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267.
Refer to the provided graph. Suppose consumers do not fully appreciate the benefits of the
product whose market is shown in the graph. If an external agency is able to provide full
information to consumers about the benefits of the product, then
A. the supply curve will shift to the left.
4-133
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
government intervention in some markets.
Test Bank: II
Topic:
Appendix: Information Failures
268.
Refer to the provided graph. Suppose that it shows the market for an insurance product. If
something happens to heighten the adverse selection problem faced by sellers in this market,
then
D.
the supply curve will not be affected.
269.
The 2010 Health Care Reform Law, also known as "Obamacare," includes a part known as
universal coverage which requires everyone to have health insurance. One reason for this is to
address the problem of
A.
moral hazard.
270.
The "too big to fail" policy of the Fed, whereby some banks are bailed out if they are in
danger of failing because they are too big and could bring the system down, leads to which of
the following problems?
A.
adverse selection
271.
If a person drives with less care after purchasing auto insurance, this situation would be an
example of a(n)
A.
reverse wealth problem.
4-135
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D i f f i c u l t y :
02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify
government intervention in some markets.
Test Bank: II
Topic:
Appendix: Information Failures
272.
Which of the following would be an example of a moral hazard problem?
A.
a person in poor health who purchases life insurance
273.
Which of the following would be considered an example of adverse selection?
A.
Malpractice insurance may increase the amount of malpractice.
274.
The franchising of fast-food restaurants would be an example of how a private business
D.
corrects the problem of externalities.
275.
Insurance policies typically stipulate a deductible amount which the insured must shoulder;
this is to address the problem of
A.
adverse selection.
276.
Depositors do not check their banks carefully for stability anymore, because of the Federal
deposit insurance program. This illustrates the problem of
A.
adverse selection.
4-137
277.
eBay, Amazon, and other Internet shopping sites provide "seller ratings" done by previous
buyers, in order to help deal with the problem of
D.
public goods.
278.
Credit bureaus provide credit histories to banks and insurance companies, in order to help
deal with the problem of
A.
public goods.
279.
There is an adverse selection problem in the market for used cars because
D.
government actions to pass "lemon" laws have reduced information on used cars.
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280.
One consequence of the asymmetric-information problem in the used car market, if left
unresolved, is the higher probability of
D.
used-car buyers willing to pay higher prices in the market.
True / False Questions
281.
Asymmetric information occurs when the two parties in a market transaction do not have
the same amount of information regarding the product or process involved in the transaction.
282.
The licensing and regulation of financial advisers is one way by which the government tries
4-139
to deal with the problem of inadequate information that financial firms have about their
customers.
283.
Better Business Bureaus in various cities exist partly in order to try to deal with inadequate
buyer information about sellers.
284.
A moral hazard problem occurs before a transaction-when people alter their behavior
before they sign a contract, imposing costs on the other party.
285.
Adverse selection is when someone with home insurance decides to take the chance that a
dying tree would fall on the garage, rather than spend the money to have the tree cut down.
4-140
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
FA LSE
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify
government intervention in some markets.
Test Bank: II
To pi c:
Appendix: Information Failures
286.
When the government bails out large banks when the banks become unstable, it could lead
to a moral hazard problem in banking.
287.
When the government bails out failing banks, it creates a moral hazard problem; but when
the government bails out homeowners who are defaulting on their mortgages, there is no moral
hazard problem.
288.
When critics of unemployment insurance claim that some of the unemployed are not
exerting much effort to find jobs because of the unemployment benefits, they are referring to the
moral hazard problem.
289.
eBay and Amazon provide "sellers' ratings" information based on the experiences of past
buyers. This is to help resolve the adverse selection problem faced by potential buyers.
290.
An example of an adverse selection problem is in insurance, where the people most likely
to claim insurance payouts are the people who will seek to buy the most generous policies.
