ECON200 final exam latest version
verified with correct answer.
complete information - CORRECT ANSWERS-When people are fully informed about
the choices that they and other relevant economic actors face
information asymmetry - CORRECT ANSWERS-A condition in which one participant in
a transaction knows more than the other participant. (if both parties' incentives are
aligned, then info asymmetry doesn't matter).
adverse selection - CORRECT ANSWERS-a state that occurs when when buyers and
sellers have different information about the quality of a good or the riskiness of a
situation, and this asymmetric information results in failure to complete transactions that
would have been possible if both sides had the same information.
principal-agent problem - CORRECT ANSWERS-a person called a principal entrusts
someone else, called the agent, with a task.
moral hazard - CORRECT ANSWERS-The tendency for people to behave in a riskier
way or to renege on contracts when they do not face the full consequences of their
actions
screening - CORRECT ANSWERS-Taking action to reveal private information about
someone else
signaling - CORRECT ANSWERS-when people take action, on purpose or not, to
reveal their own private information
statistical discrimination - CORRECT ANSWERS-distinguishing between choices by
generalizing based on observable characteristics in order to fill in missing information
A course description posted during the registration period notes that homework is
graded complete or incomplete rather than being corrected by the instructor. Which of
the following describes the adverse-selection problem in this situation?
The description will disproportionately attract high performing students with a genuine
love of learning.
The description is likely to give potential students the false belief that the assignments
will be easy when they may still receive low grades on their assignments.
The description will disproportionately attract students who don't typically perform well
on graded assignments.
While informative, the description still fails to give prospective students complete
information on type of homework given. - CORRECT ANSWERS-The description will
disproportionately attract students who don't typically perform well on graded
assignments.
When adverse selection occurs there are:
more transactions than would have been occurred if both sides had the same
information.
fewer transactions than would have been occurred if both sides had the same
information.
,the same transactions that would occur when both sides had the same information.
no transactions. - CORRECT ANSWERS-fewer transactions than would have been
occurred if both sides had the same information.
There is a town with exactly 1,000 residents. In the town, 75% of the residents make
healthy choices and 25% of the residents consistently make unhealthy choices, but the
health insurance company in town cannot tell who is healthy and who is unhealthy. A
healthy person has an average of $600 in medical expenses each year and is willing to
pay $800 for insurance. An unhealthy person has an average of $1,600 in medical
expenses each year and is willing to pay $2,000 for insurance. The health insurance
provider can offer insurance at only one price.
a. In equilibrium, the price of insurance will be at least
b. In equilibrium, who will buy insurance? - CORRECT ANSWERS-a. $1,600
b. Unhealthy residents
The health insurance provider can offer only one price. If it tries to cover the costs of
both the unhealthy and the healthy individuals, its costs on average will be (0.75 × 600)
+ (0.25 × 1,600) = $850. Because healthy individuals are only willing to pay up to $800,
healthy individuals would not purchase this insurance. Only unhealthy individuals would
purchase insurance. In this case, the insurance provider needs to cover the costs of the
unhealthy individuals, which are $1,600. Thus, insurance will cost at least $1,600.
**In which of the following government policies is moral hazard not a concern? -
CORRECT ANSWERS-Government raises taxes to pay for social services
When people do not face the full consequences of their actions, they may act in riskier
ways than they would otherwise.
a. This situation is called:
moral hazard.
adverse selection.
market failure.
imperfect competition.
b. An example of this problem is:
buyers cannot determine the value of a stock before purchase.
people in poor health are more likely to buy insurance.
drivers with insurance may drive less carefully.
only low-quality cars will be available on the market. - CORRECT ANSWERS-a. moral
hazard
b. drivers with insurance may drive less carefully.
Say whether each of the following situations involves screening or signaling.
,a. Auto shops and motels advertise that they are AAA-approved:
b. Employers check interviewees' Facebook or LinkedIn profiles before hiring one of
them:
c. Applicants must pass an exam before becoming eligible for a civil-service position:
d. People wear expensive clothing with large brand names or logos: - CORRECT
ANSWERS-a. signaling
b. screening
c. screening
d. signaling
Jane uses an online dating service. For each of the following activities say whether
Jane is screening or signaling.
a. Jane views profiles of only non-smokers:
b. Jane describes her volunteer activities in her profile:
c. Jane lists museums and foreign films among her interests:
d. Jane looks for matches who live within 25 miles of her address: - CORRECT
ANSWERS-a. screening
b. signaling
c. signaling
d. screening
In college admissions, which of the following are examples of statistical discrimination?
a. A college has minimum required scores on standardized tests.
b. A college is an all-women's school.
c. A college uses high school GPA to rank students for scholarship offers.
d. A college requires three letters of recommendation. - CORRECT ANSWERS-a and c
are checked
b and d are unchecked
In a market for car insurance, which of the following are examples of statistical
discrimination?
a. Premiums are adjusted based on the zip code of the insured.
b. Premiums are adjusted based on the color of the car.
c. Premiums are adjusted based on the driving record of the insured.
d. Premiums are adjusted based on the model of the car. - CORRECT ANSWERS-all
boxes are checked
Imagine that the owner of a bagel shop visits it only once a day. According to company
policy, employees are supposed to pay for all the bagels they eat. Moral hazard is likely
to be a problem in this situation and to prevent it the owner could:
, a. keep track of the bagel supply versus receipts.
b. install surveillance equipment.
c. spend more time in the shop.
d. provide each employee with a free bagel every morning.
e. stop by the shop at noon every day. - CORRECT ANSWERS-a, b, and c are checked
d and e are unchecked
**Some people have argued that mandatory health insurance could reduce health care
costs, stating that it would address the problem of - CORRECT ANSWERS-adverse
selection
Reputation may solve some problems with information asymmetries because:
it increases the opportunity cost of less desirable actions.
it eliminates the problem of information asymmetries.
it eliminates adverse selection.
it screens for better employees. - CORRECT ANSWERS-it increases the opportunity
cost of less desirable actions.
Building a good reputation is costly and time-consuming. Since a good reputation is
valuable, agents will be less likely to take actions that will harm that reputation.
interest rate - CORRECT ANSWERS-the price of money, typically expressed as a
percentage per dollar per unit of time; for savers, it is the price received for letting a
bank use money for a specified period of time; for borrowers, it is the price of using
money for a specified period of time
The interest rate tells us how much more the money is worth to the bank today than in
the future.
compounding - CORRECT ANSWERS-the process of accumulation that results from
the additional interest paid on previously earned interest
present value - CORRECT ANSWERS-how much a certain amount of money that will
be obtained in the future is worth today
Future value of sum = FV = PV × (1 + r)^n - CORRECT ANSWERS-Present value of
sum = PV = FV/(1 + r)^n
risk - CORRECT ANSWERS-exists when the costs or benefits of an event or choice are
uncertain. Everything in life involves some uncertainty.
expected value - CORRECT ANSWERS-the average of each possible outcome of a
future event, weighted by its probability of occurring.
Expected value=EV=(P1×S1)+(P2×S2)+...+(Pn×Sn)
risk-averse - CORRECT ANSWERS-having a low willingness to take on situations with
risk; when faced with two options with equal expected value, the one with lower risk is
preferred
risk-seeking - CORRECT ANSWERS-having a high willingness to take on situations
with risk; when faced with two options with equal expected value, the one with higher
risk is preferred
risk pooling - CORRECT ANSWERS-organizing people into a group to collectively
absorb the risk faced by each individual
verified with correct answer.
complete information - CORRECT ANSWERS-When people are fully informed about
the choices that they and other relevant economic actors face
information asymmetry - CORRECT ANSWERS-A condition in which one participant in
a transaction knows more than the other participant. (if both parties' incentives are
aligned, then info asymmetry doesn't matter).
adverse selection - CORRECT ANSWERS-a state that occurs when when buyers and
sellers have different information about the quality of a good or the riskiness of a
situation, and this asymmetric information results in failure to complete transactions that
would have been possible if both sides had the same information.
principal-agent problem - CORRECT ANSWERS-a person called a principal entrusts
someone else, called the agent, with a task.
moral hazard - CORRECT ANSWERS-The tendency for people to behave in a riskier
way or to renege on contracts when they do not face the full consequences of their
actions
screening - CORRECT ANSWERS-Taking action to reveal private information about
someone else
signaling - CORRECT ANSWERS-when people take action, on purpose or not, to
reveal their own private information
statistical discrimination - CORRECT ANSWERS-distinguishing between choices by
generalizing based on observable characteristics in order to fill in missing information
A course description posted during the registration period notes that homework is
graded complete or incomplete rather than being corrected by the instructor. Which of
the following describes the adverse-selection problem in this situation?
The description will disproportionately attract high performing students with a genuine
love of learning.
The description is likely to give potential students the false belief that the assignments
will be easy when they may still receive low grades on their assignments.
The description will disproportionately attract students who don't typically perform well
on graded assignments.
While informative, the description still fails to give prospective students complete
information on type of homework given. - CORRECT ANSWERS-The description will
disproportionately attract students who don't typically perform well on graded
assignments.
When adverse selection occurs there are:
more transactions than would have been occurred if both sides had the same
information.
fewer transactions than would have been occurred if both sides had the same
information.
,the same transactions that would occur when both sides had the same information.
no transactions. - CORRECT ANSWERS-fewer transactions than would have been
occurred if both sides had the same information.
There is a town with exactly 1,000 residents. In the town, 75% of the residents make
healthy choices and 25% of the residents consistently make unhealthy choices, but the
health insurance company in town cannot tell who is healthy and who is unhealthy. A
healthy person has an average of $600 in medical expenses each year and is willing to
pay $800 for insurance. An unhealthy person has an average of $1,600 in medical
expenses each year and is willing to pay $2,000 for insurance. The health insurance
provider can offer insurance at only one price.
a. In equilibrium, the price of insurance will be at least
b. In equilibrium, who will buy insurance? - CORRECT ANSWERS-a. $1,600
b. Unhealthy residents
The health insurance provider can offer only one price. If it tries to cover the costs of
both the unhealthy and the healthy individuals, its costs on average will be (0.75 × 600)
+ (0.25 × 1,600) = $850. Because healthy individuals are only willing to pay up to $800,
healthy individuals would not purchase this insurance. Only unhealthy individuals would
purchase insurance. In this case, the insurance provider needs to cover the costs of the
unhealthy individuals, which are $1,600. Thus, insurance will cost at least $1,600.
**In which of the following government policies is moral hazard not a concern? -
CORRECT ANSWERS-Government raises taxes to pay for social services
When people do not face the full consequences of their actions, they may act in riskier
ways than they would otherwise.
a. This situation is called:
moral hazard.
adverse selection.
market failure.
imperfect competition.
b. An example of this problem is:
buyers cannot determine the value of a stock before purchase.
people in poor health are more likely to buy insurance.
drivers with insurance may drive less carefully.
only low-quality cars will be available on the market. - CORRECT ANSWERS-a. moral
hazard
b. drivers with insurance may drive less carefully.
Say whether each of the following situations involves screening or signaling.
,a. Auto shops and motels advertise that they are AAA-approved:
b. Employers check interviewees' Facebook or LinkedIn profiles before hiring one of
them:
c. Applicants must pass an exam before becoming eligible for a civil-service position:
d. People wear expensive clothing with large brand names or logos: - CORRECT
ANSWERS-a. signaling
b. screening
c. screening
d. signaling
Jane uses an online dating service. For each of the following activities say whether
Jane is screening or signaling.
a. Jane views profiles of only non-smokers:
b. Jane describes her volunteer activities in her profile:
c. Jane lists museums and foreign films among her interests:
d. Jane looks for matches who live within 25 miles of her address: - CORRECT
ANSWERS-a. screening
b. signaling
c. signaling
d. screening
In college admissions, which of the following are examples of statistical discrimination?
a. A college has minimum required scores on standardized tests.
b. A college is an all-women's school.
c. A college uses high school GPA to rank students for scholarship offers.
d. A college requires three letters of recommendation. - CORRECT ANSWERS-a and c
are checked
b and d are unchecked
In a market for car insurance, which of the following are examples of statistical
discrimination?
a. Premiums are adjusted based on the zip code of the insured.
b. Premiums are adjusted based on the color of the car.
c. Premiums are adjusted based on the driving record of the insured.
d. Premiums are adjusted based on the model of the car. - CORRECT ANSWERS-all
boxes are checked
Imagine that the owner of a bagel shop visits it only once a day. According to company
policy, employees are supposed to pay for all the bagels they eat. Moral hazard is likely
to be a problem in this situation and to prevent it the owner could:
, a. keep track of the bagel supply versus receipts.
b. install surveillance equipment.
c. spend more time in the shop.
d. provide each employee with a free bagel every morning.
e. stop by the shop at noon every day. - CORRECT ANSWERS-a, b, and c are checked
d and e are unchecked
**Some people have argued that mandatory health insurance could reduce health care
costs, stating that it would address the problem of - CORRECT ANSWERS-adverse
selection
Reputation may solve some problems with information asymmetries because:
it increases the opportunity cost of less desirable actions.
it eliminates the problem of information asymmetries.
it eliminates adverse selection.
it screens for better employees. - CORRECT ANSWERS-it increases the opportunity
cost of less desirable actions.
Building a good reputation is costly and time-consuming. Since a good reputation is
valuable, agents will be less likely to take actions that will harm that reputation.
interest rate - CORRECT ANSWERS-the price of money, typically expressed as a
percentage per dollar per unit of time; for savers, it is the price received for letting a
bank use money for a specified period of time; for borrowers, it is the price of using
money for a specified period of time
The interest rate tells us how much more the money is worth to the bank today than in
the future.
compounding - CORRECT ANSWERS-the process of accumulation that results from
the additional interest paid on previously earned interest
present value - CORRECT ANSWERS-how much a certain amount of money that will
be obtained in the future is worth today
Future value of sum = FV = PV × (1 + r)^n - CORRECT ANSWERS-Present value of
sum = PV = FV/(1 + r)^n
risk - CORRECT ANSWERS-exists when the costs or benefits of an event or choice are
uncertain. Everything in life involves some uncertainty.
expected value - CORRECT ANSWERS-the average of each possible outcome of a
future event, weighted by its probability of occurring.
Expected value=EV=(P1×S1)+(P2×S2)+...+(Pn×Sn)
risk-averse - CORRECT ANSWERS-having a low willingness to take on situations with
risk; when faced with two options with equal expected value, the one with lower risk is
preferred
risk-seeking - CORRECT ANSWERS-having a high willingness to take on situations
with risk; when faced with two options with equal expected value, the one with higher
risk is preferred
risk pooling - CORRECT ANSWERS-organizing people into a group to collectively
absorb the risk faced by each individual
