ACE 474 FINAL EXAM UPDATED ACTUAL QUESTIONS
AND CORRECT ANSWERS
Question:
1. How insurance premiums are set
Answer:
Adverse Selection, moral hazard, stats discrimination
Question:
2. Adverse Selection
Answer:
Process by which the less desirable potential trading partners volunteer to
exchange
Question:
3. Moral Hazard
Answer:
Incentives that lead people to behave in inefficient or even file ways (e.g.,
fraudulent claims or be negligent in their care of goods insured).
Question:
4. Statistical Discrimination
Answer:
Draw conclusions based on some known characteristics.
Insurance premiums and credit scores.
Question:
5. Effects of Information & Advertising on Consumption
Answer:
The economics of information
Signaling between potential adversaries
-Costly-to-fake principle
-Full disclosure principle
Akerlof's lemons principle
Adverse selection
Statistical discrimination
,Question:
6. The costly-to-fake principle
Answer:
It is the idea that to communicate information credibly to a potential rival, a signal
must be costly or difficult to fake
Warranties
Million dollars worth advertising on national TV
Question:
7. full disclosure principle
Answer:
requires a company to provide the necessary information so that people who are
accustomed to reading financial information can make informed decisions
concerning the company
Question:
8. Akerlof's Lemon's Principal:
Answer:
It discusses information asymmetry, which occurs when the seller knows more
about a product than the buyer.
Question:
9. neoclassical model
Answer:
The price of goods
The quality of goods
The amount of utility obtained from the good
In reality, consumers do not have perfect information
Question:
10. Why information is limited
Answer:
Info varies in reliability.
Costly to collect information.
Limited ability to recall information.
Efficient to use simple rules to process the information.
Inability to process the information correctly.
, Question:
11. You will collect more information before making a
purchase if....
Answer:
Marginal benefit of information
greater than
Marginal cost of obtaining and interpreting the information
Question:
12. Search goods
Answer:
Quality can be determined by inspection before purchase.
Question:
13. Experience goods
Answer:
Quality can be determined by consuming good (brand).
Question:
14. Credence goods
Answer:
Quality cannot be determined even after good is consumed (regulation,
investigation, certification).
Question:
15. Asymmetric Information
Answer:
One party to a transaction has more information than the other party.
Question:
16. Believable information has two properties:
Answer:
It is costly to fake (signal is difficult to fake).
It induces full disclosure.
AND CORRECT ANSWERS
Question:
1. How insurance premiums are set
Answer:
Adverse Selection, moral hazard, stats discrimination
Question:
2. Adverse Selection
Answer:
Process by which the less desirable potential trading partners volunteer to
exchange
Question:
3. Moral Hazard
Answer:
Incentives that lead people to behave in inefficient or even file ways (e.g.,
fraudulent claims or be negligent in their care of goods insured).
Question:
4. Statistical Discrimination
Answer:
Draw conclusions based on some known characteristics.
Insurance premiums and credit scores.
Question:
5. Effects of Information & Advertising on Consumption
Answer:
The economics of information
Signaling between potential adversaries
-Costly-to-fake principle
-Full disclosure principle
Akerlof's lemons principle
Adverse selection
Statistical discrimination
,Question:
6. The costly-to-fake principle
Answer:
It is the idea that to communicate information credibly to a potential rival, a signal
must be costly or difficult to fake
Warranties
Million dollars worth advertising on national TV
Question:
7. full disclosure principle
Answer:
requires a company to provide the necessary information so that people who are
accustomed to reading financial information can make informed decisions
concerning the company
Question:
8. Akerlof's Lemon's Principal:
Answer:
It discusses information asymmetry, which occurs when the seller knows more
about a product than the buyer.
Question:
9. neoclassical model
Answer:
The price of goods
The quality of goods
The amount of utility obtained from the good
In reality, consumers do not have perfect information
Question:
10. Why information is limited
Answer:
Info varies in reliability.
Costly to collect information.
Limited ability to recall information.
Efficient to use simple rules to process the information.
Inability to process the information correctly.
, Question:
11. You will collect more information before making a
purchase if....
Answer:
Marginal benefit of information
greater than
Marginal cost of obtaining and interpreting the information
Question:
12. Search goods
Answer:
Quality can be determined by inspection before purchase.
Question:
13. Experience goods
Answer:
Quality can be determined by consuming good (brand).
Question:
14. Credence goods
Answer:
Quality cannot be determined even after good is consumed (regulation,
investigation, certification).
Question:
15. Asymmetric Information
Answer:
One party to a transaction has more information than the other party.
Question:
16. Believable information has two properties:
Answer:
It is costly to fake (signal is difficult to fake).
It induces full disclosure.
