Imperfect information exists when buyers, sellers or both are uncertain about the quality of what is being traded.
Correct Answer
True
True. Imperfect information means that at least one side of a transaction lacks full knowledge of quality; asymmetric information is the special case in which one side knows more than the other.
Category: Imperfect Information
Question 2
Loss aversion means people feel a loss of a given size less strongly than a gain of the same size.
Correct Answer
False
False. Loss aversion means people feel a loss more strongly than an equal gain, so losing $10 hurts more than gaining $10 pleases.
Category: Imperfect Information
Question 3
Occupational licenses can act as a barrier to entry that limits the number of workers in a field and raises prices.
Correct Answer
True
True. Licenses give customers assurance about training, but by restricting who may work in an occupation they can also reduce competition, raise prices and limit choice.
Category: Reducing Information Problems
Question 4
Under the Affordable Care Act, insurers may deny coverage to people because of preexisting conditions.
Correct Answer
False
False. The Affordable Care Act bars insurers from denying coverage because of a preexisting condition.
Category: Health Insurance
Question 5
Insurance works by collecting regular payments from many policyholders and using the pooled funds to pay the few who suffer a covered loss.
Correct Answer
True
True. Pooling turns a large, unpredictable loss for one person into a smaller, predictable payment shared by many.
Category: How Insurance Works
Question 6
An actuarially fair premium for a risk group is set equal to the largest loss any member of the group might suffer.
Correct Answer
False
False. An actuarially fair premium equals the average, or expected, payout for members of the risk group, not the largest possible loss.
Category: How Insurance Works
Question 7
Sorting people into risk groups allows an insurer to charge lower premiums to people with a lower chance of a loss.
Correct Answer
True
True. When an insurer can tell risk groups apart, it can charge each group a premium based on that group's expected claims, so lower-risk groups pay less.
Category: How Insurance Works
Question 8
Moral hazard arises because insurers can observe every risky choice that policyholders make.
Correct Answer
False
False. Moral hazard arises because insurers cannot fully observe how carefully policyholders behave, so insured people can take more risk without the insurer knowing.
Category: Moral Hazard
Question 9
An insurer that offers lower property premiums to businesses with inspected security systems is using an incentive to reduce moral hazard.
Correct Answer
True
True. Rewarding careful behavior with lower premiums encourages insured businesses to keep taking steps to prevent losses.
Category: Moral Hazard
Question 10
Higher deductibles and copayments are expected to increase the amount of medical care people use.
Correct Answer
False
False. Making patients pay part of the cost gives them a reason to use less care, so higher deductibles and copayments are expected to reduce use of medical services.
Category: Moral Hazard
Question 11
Laws that require drivers to carry auto insurance reduce adverse selection by keeping low-risk drivers in the insurance pool.
Correct Answer
True
True. If buying insurance were voluntary, more low-risk drivers might go without it, leaving a riskier pool; a requirement keeps them in and spreads costs more widely.
Category: Adverse Selection
Question 12
Unemployment insurance and workers' compensation are paid for mainly by the workers who receive the benefits.
Correct Answer
False
False. Both programs are funded mainly by employers, not by the workers who collect benefits.
Category: How Insurance Works
Question 13
A money-back guarantee is especially valuable to online sellers, whose customers cannot inspect a product before buying it.
Correct Answer
True
True. When buyers cannot see or test a product first, a promise of a refund reduces their risk of being stuck with a poor-quality item.
Category: Reducing Information Problems
Question 14
Members of the same risk group face very different chances of experiencing an adverse event.
Correct Answer
False
False. A risk group is defined as people who face roughly the same chance of an adverse event, which is what allows an insurer to set one fair premium for the group.
Category: How Insurance Works
Question 15
People often judge a $10 saving as more worthwhile on a $20 item than on a $300 item, even though the dollar saving is the same.
Correct Answer
True
True. Behavioral economists find that people tend to judge savings relative to the price, so the same $10 seems larger on a cheaper item.
Category: Imperfect Information
Question 16
Under fee-for-service payment, health care providers earn less when they perform more procedures.
Correct Answer
False
False. Under fee-for-service, providers are paid for each service, so performing more procedures raises their income.
Category: Moral Hazard
Question 17
Social insurance programs such as Social Security use taxes on current workers to pay benefits to people who are currently retired.
Correct Answer
True
True. In social insurance, today's workers pay into the system to fund benefits for today's retirees, even though the contributors are not yet eligible themselves.
Category: How Insurance Works
Question 18
If an insurer raises everyone's premium to cover losses caused by adverse selection, lower-risk customers become more likely to buy coverage.
Correct Answer
False
False. A higher premium makes coverage an even worse deal for low-risk customers, so more of them drop out, leaving a riskier pool.
Category: Adverse Selection
Question 19
Lenders can reduce the risk of lending under asymmetric information by checking a borrower's past credit record.
Correct Answer
True
True. A credit check reveals how a borrower has handled earlier debts, giving the lender information the borrower might otherwise keep hidden.
Category: Reducing Information Problems
Question 20
Over the long run, an insurer can survive with average premiums below its average claims as long as it has many customers.
Correct Answer
False
False. Average premiums must cover average claims plus operating costs and a profit, no matter how many customers the insurer has.
Category: How Insurance Works