Question : 51) The study of the problems due to asymmetric information : 1245126

51) The study of the problems due to asymmetric information was begun when economists analyzed which type of market?

A) the market for citrus fruit

B) the market for insurance

C) farmers’ markets

D) the market for automobiles

52) Which of the following Nobel laureates became known for the study of asymmetric information?

A) Gary Becker

B) Michael Spence

C) George Ackerlof

D) Ronald Coase

53) Adverse selection will occur in a market as a result of

A) asymmetric information.

B) moral hazard.

C) the sale of “lemons.”

D) rational ignorance.

54) Which of the following is an example of adverse selection?

A) The odds of a fire rise after a building is insured because the person with fire insurance is likely to pay less attention to fire hazards.

B) Someone who did not install fire alarms and a sprinkler system in a building he owns buys insurance for the building.

C) Someone with automobile insurance drives more recklessly than someone without insurance.

D) People prefer to buy new cars rather than used cars.

55) Why is the study of asymmetric information associated with the market for “lemons”?

A) Sellers of citrus fruit—lemons, oranges, grapefruit—know the difference between bad fruit and good fruit; buyers do not have this information.

B) Because there is little advertising in the market for lemons, buyers have difficulty determining the quality of lemons before they are purchased.

C) Potential buyers of used cars have difficulty separating good used cars from bad used cars; bad used cars are often referred to as “lemons.”

D) Most sellers of used cars have less information about their cars than the dealers who buy them; used cars are often referred to as “lemons.”

56) Because of asymmetric information, most used cars that are offered for sale will be sold for prices that are greater than their true value. Because of this fact, the used car market falls victim to

A) the free rider problem.

B) deadweight loss and economic inefficiency.

C) a surplus of used cars.

D) adverse selection.

57) Suppose that in a market for used cars, there are good used cars and bad used cars (lemons). Consumers are willing to pay as much as $9,000 for a good used car but only $3,000 for a lemon. Sellers of good used cars value their cars at $7,500 each and sellers of lemons value their cars at $1,500 each. Buyers cannot tell if a used car is reliable or is a lemon. Based on this information, what is the likely outcome in the market for used cars?

A) Sellers of good used cars will drop out of the market.

B) Sellers of good used cars will incur losses.

C) Sellers of lemons will drop out of the market.

D) Used cars will sell for $6,000.

58) Adverse selection in the market for health insurance arises because

A) many insurance companies care more about profits than they do about providing services for their customers in the event of illness.

B) the federal government intervenes in insurance markets by controlling prices and reimbursement policies.

C) insurance companies are not allowed to charge premiums that are high enough to insure against “worst-case” illness.

D) buyers of insurance know more than insurance companies about the likelihood of an illness for which buyers want insurance.

59) Economists refer to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off as

A) bad faith.

B) economic inefficiency.

C) moral hazard.

D) market failure.

60) In the 1973 movie Save the Tiger, Jack Lemmon plays Harry Stoner, the CEO of a clothing manufacturer whose business has fallen on hard times. In one of the key scenes of the movie, Stoner tries to convince his partner that they should hire someone to burn one of their buildings in order to collect on their insurance policy. Harry Stoner’s actions are an example of

A) adverse selection.

B) moral hazard.

C) self-interest.

D) asymmetric information.