Multiple-Choice Review Questions

1. Question

   Which of the following is true about private information?

   
   

   
   

   1. It has value.

      
      
   
   

   2. Everyone has access to it.

      
      
   
   

   3. It can distort economic decisions.

      
      
   
   

   A.

   I only

   B.

   II only

   C.

   III only

   D.

   I and III only

   E.

   I, II, and III

2. Question

   Due to adverse selection,

   A.

   mutually beneficial trades go unexploited.

   B.

   people buy lemons rather than other fruit.

   C.

   sick people buy less insurance.

   D.

   private information is available to all.

   E.

   public information is available to no one.

3. Question

   When colleges use grade point averages to make admissions decisions, they are employing which strategy?

   A.

   signaling

   B.

   screening

   C.

   profit maximization

   D.

   marginal analysis

   E.

   adverse selection

4. Question

   Moral hazard is the result of

   A.

   asymmetric information.

   B.

   signaling.

   C.

   toxic waste.

   D.

   adverse selection.

   E.

   public information.

5. Question

   A deductible is used by insurance companies to

   A.

   allow customers to pay for insurance premiums using payroll deduction.

   B.

   deal with moral hazard.

   C.

   make public information private.

   D.

   compensate policyholders fully for their losses.

   E.

   avoid all payments to policyholders.