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Chapter 18: Quiz

The Economics of Information

1. An individual’s willingness to pay for information can be determined by a. the amount of money it takes to achieve a given level of utility with the information. b. the amount of money it takes to achieve a given level of utility without the information. c. the difference between a and b. d. the difference between the level of utility they can achieve with the information and without the information.

2. An individual will not choose to acquire all available information because a. information is characterized by increasing marginal value. b. information, at some point, is characterized by decreasing marginal value. c. information is always characterized as having constant marginal value. d. the marginal cost of information is decreasing.

3. Which of the following is an example of adverse selection? a. a person who has health insurance choosing to see a doctor about a minor sprained ankle. b. a person who has fire insurance smoking cigarettes in bed. c. a person who had health insurance catching pneumonia. d. a person with a pre-existing medical problem purchasing health insurance.

4. If insurance policies are hopelessly complex and insurance companies don’t have reputations based on the quality of service they provide, then, in addition to the issue discussed in the previous question, it might be the case that adverse selection arises in insurance markets because a. insurance buyers have more information about policies than do insurance sellers. b. insurance sellers have more information about policies than do insurance buyers. c. collecting information on policy details and company service records is costless. d. none of the above.

5. Which of the following is an example of asymmetric information in insurance? a. an insurance company not know how careful a particular driver is. b. a person who has health insurance seeking medical attention for a very minor condition. c. an insurance company having superior knowledge about the details of its policies. d. both a and c. e. all of a, b and c.

6. Which of the following illustrates moral hazard? a. Individuals sometimes mistakenly buy defective cameras. b. Individuals will not search for bargains for low cost items. c. Individuals know a lot about their family health history when they buy insurance. d. Individuals can choose whether to drive safely or not.

7. Suppose high risk individuals face a .10 probability of having a $25,000 car stolen whereas low risk individuals face a .02 probability of having a $25,000 car stolen. Each type of buyer is equally represented in the population and each is risk-neutral. If the insurance company cannot differentiate between buyers and there are no administrative costs, insurance will cost a. $ 500. b. $1,500. c. $2,000. d. $2,500.

8. Adverse selection can arise in employment situations if information about worker quality is a. better for employees than employers. b. better for employers than employees. c. perfect. d. available at a low enough cost.

9. Under what conditions will receiving a college degree effectively signal that a person is a high quality employee rather than a low quality employee? a. if the education related to the degree includes useful knowledge and skills. b. if earning the degree is much harder for high quality employees than it is for low quality employees. c. if earning the degree is equally difficult for low quality and high quality employees. d. none of the above.

10. A risk neutral buyer of a new car believes there is a 50 percent chance she can save $1,000 if she travels out-of-state to buy the car. She will make the trip only if it costs a. less than $1,000. b. less than $500. c. zero. d. an amount that cannot be exactly determined from the information given.

11. If an insurance market has a separating equilibrium, then which of the following is true? a. the company will not have to determine whether each customer is of the low risk type or of the high risk type. b. the company will offer only one type of policy. c. the company will have to determine which customers are high risk type and which customers are low risk type and offer each type the appropriate policy. d. the company will charge a higher premium and offer a lower deductible to the low risk type.

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12. Which potential problem is faced by the shareholders of a mutual fund when they hire a manager to make investment decisions for the fund? a. adverse selection. b. moral hazard. c. principal-agent problem. d. none of the above.