrium, what is the average worth of cars sold in this market?

A)$1,250
B)$1,000
C)$500
D)$1,500

Question 48

In the principal-agent problem, the principal is a person who:

A)entrusts someone with performing a task.
B)carries out a task on someone else's behalf.
C)is in charge of an educational system.
D)is the source of the problem.

Question 49

What is one way to avoid the principal-agent problem in the workplace?

A)The employee constantly monitors the employer's activities.
B)The employer constantly monitors the employee's efforts.
C)The employer shares all management choices with employees before making decisions.
D)The employee signs a waiver of release.

Question 50

Consider a market for health insurance with 1,000 potential buyers. The insurance company knows that half of the potential buyers are of poor health and will cost the insurance company $40,000 annually, while the other half are of good health and will cost the insurance company $10,000 annually. However, the insurance company does not know which individual people are of poor health or good health. The potential buyers know whether they are of poor health or good health. What would be the equilibrium price of an insurance policy in this market?

A)$25,000
B)$40,000
C)$10,000
D)None of these are correct.

Question 51

The principal-agent problem:

A)arises from an imbalance of information.
B)is caused by the principal having imperfect information about the agent.
C)is caused by the principal being unable to perfectly observe the actions of the agent.
D)All of these statements are true.

Question 52

Consider a hypothetical used car market in which fifty percent of the cars for sale are low-quality cars and fifty percent of the cars for sale are high-quality cars. Buyers know that half of the cars are high quality and half are low quality, but they do not know which individual cars are high quality and low quality. Sellers know whether their cars are high quality or low quality. Buyers would be willing to pay at most $2,000 for a low-quality car and at most $8,000 for a high-quality car. Sellers of low-quality cars have a willingness to sell of $1,500. Sellers of high-quality cars have a willingness to sell of $7,000.Which of the following statements is true?

A)This market will become saturated with low-quality cars.
B)Buyers will offer a price of $5,000 in equilibrium.
C)Both the buyers and the sellers have incomplete information.
D)All of these statements are true.

Question 53

The principal-agent problem occurs:

A)when the principal has less information than the agent.
B)when the principal has more information than the agent.
C)when neither party has enough information.
D)when both parties have complete information.

Question 54

Consider a market for health insurance with 1,000 potential buyers. The insurance company knows that half of the potential buyers are of poor health and will cost the insurance company $50,000 annually, while the other half are of good health and will cost the insurance company $10,000 annually. However, the insurance company does not know which individual people are of poor health or good health. The potential buyers know whether they are of poor health or good health. If the insurance company sets the price of the insurance policy at $30,000, _____ people will purchase insurance, and the average per-person cost incurred by the insurance company will be _____.

A)500; $40,000
B)1,000; $10,000
C)1,000; $30,000
D)500; $50,000

Question 55

In the principal-agent problem, the agent is a person who:

A)entrusts someone with a task.
B)carries out a task on someone else's behalf.
C)is in charge of a top-secret mission.
D)has the same objectives as the principal.

Question 56

What is moral hazard?

A)The tendency for people to engage in behavior that is considered highly desirable by the person who bears the cost of the behavior.
B)A situation in which buyers and sellers have different information about the quality of a good or the riskiness of a situation.
C)An agreement made between buyers and sellers who have the same information about the quality of a good or the riskiness of a situation.
D)The tendency for people to behave in a riskier way or put forth less effort when they do not face the full consequences of their actions.

Question 57

Akiko and her friend Priyana both work for an electronics store. Akiko's pay is entirely based on commission. Priyana is one of 25 salaried customer service workers who are overseen by one manager. There is a _____ possibility of _____ arising in Priyana's job than in Akiko's job.

A)greater; signaling
B)lesser; moral hazard
C)greater; the principal-agent problem
D)lesser; adverse selection

Question 58

Individuals with an expensive pre-existing condition are more likely to purchase health insurance, which exemplifies _____. Individuals who have health insurance visit the doctor more frequently than individuals who are uninsured, which exemplifies _____.

A)moral hazard; adverse selection
B)adverse selection; moral hazard
C)statistical discrimination; adverse selection
D)adverse selection; the principal-agent problem

Question 59

The principal-agent problem occurs:

A)when the principal has more information than the agent.
B)commonly in school settings, when the agent puts in more effort than the principal would like.
C)commonly in the employer-employee relationship.
D)when the principal and agent have the same objectives.

Question 60

The tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions is called:

A)moral hazard.
B)adverse selection.
C)counter information.
D)collective bargaining.

Question 61

An employer only hiring applicants who have college degrees is an example of

A)proofing.
B)moral hazard.
C)screening.
D)mandating that information be shared.

Question 62

A market can experience:

A)moral hazard without adverse selection.
B)adverse selection without moral hazard.
C)both moral hazard and adverse selection.
D)All of these statements are true.

Question 63

Dressing well for a job interview is an attempt to reduce asymmetric information by:

A)looking more intelligent.
B)signaling professionalism.
C)showing moral character.
D)mandating that information be shared.

Question 64

When you are considering a decision but lack full information, you should:

A)obtain more information only if the benefit of the information is greater than the opportunity cost of getting it.
B)always seek out the most information you can before making a decision.
C)not make the decision without complete information.
D)obtain more information if there is any benefit at all to getting the information.

Question 65

When parties attempting to enter into an agreement lack information:

A)they should always gain more information before making a decision.
B)the cost of acquiring information is sometimes prohibitive.
C)an exchange will never happen.
D)the exchange will happen, but surplus is unlikely to be maximized.

Question 66

Moral hazard is a problem that arises _____ the parties have entered into an agreement.

A)before
B)after
C)either before or after
D)Moral hazard does not relate to parties entering into an agreement.

Question 67

One way to solve the problems caused by information asymmetry is:

A)surfing.
B)signaling.
C)proofing.
D)All of these are solutions to problems caused by information asymmetry.

Question 68

Which of the following explains why moral hazard often arises in the workplace?

A)Employees do not directly benefit from their effort, but rather their time spent at work.
B)Employees receive the same compensation no matter the effort put forth.
C)Employees are hesitant to work their hardest for fear that will become the expectation.
D)All of these statements are true.

Question 69

Two years ago, Ayesha did not have health insurance. When she was sick, her only option was to go to an urgent care center and pay $150 out of pocket. Ayesha fell ill three times that year, but each time she waited one week for her symptoms to clear up before heading to the doctor. She ended up visiting the urgent care center only once that year. At the beginning of last year, Ayesha started a new job that provided her with health insurance and allowed her to see a doctor for only $20 per visit. Last year, she again fell ill three times, but went to the doctor all three times, waiting only a day or two after her symptoms began to see the doctor.Ayesha's behavior is an example of:adverse selection.moral hazard.the principal-agent problem.

A)I only
B)II only
C)II and III only
D)I and II only

Question 70

Moral hazard focuses on_____, while adverse selection focuses on _____.

A)unobserved characteristics of people occurring before parties enter into an agreement; actions that arise after the parties enter an agreement
B)what can happen in the absence of information asymmetries; actions that require information asymmetry
C)actions that arise after the parties enter an agreement; unobserved characteristics of people occurring before parties enter into an agreement
D)None of these statements are true.

Question 71

Taking action to reveal private information about someone else is called:

A)screening.
B)signaling.
C)discriminating.
D)illegal.

Question 72

In order for a college degree to be effective as a signal of worker productivity:

A)it must be easy for everyone to get a college degree.
B)it must be costly for low productivity workers to get a college degree.
C)potential employers must understand the principal-agent problem.
D)it must completely eliminate moral hazard.

Question 73

If the cost of acquiring more information about a good outweighs the benefit of having that extra information, then we can predict that the exchange:

A)will definitely not take place.
B)may take place anyway.
C)will not benefit anyone.
D)will take place, but will be regretted in the future.

Question 74

Which of the following is one way employers can minimize moral hazard?

A)Monitor employees' computer activity
B)Offer bonuses for consistent productivity
C)Set up video cameras in the workplace
D)All of these are ways to minimize moral hazard.

Question 75

Auto insurance companies charge higher insurance premiums for plans with lower deductibles as a way of:

A)screening between types of drivers.
B)avoiding moral hazard.
C)reducing the lemons problem.
D)optimizing information acquisition.

Question 76

Moral hazard can be avoided by:

A)employers monitoring employee effort.
B)removing the asymmetric information.
C)employers incentivizing employees to maintain consistent effort.
D)All of these statements are true.

Question 77

Moral hazard:

A)is a normative judgement about the moral choices made by economic agents.
B)is about actions and occurs after parties have voluntarily entered into an agreement.
C)is always present when adverse selection arises.
D)All of these statements are true.

Question 78

People with auto insurance tend to drive less carefully. Economists use this as an example of:

A)adverse selection.
B)moral hazard.
C)asymmetric selection.
D)information optimization.

Question 79

People sometimes make purchases without complete information because:

A)they are acting irrationally.
B)the opportunity cost of getting more information outweighs the benefit of having it.
C)the benefit of having more information outweighs the opportunity cost of acquiring it.
D)they prefer to take risks.

Question 80

Moral hazard _____ when adverse selection is a problem.

A)always occurs
B)never occurs
C)can occur
D)Moral hazard is not related to adverse selection.