Questions on Market with Asymmetric Information:

11. Julia is a 28-year-old nonsmoking, non-drinking female of normal weight. Because of adverse selection in health insurance,

A) She will be charged less for her premiums than people who are higher risks.

B) She is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is.

C) When she get health insurance, she will be less likely to take care of herself.

D) She must get health insurance early in life, and is likely to lose health insurance if she smokes, drinks to excess, or gains weight.

E) She is more likely than the average person to buy health insurance, because she is more likely to be offered it.

12. Consider a market in which high-quality and low-quality television sets are sold.Before consumers make a purchase, they do not know the quality of the sets, but the sellers do know.As compared to a situation where both consumers and sellers know the quality of the sets, this situation would

A) cause no change in the ratio of low to high-quality sets sold.

B) increase the fraction of high-quality sets sold.

C) increase the fraction of low-quality sets sold.

D) cause the average price of goods sold to rise.

13. Augustus bought his BMW convertible as a new car in 1998 and knows that it is in excellent condition.He now wants to sell it and knows that there are many other similar cars on the used car market that are lemons.As a result:

A) he should be able to sell my car at a premium price because of its excellent condition.

B) he will have to accept a lower price for his car because buyers might think that it is a lemon.

C) he will not be able to sell his car unless he offers some sort of guarantee.

D) he will get the best price for his car by selling it to a dealer.

14. Credit histories allow firms to

A) identify high-risk borrowers, so they can be eliminated and interest rates kept down for others.

B) increase the number of credit cards issued, and interest rates go up as a result.

C) increase the number of credit cards issued, and interest rates go down as a result.

D) lower the number of credit cards issued, and interest rates go up as a result.

E) increase market power in the credit card industry, raising interest rates.

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

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

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

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

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

E) 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.

16. When a moral hazard problem exists for automobile driving, the marginal cost of driving

A) is lowered, and the amount of driving done is raised above the efficient level.

B) is lowered, and the amount of driving done is lowered below the efficient level.

C) is raised, and the amount of driving done is raised above the efficient level.

D) is raised, and the amount of driving done is lowered below the efficient level.

E) is raised above the efficient level, but market forces keep the total amount of driving is kept at the efficient level.

Questions on Externalities:

17. Externalities

A) are not reflected in market prices, so they can be a source of economic inefficiency.

B) do become reflected in market prices, so they can be a source of economic inefficiency.

C) are not reflected in market prices, so they do not adversely affect economic efficiency.

D) do become reflected in market prices, so they do not adversely affect economic efficiency.

E) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.

18. Dry cleaning of clothing produces air pollutants.Therefore, in the market for dry cleaning services, the equilibrium price

A) and output are too low to be optimal.

B) and output are too high to be optimal.

C) is too low to be optimal, and equilibrium quantity is too high.

D) is too high to be optimal, and equilibrium quantity is too low.

E) is optimal, but there is an excess supply.

19. Which of the following is a negative externality connected to attending college?

A) The fact that completion of a college degree acts as a signaling mechanism to employers.

B) The fact that other costs, such as books and materials, are incurred in addition to tuition and fees.

C) The fact that your college has required that all individuals living in student housing either get or show they have already obtained vaccinations against all communicable diseases.

D) The fact that the people in the next room play loud music at hours you want to sleep.

E) The fact that you will get benefits from college that you don't currently anticipate.

20. Because of the kind of externalities that tend to be generated from general R&D resources bought by firms, the equilibrium price of R&D

A) is above the optimal level, and quantity is below the optimal level.

B) is below the optimal level, and quantity is above the optimal level.

C) and quantity of R&D are both above the optimal level.

D) and quantity of R&D are both below the optimal level.

E) must fall in order for the market to reach equilibrium.