Check Your Understanding

  1. Question

    Your car insurance premiums are lower if you have had no moving violations for several years. Explain how this feature tends to decrease the potential inefficiency caused by adverse selection.

  2. Question

    A common feature of home construction contracts is that when it costs more to construct a building than was originally estimated, the contractor must absorb the additional cost. Explain how this feature reduces the problem of moral hazard but also forces the contractor to bear more risk than she would like.

  3. Question

    True or false? Explain your answer, stating what concept discussed in this module accounts for the feature. People with higher deductibles on their auto insurance

    1. generally drive more carefully.

    2. pay lower premiums.

We provide these review questions in addition to discussion starters in case you or the AP® program chooses a rigorous approach to this material.