Micro Economics Theory Applications II Set 3 MCQs

Q1 | When the average buyer of an insurance policy is likely to have higher risk than others in hisclass, this is known as

adverse selection.

moral hazard.

asymmetric information.

an hmo.

Q2 | Health care markets may be inefficient because of

poor information (‘ignorance’).

adverse selection.

moral hazard.

all of the above.

Q3 | The government can address by providing universal health insurance coverage and charginguniform premiums.

expected utility

asymmetric information

commodity egalitarianism

adverse selection

Q4 | When people behave in ways that involve increased risk because they have insurance, this isknown as

adverse selection.

moral hazard.

asymmetric information.

a hmo.

Q5 | Which of the following is not an assumption used in class for reaching the conclusion, usingutilitarian reasoning, that income should be divided equally:

everybody has the same utility function

there is a fixed amount of income to be divided

marginal utility is a diminishing function of income

some people are more productive than others

Q6 | In the economic analysis of the market for new drugs, it is critical to take into account

inefficiency from monopoly power granted by patents

inequity generated by drug makers charging more than a medication costs to make

incentives for innovation by inventing new drugs

all of the above

Q7 | Suppose that you have complete health insurance that covers all expenses. You will usemedical care up to the point where your:

total benefits equal the costs of providing the medical care.

marginal benefit is zero.

marginal benefit is equal to the marginal cost of the medical care.

marginal benefit is equal to the total costs of providing the medical care. as

Q8 | If the government subsidizes the health insurance costs of individuals because individuals donot sufficiently realize the importance of having health insurance, which of the following justifications for government intervention is being used?

high administrative costs

redistribution

ignorance

externalities

Q9 | Which of the following is a reason why employers are the predominant source of insurance?

insuring at the firm level reduces the extent to which insurance has moral hazard effects.

insuring at the firm level allows insurers to create large insurance pools with a predictable distribution of medical risk.

employee compensation in the form of medical expenditures is not taxed.

both b and c are correct.

Q10 | Adverse selection can occur when

all persons involved in a transaction have full information.

one person has information not available to others.

post-agreement incentives result in workers shirking.

nobody has any information about a particular product.

Q11 | Adverse selection occurs when

a person takes more risks that are not known to the life insurance company because he has life insurance.

a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.

a person is a risk lover.

pregnant women with health insurance make more doctor visits than uninsured pregnant women.

Q12 | Adverse selection occurs when there is

full information.

an unobserved behaviour.

an unobserved characteristic.

a worker who shirks because his boss does not watch him.

Q13 | If reckless drivers are more likely to buy automobile insurance than safe drivers are,

a moral hazard has occurred.

adverse selection has occurred.

the market for insurance is efficient.

then automobile insurance will be fairly priced.

Q14 | An individual is willing to pay something for information because

information is costly.

it is always better to know than not to know.

this allows him or her to increase utility.

information is a public good.

Q15 | An individual will not choose to acquire all available information because

that would maximize utility given his or her budget constraint.

that would violate the assumption of risk aversion.

there are increasing returns to additional information.

there are decreasing marginal costs to acquiring information.

Q16 | Adverse selection arises because

insurance buyers have more information than insurance sellers.

insurance sellers have more information than insurance buyers.

individuals can select which insurance company to patronize.

insurance companies can exercise too much control over who they insure.

Q17 | Adverse selection in competitive insurance markets harms

high risk individuals.

low risk individuals.

owners of insurance companies.

everyone.

Q18 | One way the “lemons problem” in the used-car industry can be mitigated is by

raising the price of used cars.

hiring auto experts to sell used cars.

requiring sellers to guarantee trouble-free cars.

allowing owners to trade in their own cars when they purchase a used car.

Q19 | An example of adverse selection is

purchasing a new car sight unseen based on the recommendation of a neighbour.

high health insurance premiums resulting from the poor health of people who buy policies.

suppliers who charge more for better quality clothing than for lower quality clothing.

being talked into buying a low-quality item because the price is lower.

Q20 | If markets are perfect, a rational actor may reasonably conclude from the high price of a good that the good

is produced by a monopoly.

is of better quality.

has a greater demand for it.

is not known about by other consumers.

Q21 | In volatile markets, “speculators” would be expected to provide some stability because

they will be required to do so by the government.

they will use current price moves to predict future moves.

they will buy when price is below equilibrium and sell when it is above equilibrium.

they will buy when price is above equilibrium and sell when it is below equilibrium.

Q22 | A market participant who obeys the principles of rational expectations will base his or herexpectations of market price on

all possible information about supply and demand curves.

all possible information about the history of price movements.

rational behaviour by other market participants.

rational behaviour by government regulators.

Q23 | The “lemons model” predicts quality deterioration in the used car market because

used cars require increasing maintenance.

suppliers and demanders have different information about cars’ quality.

used cars are generally of a lower quality than new cars.

people will usually buy new cars if they are available.

Q24 | The standard economic model assumes people are

rational

boundedly rational

altruistic

emotional

Q25 | What is the methodology of positive economics

models should say what it is optimal for a person to do

models should be as realistic as possible

models should be judged on their assumptions

models should be judged on their ability to predict