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c.
moral hazard.
d.
screening.
64. When homeowners sell a house, part of the paperwork they complete is a statement of disclosure on which the
homeowners are supposed to reveal everything that they know is wrong with the house. The purpose of the statement of
disclosure is to try to solve the
a.
principal-agent problem.
b.
moral-hazard problem.
c.
adverse-selection problem.
d.
signaling problem.
65. Which of the following is not an example of an adverse selection problem?
a.
A homeowner purchases a refrigerator that the seller knows has a history of leaking.
b.
A highly productive worker quits her job after a salary cut knowing that she can make more at a different job.
c.
A major league baseball player performs poorly in his second season after signing a multi-million dollar
contract.
d.
A contractor uses low quality materials for construction but charges for higher quality materials.
66. Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water
stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of
a.
moral hazard.
b.
screening.
c.
adverse selection.
d.
the principal-agent problem.
67. The buyer runs a risk of being sold a good of low quality when there is
a.
a principal-agent problem.
b.
a moral-hazard problem.
c.
a problem involving hidden actions.
d.
a problem involving hidden characteristics.
68. Life insurance companies usually require applicants to have physicals and disclose information on their health. This
practice is designed to address
a.
a principal-agent problem.
b.
a moral-hazard problem.
c.
a problem involving hidden characteristics.
d.
all of the above are correct.
69. The state of Massachusetts requires all citizens to purchase medical insurance or face a monetary penalty when filing
their taxes. The penalty is significantly less than the average annual insurance premium. Moreover, the state requires
insurance companies to issue policies to anyone who applies, regardless of their health at the time of application. Which
of the following examples describes the inherent adverse selection problem?
a.
Tricia purchases an insurance policy through her employer and visits her doctor for annual check-ups.
b.
Sue purchases insurance only after learning that she has cancer.
c.
Mike pays the penalty rather than purchasing insurance because it is cheaper for him than paying insurance
premiums and he is generally in good health.
d.
Both b and c are correct.
70. When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest quality, she is
engaging in
a.
both moral hazard and adverse selection.
b.
neither moral hazard nor adverse selection.
c.
moral hazard, but not adverse selection.
d.
adverse selection, but not moral hazard.
71. A street vendor sells a replica of a pair of designer shoes to a young woman who believes the shoes are authentic. The
street vendor is engaging in
a.
both moral hazard and adverse selection.
b.
neither moral hazard nor adverse selection.
c.
moral hazard, but not adverse selection.
d.
adverse selection, but not moral hazard.
72. Which of the following is an example of an adverse selection problem?
a.
A customer purchases four apples, two of which are bruised.
b.
A card shop puts its Halloween merchandise on sale on November 1st.
c.
A young job applicant fails to reveal that she was fired from her last job because she was incompetent.
d.
A man rents a car and then drives it less carefully and fills it with cheaper gas than he would if he owned it.
73. The Latin term caveat emptor, meaning "let the buyer beware," brings to mind the problem of
a.
hidden actions.
b.
adverse selection.
c.
principals and agents.
d.
moral hazard.
74. When the buyer knows less than the seller about the characteristics of the good being sold, there is
a.
a principal-agent problem.
b.
a moral hazard problem.
c.
an adverse selection problem.
d.
a signaling problem.
75. The classic example of adverse selection is the
a.
market for used cars.
b.
market for new cars.
c.
relationship between shareholders and managers.
d.
relationship between a coach and an athlete.
76. The adverse selection problem is a likely explanation for the fact that
a.
some parents use video cameras to monitor the nannies caring for their children.
b.
some corporate managers were recently sent to prison for enriching themselves at the expense of shareholders.
c.
people in average health may be discouraged from buying health insurance by the high price.
d.
gifts can be interpreted as signals.
77. People with hidden health problems are more likely to buy health insurance than are other people. This is an example
of
a.
moral hazard and makes the cost of health insurance higher than otherwise.
b.
moral hazard and makes the cost of health insurance lower than otherwise.
c.
adverse selection and makes the cost of health insurance higher than otherwise.
d.
adverse selection and makes the cost of health insurance lower than otherwise.
78. Severe adverse-selection problems may result in
a.
too few good used cars being offered for sale.
b.
wages that are too low relative to equilibrium levels.
c.
too many good drivers buying too much automobile insurance.
d.
people with average health buying too much health insurance.
79. "Signaling" refers to actions by an informed party for the sole purpose of
a.
telling another party that the signaler has information to reveal, without actually revealing that information.
b.
conveying false information.
c.
induce employees to put in the effort they are capable of.
d.
credibly revealing private information.
80. Effective signals
a.
convey useful information from informed parties to uninformed parties.
b.
impose little or no cost on the signaler.
c.
cannot be conveyed accurately when there is an information asymmetry.
d.
raise the quantity sold but reduce the price sellers receive.
81. Which of the following is not an example of signaling?
a.
screening
b.
advertising
c.
getting an education
d.
gift giving
82. Which of the following is not an example of signaling?
a.
An employer calls the references of a potential employee before hiring him or her.
b.
A boyfriend gives his girlfriend a necklace with her favorite gemstone for Valentine’s Day.
c.
A home flooring company advertises its high Better Business Bureau rating during its television commercials.
d.
A company advertises that it makes charitable contributions.
83. A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a
a.
moral hazard problem.
b.
screening device.
c.
signal of how much she cares for him.
d.
All of the above are correct.
84. 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
a.
signaling.
b.
screening.
c.
selecting.
d.
All of the above are correct.
85. If the seller of a used car offers a limited warranty, the warranty is an example of a(n)
a.
signal.
b.
screen.
c.
efficiency wage.
d.
agent.
86. 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)
a.
signal.
b.
screen.
c.
moral hazard.
d.
adverse selection.
87. A firm with a very good product
a.
has a higher cost of signaling (advertising) than does a firm with an inferior product.
b.
has more to gain by signaling (advertising) than does a firm with an inferior product.
c.
does not need to signal (advertise) because the product’s quality speaks for itself.
d.
will signal (advertise) effectively if signaling is free.
88. 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?
a.
Budweiser chooses to signal during the Super Bowl, while Miller Brewing Co. does not.
b.
Budweiser chooses to screen during the Super Bowl, while Miller Brewing Co. does not.
c.
Miller does not advertise during the Super Bowl because it has a superior product and the audience already
knows that.
d.
Budweiser’s advertisements during the Super Bowl are entertaining but convey no information about the
quality of its products.
89. Which of the following is an example of signaling?
a.
Graduates of highly-respected universities highlight that fact on their resumes.
b.
Magazine advertisements include the phrase "as seen on TV."
c.
Advertisements for universities include the phrase "fully accredited."
d.
All of the above are correct.
90. Which of the following events best exemplifies the concept of signaling?
a.
A college student's parents, having learned that their child is short of money, send her a check for $1,000.
b.
A new company making high quality bicycles at a reasonable price sends free bikes to reviewers working for
bicycle magazines.
c.
A grocery store maintains a policy of examining the driver's license of everyone who writes a personal check
to purchase his groceries.
d.
A university maintains a policy of considering for admission only those students who graduated among the top
ten percent of their high school class.
91. 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.
screening.
b.
signaling.
c.
the seller's curse.
d.
the principal-agent problem.
92. Which of the following is an example of signaling?
a.
Pat is considering the purchase of a used car. Before making the purchase he has the car checked by an auto
mechanic.
b.
Zach is applying for a new life insurance policy. Before writing the policy, the insurance company requires
Zach to be examined by a doctor.
c.
Denise is applying for a new job. Before hiring her, the firm requires Denise to take a drug test.
d.
Marcus is planning to ask for Chaquila's hand in marriage. Before asking her, he buys her a box of her favorite
chocolates and takes her to dinner at her favorite restaurant.
93. Screening occurs when
a.
an informed party acts to reveal his private information.
b.
an informed party acts to conceal his private information.
c.
an uninformed party acts to induce the informed party to reveal private information.
d.
an uninformed party acts on its limited information.
94. A life insurance company requires new applicants to have a medical exam prior to writing the insurance policy. This
requirement is an example of
a.
signaling.
b.
screening.
c.
moral hazard.
d.
adverse selection.
95. Which of the following is an example of screening?
a.
A lender checks a loan applicants credit history.
b.
When an employee purchases group life insurance without taking a physical exam, she knows more about her
health than does the insurance company.
c.
When someone is considering buying a used car from a dealership, the seller knows the repair history of the
car but the potential buyer does not.
d.
All of the above are correct.
96. Which of the following is an example of screening?
a.
a man buys an expensive birthday present for his girlfriend
b.
an insurance company offers a policy with a high deductible
c.
the seller of a used motorcycle knows more about its true condition than a prospective buyer
d.
society supports long prison terms for corporate criminals
97. An insurance company that writes automobile policies tries to separate safe drivers from risky drivers by offering
policies that feature different deductibles and different premiums. This practice is best described as an example of
a.
screening.
b.
behavioral economics.
c.
monitoring.
d.
signaling.
98. A safe driver would likely choose an auto insurance policy with a
a.
low premium and a high deductible.
b.
high premium and a high deductible.
c.
high premium and a low deductible.
d.
high premium and no deductible.
99. An unhealthy person would likely choose a medical insurance policy with a
a.
low premium and a high deductible.
b.
high premium and a high deductible.
c.
high premium and no deductible.
d.
The unhealthy person would choose not to be insured.
100. An airline knows that business travelers have more inelastic demand for travel than vacationers. That is, business
travelers are often willing to pay more for airline tickets than vacationers. The airline also knows that business travelers
do not like to travel over weekends. When customers request airline tickets that do not involve travel over a weekend, the
airline determines that a traveler is likely a business traveler and charges a higher price. This is an example of
a.
moral hazard.
b.
signaling.
c.
screening.
d.
adverse selection.
101. Suppose that an economics department is offering a student exchange program with a university in Giessen,
Germany. If the department requires students to submit an essay in order to be considered for the program, the essay may
be an example of
a.
signaling.
b.
screening.
c.
monitoring.
d.
principal.
102. On car insurance policies, Countrywide Insurance Company offers drivers an option: Policy 1 features a deductible
of $1,000, and it requires a driver to pay an annual premium of $500. Policy 2 features a deductible of $250, and it
requires a driver to pay an annual premium of $1,000.
a.
In offering these two policies, Countrywide is engaging in illegal price discrimination.
b.
In offering these two policies, Countrywide is screening drivers.
c.
Policy 1 is more of a burden for safe drivers than it is for risky drivers.
d.
In offering these two policies, Countrywide is signaling their quality to drivers.
Scenario 22-1
Esteban and Michaela own an apartment building. They hire Nico to manage the building and deal with tenants’
complaints. They also hire Ted to make any necessary repairs to the apartments or the common area and they hire Rex to
be the door guard at night.
103. Refer to Scenario 22-1. Which of the following statements is correct?
a.
If Rex falls asleep while he is supposed to be guarding the door, he has created an adverse selection problem.
b.
Esteban and Michaela are the principals and Nico, Ted, and Rex are the agents.
c.
Nico is the principal and Ted and Rex are the agents.
d.
All of the above are correct.
104. Refer to Scenario 22-1. Which of the following is an example of a moral hazard problem?
a.
Ted steals $5 off the counter in a tenant’s apartment while he is there to repair a leaky faucet.
b.
Esteban and Michaela do not tell Nico that they are planning to sell the building at the end of the year.
c.
Esteban goes golfing while Michaela reviews the financials from the business.
d.
Rex is paid an efficiency wage to ensure productivity because he is usually not monitored while working.
Scenario 22-2
A wireless telephone service provider offers three service plans to its consumers.
Peak Minutes
Messaging
Data Usage
Monthly Fee
Plan A
450
200
2GB/month
$69.99
Plan B
900
1000
5GB/month
$119.99
Plan C
Unlimited
Unlimited
Unlimited
$149.99
105. Refer to Scenario 22-2. By offering consumers these choices, the wireless telephone provider is
a.
signaling to customers that they offer great customer service.
b.
screening customers to reveal how much they plan to use the service.
c.
creating asymmetric information because only the firm knows the true cost of the service.
d.
engaging in a principal-agent problem
106. Kris and Kelly have been dating for several years. Kris loves Kelly very much and wants to marry her. Which of the
following is the best way to signal his love to her?
a.
Kris should buy Kelly a box of his favorite chocolates.
b.
Kris should give Kelly $15,000 cash to purchase her own engagement ring, since he doesn’t know what kind
she would like.
c.
Kris should buy Kelly the diamond ring that she has been looking at recently in the jewelry store window.
d.
Kris should send Kelly a text asking for her hand in marriage.
Narrative 22-1
Katie owns a boutique that sells high-end women’s clothing and accessories. Shana works part-time at the boutique and
frequently is the only employee in this small store. Katie pays Shana a wage that is higher than the market wage for this
type of job. When the store is not full of customers, Shana diligently works on displays and cleans to keep the store
looking its best. Magda is a customer in the store who asks Shana’s opinion on the quality of some jeans she is
considering purchasing. Even though she’s had several other customers return them due to flaws, Shana tells Magda the
quality is great. Belinda is another customer who is returning a necklace without revealing that she lost a gem from it
while wearing it.
107. Refer to Narrative 22-1. Which of the ladies is an agent?
a.
Shana
b.
Katie
c.
Belinda
d.
Magda
108. Refer to Narrative 22-1. Which of the ladies is a principal?
a.
Shana
b.
Katie
c.
Belinda
d.
Magda
109. Refer to Narrative 22-1. Which of the ladies is causing a moral hazard problem?
a.
Shana
b.
Katie
c.
Belinda
d.
Magda
110. Refer to Narrative 22-1. Which of the ladies is the victim of an adverse selection problem?
a.
Shana
b.
Katie
c.
Belinda
d.
Magda
111. A Principles of Microeconomics professor wants to know how much prior knowledge her students have before
beginning the class so she gives them a pre-test. This action is an example of
a.
signaling.
b.
screening.
c.
adverse selection.
d.
moral hazard.
112. Which of the following is a reason to think that government action may not be valuable to improve market outcomes
with asymmetric information?
a.
The private market can sometimes deal with information asymmetries using signaling and screening.
b.
The government rarely has more information than the private parties.
c.
Government actions have their own imperfections.
d.
All of the above are correct.
113. A car mechanic knowing more about what's wrong with your vehicle than you do is best explained by which of the
following concepts:
a.
Asymmetric information
b.
Adverse selection
c.
Availability bias
d.
Bounded rationality
114. Real estate agents have been found to keep their own homes on the market longer and sell their homes for more than
comparable homes of the individuals they represent. This phenomenon is best described by which of the following
concepts?
a.
Adverse selection
b.
Moral hazard
c.
Availability bias
d.
Time inconsistency
115. Economists have found that some risky behaviors increase and preventative medicine use decreases when individuals
in the U.S. turn 65 and qualify for Medicare (public health insurance). This phenomenon is most consistent with which of
the following concepts?
a.
Moral hazard
b.
Time inconsistency
c.
Availability bias
d.
Confirmation bias
116. When an agent attempts to reveal information to the principal, which of the following is occurring?
a.
Signalling
b.
Screening
c.
Moral hazard
d.
Asymmetric information
117. When a principal attempts to get an agent to reveal his or her private information, which of the following is
occurring?
a.
Screening
b.
Signalling
c.
Moral hazard
d.
Adverse selection
