Keep the Highest / 1 1. Recognizing the existence of asymmetric information Complete the following table by determining which economic problem is characterized in each of the scenarios provided. Scenario Adverse Moral Selection Hazard When Arjun was not covered by boat insurance, he navigated his ship only in secluded areas because he knew he would have to pay a large fine for driving uninsured if his were to be stopped by the coast guard. Now that he has O boat insurance, he is willing to visit more popular areas because he knows that when he gets stopped by patrols, his O paperwork is all up to date. Hakeem is interested in purchasing a condo directly from the current owner, but he doesn't know the basics of home Inspection. Hakeem suspects that homeowners living in lower-quality condos are more willing to vacate than those in O O higher-quality condos. Hakeem thus assumes that available condos are of poor quality, and will probably require a lot of work. Grade It Now Save & Continue Continue without saving2. The market for lemons Consider a market in which there are many potential buyers and sellers of used cars. Each potential seller has one car, which is either of high quality (a plum) or low quality (a lemon). A seller with a low-quality car is willing to sell it for $6,500, whereas a seller with a high-quality car is willing to SALY sell it for $13,000. A buyer is willing to pay $7,500 for a low- quality car and $15,000 for a high-quality car. Of course, only the seller knows whether a car is of high or low quality, as illustrated in the accompanying image: Suppose that 75% of sellers have low-quality cars. Assume buyers know that 75% of sellers have low-quality cars but are unable to determine the quality of individual cars. 16,490X E Suppose that 75% of sellers have low-quality cars. Assume buyers know that 75% of sellers have low-quality cars but are unable to determine the quality of individual cars. EI If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is $ (Hint: The expected value of a car is the sum of the probability of getting a low-quality car multiplied by the value of a low-quality car and the probability of getting a high-quality car multiplied by the value of a high-quality car.) Suppose buyers are willing to pay only up to the expected value of a car that you found in the previous question. Since sellers of low-quality cars are willing to sell for $6,500, while sellers of high-quality cars are willing to sell for $13,000, will be willing to participate in this market at that price. The dilemma in this problem is an example of which of the following economic concepts? Adverse selection Screening Moral hazard C- O Signaling3. How asymmetric information prevents gains from trade Ahmet sees a Facebook Marketplace post from Trinity selling a used gaming console for $20. Just to the right, Ahmet notices a targeted ad from a electronics chain offering a new gaming console for $220. Ahmet values a gaming console at $260 as long as it works, regardless of whether it is new or used. For each of the scenarios listed, determine the principle illustrated by each person's reasoning. Scenario Moral Adverse Hazard Selection Suppose Trinity, the seller of the gaming console, knows the system works well-she is selling it only because she finally managed to find the next gen model. She thinks about asking $48 and offering a guarantee: She will replace the gaming console with a new $220 gaming console if it turns out not to work. Then she thinks, "That's not a good O O idea! Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new gaming console for $48-meanwhile, I'll be out $172!" Suppose Ahmet buys the new gaming console from the national electronics chain, thinking, "Someone would ask $20 O O for a used gaming console only if it didn't work well." Why is Trinity unable to sell Ahmet the gaming console? Check all that apply. Adverse selection can cause buyers to avoid purchasing high-quality goods because of the uncertainty about their quality. )Moral hazard can prevent sellers from offering guarantees of quality because they can't be sure that buyers won't try to take advantage C+ of the guarantees by filing false claims.Attempts Keep the Highest / 2 4. Asymmetric information and labor markets E Ian is the manager of a factory. Workers at the factory are assigned to one of two tasks, one of which requires skilled labor and one of which requires unskilled labor. Because skilled workers earn a higher wage than unskilled workers, everyone who applies for a job says they're skilled. Ian's challenge is to figure out who is actually a skilled worker and who is an unskilled worker. E Suppose that Ian would like to use the economic concept of screening to separate out worker types. Which of the following scenarios illustrates this concept? Ian voluntarily pays all workers a higher wage in hopes of attracting and retaining more productive workers. Ian implements a test to determine whether applicants are skilled or not. O Skilled workers pay to take a certification course to demonstrate their ability. Suppose, instead, Ian considers paying efficiency wages to increase the factory's profitability. True or False: Efficiency wages are set below the average industry wage and are intended to give the firm implementing them a competitive advantage over rivals. O True C- False APR zoom 4Homework (Ch 22 ) X Kacy, Sydney, and Taymour want to bake a cake. They are choosing among chocolate cake (C)), vanilla cake (V), and red velvet cake (R). The following table shows each person's preferences for cake flavors. The three friends decide to vote on the kind of cake they want and agree to bake the kind that wins by majority vote. Kacy Sydney Taymour First choice C R V Second choice R V C Third choice V C R Suppose Kacy, Sydney, and Taymour first vote on whether to bake a red velvet cake or a chocolate cake, and then they vote between vanilla cake and the winner from the previous vote. C+ Between red velvet cake and chocolate cake, the majority will vote for , and between this winner and vanilla cake, the majority will vote forHomework (Ch 22) Third choice V Suppose Kacy, Sydney, and Taymour first vote on whether to bake a red velvet cake or a chocolate cake, and then they vote between vanilla cake and the winner from the previous vote. Between red velvet cake and chocolate cake, the majority will vote for , and between this winner and vanilla cake, the majority will vote for Now, suppose Kacy, Sydney, and Taymour first vote on whether to bake a chocolate cake or a vanilla cake, and then they vote between red velvet cake and the winner from this vote. Between chocolate cake and vanilla cake, the majority will vote for , and between this winner and red velvet cake, the majority will vote for True or False: Kacy, Sydney, and Taymour's democratic voting system does not produce transitive preferences. (Hint: Recall your answers to the previous questions.) O True FalseHomework (Ch 22) Ross, Talo, and Malik are housemates who are trying to decide how much money each should contribute to a function they are hosting. . Malik does not care about the function and is on a tight budget. Therefore, he prefers to contribute no money to the function, and his utility declines at a constant rate as the roommates increase the amount of money they spend. A-Z . Ross wants to buy a $90 keg of beer and $90 worth of pizza. Therefore, he would ideally like each to contribute $60 to the function, but if the others are unwilling to contribute that much, he would settle for buying just the pizza (and contributing $30 each) and asking guests to bring their own beer. . Taio would ideally contribute $30 because he only wants to buy pizza. However, he would prefer contributing $60 to contributing $0 and not having a party at all. Suppose the three housemates vote on spending either $0, $30, or $60 on the function using the Borda count system of voting. That is, each housemate awards three points to his first choice, two points to his second choice, and one point to his third choice. Complete the following table by indicating the number of points each housemate awards to each option and then summing the scores of each option to obtain a final ranking. Borda Count For Spending... $60 $30 $0 RossSuppose the three housemates vote on spending either $0, $30, or $60 on the function using the Borda count system of voting. That is, each housemate awards three points to his first choice, two points to his second choice, and one point to his third choice. Complete the following table by indicating the number of points each housemate awards to each option and then summing the scores of each option EI to obtain a final ranking. Borda Count For Spending... $60 $30 $0 Ross Taio Malik Total Under a system of Borda count, the winning option is V If, instead, the housemates were to hold a two-phase election (such that they first voted between two options, then voted between the winner of that contest and the final option), the winner would be _ . (Hint: Determine the outcome if the roommates first voted between $60 and $0, and then voted between the winner of that contest and $30.) The median voter in this situation isHomework (Ch 22) properties: Arrow's impossibility theorem states that under certain assumptions about preferences, no voting system exists that satisfies all of the following E . Unanimity . Transitivity . Independence of irrelevant alternatives . No dictators EI Assume individuals in a society have preferences regarding the following possible outcomes: X, Y, and Z. For each description in the following table, identify the property of a desirable voting system it portrays. Independence of Irrelevant No Description Unanimity Transitivity Alternatives Dictators If X beats Z, and Z beats Y, then X beats Y. O O O O The ranking between Z and X does not depend on whether Y O O O is also available. There is no person who always gets what he wants, despite O O O O everyone else's preferences O O O O If everyone prefers X to Z, then X beats Z.Homework (Ch 22) The ranking between Z and X does not depend on whether Y X is also available. O O O O There is no person who always gets what he wants, despite everyone else's preferences O O O O E If everyone prefers X to Z, then X beats Z. O O O O Consider the following voting system: In the Borda count voting system, each voter ranks the possible outcomes, giving 1 point to the last-place outcome, 2 points to second to last, etc. The outcome that receives the most total points wins. Suppose when outcomes X, Y, and Z are available, outcome Y is the winner according to a Borda count voting system. However, when outcome Z is no longer possible, outcome X is the winner according to a Borda count voting system. Which property does this voting method violate, according to Arrow's impossibility theorem? Independence of irrelevant alternatives No dictators O Unanimity O TransitivityHomework (Ch 22) Attempts Keep the Highest / 2 8. Median voter outcome E Consider the race for governor of a small state. The population of the state is evenly divided between three cities-Oakland, Delmar, and Overtown. The governor's race is between Rashad Ruskin (the mayor of Oakland) and Cameron Conor (the mayor of Delmar). Assume that no matter what is said during the campaign, Ruskin can count on the support of 100% of the Oakland population, and Conor can count on the support of 100% of the Delmar population. Assume 100% voter participation. According to the result of majority-rule voting, the next governor will be the one preferred by the majority of the residents of The two candidates are asked in a debate about their support of small business subsidies. Public opinion polls in the city you just identified have shown the following about the level of small business subsidies desired: . 40% want a low level . 15% want a medium level . 45% want a high level Assuming that voters prefer outcomes closer to their preferred choices to outcomes further away, the median voter model predicts that the candidates will support a level of small business subsidies. C- Grade It Now Save & ContinueAttempts E Keep the Highest / 1 9. Behavioral economics Indicate whether each of the following examples of behavior is consistent with the way the traditional economic framework suggests people should act, or whether it is reserved for behavioral economists to examine. Behavior Consistent with Traditional Exclusive to Behavioral Economic Model predictions Economic theory There are people who pursue a degree in art history rather than informatics, even though high-tech careers are usually much higher- O O paying. Some people would be willing to make a large sacrifice in order to help a O O loved one. Some people treat $60 they earn differently from $60 they win playing O O powerball. Some people would be willing to pay money to lower the incomes of O O others. Grade It Now Save & ContinueQ. Search this co Back to Assignment Attempts Keep the Highest 1 / 2 3. Imperfections in the health insurance market Suppose Paolo pays a monthly premium for health insurance through his employer. After paying the monthly premium, all subsequent medical costs, such as doctor's visits, would be paid for by the insurance. The cost of a doctor's visit without insurance is $450. Since Paolo doesn't pay the true cost of a doctor's visit, he is likely to visit the doctor _ frequently than he would if he didn't have health insurance. This issue in the health insurance market is known as True or False: In part owing to such incentives, the United States pays less for health care, as a percentage of GDP, than other developed countries. O True False Grade It Now Save & Continue Continue without savingAttempts 1.5 Keep the Highest 1.5 / 2 1. The value of insurance Suppose your classmate Gabi is faced with the following decision: they either receive $4,000 with certainty, or a 50-50 chance of receiving $2,000 or $6,000. Suppose Gabi prefers the 50-50 chance of $2,000 or $6,000. True or False: Based on their preferences, Gabi is not a risk aversa person. O True O False Suppose there is a disease certain to impact exactly 1% of a population and that each member of the population is equally likely become infected. Treatment for individuals who are infected costs $40,000. Assume in this scenario that the necessary treatment for the disease is the only healthcare cost faced by this population. The expected cost of healthcare is $ . If members of the population to pay the expected cost of healthcare with certainty, rather than take on the 1% risk of having to pay the full cost of the treatment, they are risk averse. Grade It Now Save & Continue Continue without savingto Assignment Attempts Keep the Highest / 1 4. Explaining growing health care spending in the U.S. According to the data collected by the Center for Medicare and Medicaid Services, health spending in the United States as a percentage of GDP has risen from 5% in 1960 to 18% in 2017. Which of the following are the forces that are responsible for this upward trend in health spending? Check all that apply. . Baumol's cost disease implies that the cost of healthcare has been falling so that more people could afford it. O Productivity in the healthcare sector rose with the rest of the economy, causing a steep increase in the wages of healthcare providers. As an aging population continues to grow older, the demand for healthcare rises. Productivity in the healthcare sector remained relatively low compared to the rest of the economy, whereas wages of healthcare providers have been rising along with the rest of the labor force. As incomes continue to rise, people tend to spend a higher fraction of their budget on healthcare. Grade It Now Save & Continue tinue without savingHomework (Healthcare) Back to Assignment Attempts Keep the Highest / 1 5. Explaining the excessive health insurance in the United States Many economists agree that the health system of the United States relies too heavily on health insurance, especially for minor or routine expenditures. Their thinking is that excessive insurance compounds the moral hazard problem and thus drives up the cost of healthcare. EI Which of the following is largely responsible for the problem of excessive insurance? The Veterans Health Administration O Private health insurance provided through employers O Government insurance through Medicare and Medicaid O Primary care physicians Grade It Now Save & Continue Continue without savingBack to Assignment Attempts Keep the Highest / 1 5. Explaining the excessive health insurance in the United States Many economists agree that the health system of the United States relies too heavily on health insurance, especially for minor or routine expenditures. Their thinking is that excessive insurance compounds the moral hazard problem and thus drives up the cost of healthcare. Which of the following is largely responsible for the problem of excessive insurance? O The Veterans Health Administration O Private health insurance provided through employers Government insurance through Medicare and Medicaid Primary care physicians Grade It Now Save & Continue Continue without saving6. The policy debate over healthcare X Policymakers debate the extent to which the U.S. government should be involved in the healthcare system. Some argue that the role of government should be expanded, and others argue the role should be reduced. E Which of the following are the arguments put forward by those who would like to see an expanded government role? Check all that apply. A centralized government-run system would limit individual freedom, excessively ration care, and stifle innovation. Private insurance companies put profit ahead of people. The government is to offer people a single payer system financed out of tax revenue. O Private insurers and providers should compete for consumers. Both sides of the policy debate over healthcare often reference Canada, where the government is in charge of running the healthcare system, which is financed primarily by taxes. Which of the following describe features of the Canadian centralized system favored by those who support an expanded government role? Check all that apply. O Efficient resource allocation O Limited individual freedom Lower costs C+ Reduced administrative inefficiency X