Practice Questionsfinal-2015.ppt

Practice Questionsfinal-2015.ppt - Practice Questions_b The...

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Practice Questions
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__b__ The adverse selection process is prevalent in the used car market because: a.only poorer people are likely to purchase used cars. b.sellers know more about the vehicles being sold than do potential buyers. c.the price of the car sends a signal about its quality. d.so many consumers are adverse to buying used cars.
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__b__ When do insurance companies encounter the problem of moral hazard? a.When they do not have enough information to distinguish between people who are "good risks" and those who are "bad risks.“ b.When simply having insurance causes people to take more risks than they would otherwise. c.When the price of insurance premiums fully reflects all available information. d.When the insurance company suffers large losses because a major catastrophe has affected a large number of people simultaneously.
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Each firm has a choice of advertising, ads, or not advertising, no ad. The profits each gets depend upon which it chooses.
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