61.Tamiknowsthatpeopleinherfamilydieyoung,andsoshebuyslifeinsurance.Prestonknowsheisarecklessdriverandsoheappliesforautomobileinsurance. a.Thesearebothexamplesofadverseselection. b.Thesearebothexamplesofmoralhazard. c.Thefirstexampleillustratesadverseselection,andthesecondillustratesmoralhazard. d.Thefirstexampleillustratesmoralhazard,andthesecondillustratesadverseselection. 62.Abbybuyshealthinsurancebecausesheknowsthatshehashealthrisksthatwouldn’tbeobvioustoaninsurancecompany.Bradbuyshomeownersinsuranceandthenislesscarefultomakesurehe’sputouthiscigarettes.TheexamplewithAbby a.andtheexamplewithBradillustrateadverseselection. b.andtheexamplewithBradillustratemoralhazard. c.illustratesadverseselection;theexamplewithBradillustratesmoralhazard. d.illustratesmoralhazard;theexamplewithBradillustratesadverseselection. 63.Whichofthefollowingisadverseselection? a.theriskassociatedwithselectingstocksinonlyafewspecificcompanies b.theriskthatapersonwillbecomeoverconfidentinhisabilitytoselectstocks c.ahigh-riskpersonbeingmorelikelytoapplyforinsurance d.afterobtaininginsuranceapersonhavinglessincentivetobecareful 64.Whichofthefollowingbestillustratesmoralhazard? a.Afterapersonobtainslifeinsurance,shetakesupskydiving. b.Apersonobtainsinsuranceknowingheisinpoorhealth. c.Apersonholdsstockonlyinveryriskycorporations. d.Apersonholdsstocksfromonlyafewcorporations. 65.Whenyourentacar,youmighttreatitwithlesscarethanyouwouldifitwereyourown.Thisisanexampleof a.marketrisk. b.moralhazard. c.adverseselection. d.riskaversion. 66.Financialintermediariestypicallyrequiremortgageborrowerstohavehomeowner’sinsuranceanddocreditchecksbeforemakingtheloan. a.Theinsurancerequirementandthecreditcheckarebothdesignedprimarilytoreduceadverseselection. b.Theinsurancerequirementandthecreditcheckarebothdesignedprimarilytoreducetheriskofmoralhazard. c.Theinsurancerequirementisdesignedprimarilytoreduceadverseselection;thecreditcheckisdesignedprimarilytoreducetheriskofmoralhazard. d.Theinsurancerequirementisdesignedprimarilytoreducetheriskofmoralhazard;thecreditcheckisdesignedprimarilytoreduceadverseselection. 67.Youmaybeunwillingtobuyausedcarbecauseyoususpectthelastownerfoundoutthecarwasalemon.Youmaytreatacaryourentedwithalittlelesscarethanyouwoulduseonyourowncar. a.Bothexamplesprimarilyillustrateadverseselection. b.Bothexamplesprimarilyillustratemoralhazard. c.Thefirstexampleprimarilyillustratesadverseselection;thesecondprimarilyillustratesmoralhazard. d.Thefirstexampleprimarilyillustratesmoralhazard;thesecondprimarilyillustratesadverseselection. 68.Overthepasttwocenturies,theaverageannualratesofreturnwereabout a.5percentforstocksandabout1.5percentforshort-termgovernmentbonds. b.6percentforstocksandabout2.5percentforshort-termgovernmentbonds. c.8percentforstocksandabout3percentforshort-termgovernmentbonds. d.Noneoftheaboveiscorrect. 69.Risk-aversepeoplewillchoosedifferentassetportfoliosthanpeoplewhoarenotriskaverse.Overalongperiodoftime,wewouldexpectthat a.everyrisk-aversepersonwillearnahigherrateofreturnthaneverynon-risk-averseperson. b.everyrisk-aversepersonwillearnalowerrateofreturnthaneverynon-risk-averseperson. c.theaveragerisk-aversepersonwillearnahigherrateofreturnthantheaveragenon-risk-averseperson. d.theaveragerisk-aversepersonwillearnalowerrateofreturnthantheaveragenon-risk-averseperson. 70.Whichofthefollowingisnotcorrect? a.Thehigheraveragereturnonstocksthanonbondscomesatthepriceofhigherrisk. b.Risk-aversepersonswilltaketherisksinvolvedinholdingstocksiftheaveragereturnishighenoughtocompensatefortherisk. c.Insurancemarketsreducerisk,butnotbydiversification. d.Riskcanbereducedbyplacingalargenumberofsmallbets,ratherthanasmallnumberoflargebets.