final micro - Chapter 17 1. Suppose that you see a 2001...

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Chapter 17 1. Suppose that you see a 2001 Volkswagen Jetta advertised in the campus newspaper for $8,750. If you knew it was reliable you would be willing to pay $10,500 for it. If you knew it was unreliable, you would be willing to pay $7,000 for it. You should buy it if which of the following circumstances is true? a. There is more than a 50-50 chance that it is a lemon. b. There is a 50-50 chance that it is a lemon. c. Neither. You should not buy it. 2. Every state requires that drivers have an automobile insurance policy that covers any car they own and operate. Some people have such bad driving records that they are unable to find any insurance company willing to sell them a policy. These drivers are placed in an “assigned risk pool.” Every insurance company that sells automobile insurance in the stat is required to insure some drivers from the assigned risk pool. The state government usually sets the rates these drivers pay for insurance. Why does the state government have to force insurance companies to insure bad drivers? a. The lemons problem b. Moral hazard c. Adverse selection d. Both A and B are possible. 3. Auto insurers like State Farm have begun collecting more information on drivers and using models that employ thousands of variables to predict the chance that a driver will have an accident. Why didn’t firms do this sooner if these differences among drivers always existed? a. The costs of collecting and using the data are now less than the benefits from reducing the problem of asymmetric information. b. The firms are more likely to be sued in the present than they were in the past. c. The adverse selection problem did not exist before. d. The benefits of collecting and using the data are now less than the costs associated with poor drivers. e. None of the above. 4. After the countries of Eastern Europe converted from Communism to the market system, they tried to set up stock and bond markets. Most of these markets have remained very small, with few firms being able to find buyers for their stocks or bonds. One economist remarked that the reason these financial markets have been unsuccessful is that, “the lemons problem has been too great.” The economist means that investors have been unwilling to buy the stocks and bonds of these firms because why? a. So many stocks are for sale that there is a higher probability that most of them are lemons. b. Very few stocks are for sale, so it’s likely that a large proportion of them are lemons. c. The firms that want to sell stocks or bonds to investors have been the firms that investors would least want to buy stocks or bonds from, if they knew the true state of the firms’ financial health.
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d. Both A and C. 5.
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final micro - Chapter 17 1. Suppose that you see a 2001...

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