1. Adverse selection leads to a market that

maximizes harm.

is inefficient.

maximizes benefits.

is efficient.

2. Jo wants to buy organic strawberries. Several sellers in her town claim to sell organic strawberries, and their prices range from $2 to $4 per pound. Strawberries that are not labeled as organic sell for $1.50 to $2.50 per pound. What is FALSE about the situation Jo faces in the organic strawberry market?

It is not easy for her to verify if the strawberries are organic.

Sellers have little incentive to sell at a low price.

Price is not a reliable indicator of whether the strawberries are organic.

Sellers know more than buyers about whether the strawberries are organic.

3. Private information creates _____ between parties involved in a transaction.

division

asymmetry

balance

cohesiveness

4. Sellers may choose not to sell a high-quality item when buyers are _____ to tell the quality in advance, and so the buyers _____.

able; pay a low price

not able; pay a high price hoping for high quality

not able; are not willing to pay the price of a high-quality product

able; pay a high price regardless of quality

5. Buyers of used automobiles are not privy to the same information as sellers are. Private information in this case does NOT lead to:

lower prices for cars.

a shortage of used cars on the market.

many mutually beneficial transactions not taking place.

potential sellers willing to sell only at high prices.

6. Which of the following is NOT a solution to an adverse selection problem due to seller's having private information?

Buyers can produce the good for themselves.

Sellers can signal quality.

Third-party verifiers can provide information to buyers.

The government can provide information or weed out low-quality goods.

7. Which one of the following is NOT an example of a seller offering signals of quality?

Hui Er proofreads her job application and cover letter four times to make sure it shows that she is careful about details.

Mak offers a money-back guarantee on his product.

Chau asks customers to write reviews of her manicures on a website for local businesses.

Ian's Auto Body Shop offers a warranty on its work.

8. Which seller is most likely to face adverse selection problems due to buyers having private information?

A clothing store advertises free hemming alterations on pants and then adjusts its price on pants to add in the average cost of hemming based on the proportion of the population that is taller or shorter than average.

A toy store offers a special sale of "buy one, get one free" on puzzles.

An accountant prices his services for completing tax returns individually, with each person's price based on the number of schedules and forms that need to be used to complete each return.

A lawyer gives clients a choice of paying $500 per hour or paying a flat fee of $6,000 for up to 12 hours of work plus $500 per hour for any work beyond 12 hours.

9. Merced (5 feet tall) and Tina (6 feet tall) are the shortest and tallest members of a women's choir who need to have matching floor-length outfits made. Each wants to pay as little as possible for her outfit. Which tailor would Merced prefer?

There is two-tier pricing based on height, with choir members paying either $210 or $230.

Each choir member pays $15 per hour for sewing and $100 for five yards of fabric.

Each choir member pays $15 per hour for sewing and $80 to $120 for fabric based on the actual amount needed for that member's garment.

Each choir member pays $120 for eight hours of sewing and $100 for five yards of fabric, which are the average sewing and fabric costs.

10. Which pricing approach for a restaurant would have the greatest risk of adverse selection due to buyers having private information?

Offering a set price all-you-can-eat buffet.

Offering small- and large-plate versions of each entre with different prices.

Pricing each menu item based on its cost of production.

Charging a price per ounce and weighing each plate.

11. Which of the following is NOT a solution to adverse selection when buyers have private information?

The government can increase information, offer subsidies, enforce mandates, or provide insurance.

Sellers can simplify by charging a single average price.

Sellers can offer different contracts so that buyers separate themselves.

Sellers can use information that is related to buyers' likely costs.

12. An automobile insurance agency offers two policy options one with a deductible of $400 and a premium of $1,900 and another with a deductible of $900 and a premium of $1,500. What is the auto insurer trying to achieve by offering these two options?

Low-cost customers will buy the $1,900 one, and high-cost customers will buy the $1,500 one.

Low-cost customers will buy the $1,500 one, and high-cost customers will buy the $1,900 one.

Charging a high deductible to low-cost customers will reduce their incentive to buy insurance.

Charging a high deductible to high-cost customers will induce them to buy insurance.

13. Market forces work more efficiently when

there is an absence of private information.

price is fixed rather than flexible.

adverse selection is offset by moral hazard.

buyers and sellers are altruistic.

14. Per person, health care costs tend to be _____ when _____.

higher; everyone has health insurance

lower; the level of health care is advanced

lower; fewer health care providers are present

higher; individuals can opt-in and opt-out of health insurance

15. Which of the following is an example of moral hazard?

Jose goes to the doctor more often after he gets health insurance.

Chantelle works hard to improve her health, so she does not need to go to the doctor as often.

Bella gets an insurance policy with a higher deductible to save money.

Asad gets a life insurance policy to protect his family if he dies.

16. The principal-agent problem can lead to

market failure.

overdelivering on contract requirements.

excessive purchases.

unacceptably low price.

17. Which of the following is an example of a principal-agent problem?

Buyers opt to buy the low-cost, low-quality version of a product even though they say their primary goal is high quality.

A firm fails to earn profits because a manager mismanages the employees.

Shareholders hire a CEO to increase profits, and the CEO remodels the office with expensive artwork and furnishings.

Workers are motivated to do their best on the job regardless of compensation.

18. Linking the income your workers earn to measures of their performance is called

pay-for-performance.

social norms.

incentivized employment.

monitoring.

19. Which is an example of solving moral hazard by finding the right kind of agents?

Worker pay is based on productivity.

Additional screenings ensure that hard-working persons are hired.

Laws against theft and fraud reduce those problems in workplaces.

Video surveillance monitors worker actions.

20. Insurance companies attempt to minimize adverse selection by:

relying on the government to pay for health insurance.

screening prospective clients and relying on employment-based health insurance.

relying on the free market to allocate risk efficiently.

charging high premiums to young, healthy people.