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Quiz 11

1. Regulations addressing low-quality cars should make buyers and sellers fully aware of which cars are low-quality and prevent the discounted sale of low-quality cars to the public. 2. Carfax reports on used cars detail ownership history, mileage, accidents and more, helping to lessen the "lemons problem" by reducing asymmetric information between buyers and sellers. 3. In karate instruction markets, instructors knowing more about their own instruction quality than students can create a "lemons problem" due to asymmetric information.

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Arya Shekarandaz
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269 views3 pages

Quiz 11

1. Regulations addressing low-quality cars should make buyers and sellers fully aware of which cars are low-quality and prevent the discounted sale of low-quality cars to the public. 2. Carfax reports on used cars detail ownership history, mileage, accidents and more, helping to lessen the "lemons problem" by reducing asymmetric information between buyers and sellers. 3. In karate instruction markets, instructors knowing more about their own instruction quality than students can create a "lemons problem" due to asymmetric information.

Uploaded by

Arya Shekarandaz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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QUESTION 1

Ideally, regulations that address low-quality cars should:

ban the sale of low-quality cars.


make buyers fully aware of which cars are low-quality.
prevent low-quality cars from being sold to the public at discounted prices.
make sellers fully aware of which cars are low-quality.

QUESTION 2
Carfax offers a report on used cars for $39.99 that details the ownership type and history, vehicle
mileage, accident reports, and other information. Carfax is an example of how markets try to:

increase adverse selection.


lessen the lemons problem by reducing asymmetric information.
profit from increasing information disparities between buyers and sellers.
address an inefficiency by making things worse because buyers must now pay for the report.

QUESTION 3
In the market for karate lessons, the instructors know more about the quality of their instruction
than their students do. This situation may create a:

lemons problem.
sensei equilibrium.
subgame outcome.
dojo fruition.

QUESTION 4
Based on John List's research on sports memorabilia shows, you should advise a buyer of antique
furniture at a flea market to:

purchase from local dealers.


pay with cash.
use an alias.
pay with a check.
3 points   
QUESTION 5
Principal–agent relationships arise from:

asymmetric information.
hyperbolic discounting.
risk aversion.
deadweight losses.
3 points   
QUESTION 6
Lucy, who has no mechanical knowledge of automobiles, takes her car to a mechanic because of
a pinging noise in the engine. The transaction between Lucy and the mechanic is characterized
by:

symmetric information with complete ignorance.


asymmetric information.
symmetric information.
complete information.
3 points   
QUESTION 7
Many states have laws requiring that health insurance policies cover the treatment of diabetes.
One study found that diabetics became fatter after the passage of these laws, which complicates
the treatment of diabetes. This study's finding is an example of:

cost lag.
hysteresis.
the multiplier.
moral hazard.
3 points   
QUESTION 8
In a small island population, half the people are healthy and half are sick. The annual expected
medical claims of the healthy and sick are $200 and $4,000, respectively. Assume that the health
insurance company does not know whether people are healthy or sick before they buy insurance.
What happens if the health insurance company charges an annual premium of $2,100 (the
average expected claim)?

Only the sick would buy insurance, causing future premiums to increase.
Only the healthy would buy insurance, causing future premiums to decrease.
Only the sick would buy insurance, causing future premiums to decrease.
Only the healthy would buy insurance, causing future premiums to increase.
3 points   
QUESTION 9
Adverse selection can occur when the:
I. buyer has more information than the seller.
II. seller has more information than the buyer.
III. buyer and seller have complete information.
 
I, II, and
III
II only
I and II
III only
3 points   
QUESTION 10
At a swap meet, there are 10 sellers who are each trying to sell a used 5.7L Chevy engine. Half
the engines are in mint condition, with each valued by their sellers at $3,000. The other engines
need repair, with each of these valued by their sellers at $1,000. Buyers value a mint engine at
$3,500 and an engine that needs repair at $1,600. Sellers know whether their engine is in mint
condition or needs repair, and buyers can distinguish between engines in mint condition and
those needing repair. How many engines will be sold at the swap meet?

zero
10
five mint engines and no engines that need repair
no mint engines and five engines that need repair

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