Question : 21) Automobile insurance companies have a problem with people who : 1387574

21) Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured. In other words, the automobile insurance market is subject to

A) asymmetric information.

B) market signaling.

C) moral hazard.

D) adverse selection.

22) If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce

A) the problem of adverse selection.

B) the moral hazard problem.

C) sunk costs.

D) asymmetric information.

23) Health insurance companies impose deductibles on policies and co-payments on claims

A) to increase sales.

B) to reduce moral hazard problems.

C) to reduces sunk costs.

D) to increase prices.

24) In markets with asymmetric information,

A) moral hazard causes adverse selection which in turn causes asymmetric information.

B) adverse selection causes moral hazard which in turn causes asymmetric information.

C) asymmetric information causes moral hazard and then it causes adverse selection.

D) asymmetric information causes adverse selection and then it causes moral hazard.

25) What is the principal-agent problem?

A) It is a problem caused by a person (principal) who hires an agent to act on his behalf but is unwilling to delegate authority to the agent to carry out the task in the best possible way.

B) It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them.

C) It is a problem of the power system of boss and subordinate where the boss (principal) exerts influence over his subordinates (agents) using punishment or threat.

D) It is a problem that exists when a person (principal) has more information about the task than the agent he hires to perform the task.

26) In the principal-agent relationship, the agent is

A) the owner of a resource that has hired another party to act on his behalf.

B) the person who is placed in control over resources that are not his own, with a contractual obligation to use these resources in the interests of some other party.

C) the person who is placed in control over resources that are not his own and agrees to compensate the resource owner in the event of outcomes that do not satisfy the resource owner.

D) the person who places his resources in professional hands in exchange for the professional’s promise to act on the resource owner’s behalf.

27) If a doctor knows that an insurance company will pay for most of a patient’s bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of

A) moral hazard.

B) the principle-agent problem.

C) asymmetric information.

D) adverse selection.

28) Suppose a large firm allows its employees to choose whether to participate in its health insurance plan. The firm is trying to decide between two plans: Plan I has a low monthly premium but a high deductible, and Plan II has a high monthly premium but a low deductible. Under which plan is adverse selection likely to be a bigger problem?

A) Plan I because it is likely to draw participants who expect high medical costs. This group expects to consume much health care services and therefore prefer low deductibles.

B) Plan II because it is likely to draw participants who expect high medical costs. Healthy individuals who do not expect to consume much health care services will not be willing to pay the high premiums.

C) Plan I because it is likely to draw the relatively healthy employees who do not expect to spend much on health care. Because the monthly premiums are low, the insurance company has to bear a bigger financial burden in the event of serious illnesses.

D) Plan II because it is likely to draw employees who tend to over-consume health care services because of the low deductible. Insurance companies are likely to end up paying out more claims than the premiums they collect.