Chapter 9 Market Failure: Imperfect Information, External Benefits, and External Costs

| February 14, 2018

28)
Who is more likely to offer a money-back guarantee: a seller of a lemon or a
seller of a plum? Why?

Recall
the Application about federal quality standards in the market for kiwifruit to
answer the following question(s).

29)
Recall the Application. Why were there so many “lemon” kiwifruit in
the U.S. market?

9.3 Insurance and Moral Hazard

1)
Which of the following is NOT an example of moral hazard?
A)
People take poor care of their health because they have health insurance.
B)
People drive recklessly because they have medical insurance.
C)
People don’t lock their doors because they have theft insurance.
D)
All of the above are examples of moral hazard.

2)
Andy does not bother to lock the door to his house because he has theft
insurance. This is an example of
A)
a positive spillover.
B)
moral hazard.
C)
adverse selection.
D)
irrational behavior.

3)
You do not worry about how your bank is investing your money because your
deposits are federally insured. This is an example of
A)
a positive spillover.
B)
moral hazard.
C)
adverse selection.
D)
irrational behavior.

4)
Moral hazard is more likely to arise when
A)
one side of an economic relationship cannot observe the behavior of those on
the other side.
B)
adverse selection is present.
C)
insurance policies have high deductibles.
D)
people are uninsured.

5)
In communities where more people carry property insurance you would expect
people to be
A)
less careful about securing their possessions.
B)
more careful about securing their possessions.
C)
less likely to engage in behaviors that would be classified as moral hazard.
D)
paying less for property insurance relative to communities where fewer people
carry property insurance.

6)
Suppose that Harold buys collision insurance for his car and then drives it
recklessly. This is an example of
A)
a positive spillover.
B)
moral hazard.
C)
adverse selection.
D)
irrational behavior.

7)
One way that insurance companies can reduce the moral hazard problem is to
A)
make insurance customers pay a deductible before the company pays on a claim.
B)
engage in genetic testing to determine who is more likely to be high risk.
C)
eliminate copayments on insurance claims.
D)
insure only customers with good morals.

8)
Suppose that lenders believe that the government will provide assistance if too
many of the lenders’ borrowers do not pay back their loans. If lenders expect
government assistance they will
A)
make more loans to borrowers who are less likely to repay them.
B)
make fewer loans to borrowers who are less likely to repay them.
C)
increase the interest rates that they charge borrowers who are less likely to
repay loans.
D)
not change their lending policies because this expectation is not reasonable.

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