Question 1

The problem of adverse selection in insurance results in a situation in which:

people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies.

people choose too much coverage because they do not understand the complex information in the policies.

people choose too little coverage because they do not understand the complex information in the policies.

unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market.

healthy people become more likely to buy insurance than unhealthy people, which drives premiums up, which drives even more unhealthy people away from the market even though they are the ones who need it most.

Question 2

The completion of a degree or course of study is a good labor market signal:

only if what is learned in that educational process relates directly to the job the individual is being considered for.

only if there is a positive correlation between academic success and wage income.

primarily because individuals develop good habits in college that serve them well in other areas later on.

because all individuals have the opportunity (in the United States) to pursue higher education.

because people who possess the traits that make them more productive in the workplace have an easier time completing an education than those who don't.

Question 3

Job market signals like dressing well for interviews are not especially effective because:

the cost of dressing well is about the same for high-quality and low-quality workers.

many businesses have adopted casual office attire, so dressing well is not important to the firm.

federal labor laws prohibit firms from using dress or appearance as an employment criterion.

none of the above.

Question 4

In the insurance market, "moral hazard" refers to the problem that:

insurers can't tell high-risk customers from low-risk customers.

high-risk customers have an incentive to give false signals to make themselves look like low-risk customers.

companies may unfairly lump individuals together by race, sex, age or other characteristics in an attempt to use demographic data to pinpoint high-risk populations.

individuals are willing and able to pay different amounts for insurance, but must all be charged the same amount.

individuals may change their behavior after the insurance is bought, so that they behave in a more high-risk manner than they did before.

Question 5

Which of the following is true concerning the substitution effect of a decrease in price?

It will lead to an increase in consumption only for a normal good.

It always will lead to an increase in consumption.

It will lead to an increase in consumption only for an inferior good.

It will lead to an increase in consumption only for a Giffen good.