Chapter 12 Mcgrawhill Microeconomics

Sales agents increase the extent to which goods and services find their way to the consumers who value them the most. As result, sales agents:

increase total economic surplus

People should acquire information whenever:

its marginal benefit is greater than its marginal cost

When too little of a good or service is produced because nonpayers cannot be excluded from using it, this is known as:

the free-rider problem

At your local farmer's market, you notice that the price of different kids of produce varies considerably from vendor to vendor. All else equal, this is likely to _____ the amount of time people spending looking for produce.

increase
Reason:
People are likely to spend more time searching for goods when there is a lot of price variation.

The College Board estimates that tuition and fees at four-year colleges and universities increased by over 14 percent between the 2008-09 academic year and the 2013-14 academic year. All else equal, you would expect that as the cost of attending college increases, the amount of time that prospective college students and their families spend looking for college will _____.

increase
Reason:
People should rationally spend more time searching for products that are expensive.

Sales agents:

generate economic surplus because they help make sure goods and services find their way to the consumers who value them the most

If the marginal benefit of information is greater than its marginal cost, then the consumer has acquired:

less than the optimal level of information
Reason:
Consumers should continue to acquire information whenever its marginal benefit exceeds its marginal cost.

The free-rider problem arises when:

people who do not pay for a good or service cannot be prevented from using it

Since searching for a better price on a product is costly, and you don't know if you'll find a lower price:

searching for a lower price is a gamble

All else equal, consumers should spend the most time looking for:

expensive goods with a lot of price variation

Suppose you win $8 if a fair coin comes up heads and lose $2 if it comes up tails. The expected value of this gamble is

3 dollars
(1/2)(8) - (1/2)(2) = 3

The amount of time most people spend looking for a new car is likely to be _____ the amount of time most people spend looking for a new bike.

greater than
Reason:
Since cars are more expensive than bikes, we would expect people to spend more time looking for a new car than a new bike.

The expected value of a fair gamble is:

equal to zero

A gamble whose expected value is greater than zero is a:

better-than-fair gamble

True or false: In a world with incomplete information, consumers should always gather as much information about goods and services as possible.

False
Reason:
Consumers should only acquire information if its marginal benefit exceeds its marginal cost. In other words, some level of ignorance is rational.

Suppose you win $10 if a fair coin comes up heads and lose $6 if it comes up tails. This is a _____.

better-than-fair gamble
Reason:
Since the expected value of this gamble is greater than zero (0.5×$10 - 0.5×$6 = $2), it's a better-than-fair gamble.

Select all that apply. A risk-neutral person will accept any gamble that is:

better-than-fair
fair

A gamble whose expected value is zero is:

a fair gamble

If a risk-averse person accepts a gamble, we know the gamble must be:

better-than-fair

The expected value of a better-than-fair gamble is:

greater than zero

Consider a gamble in which you win $3 if a fair coin comes up heads and lose $3 if it comes up tales. A risk-averse person

would not accept this gamble.
Reason:
Since the expected value of this gamble is zero (0.5×$3 - 0.5×$3 = $0), a risk-averse person would refuse it.

The existence of long-term leases in the apartment rental market:

helps solve the commitment problem inherent in markets with incomplete information.
Reason:
Without long-term leases landlords might not be willing to rent apartment out of fear that tenants would move out as soon as they found a cheaper apartment. Long-term leases help solve this commitment problem.

Asymmetric information arises in situations in which:

buyers are sellers are not equally well-informed about the characteristics of goods and services

The lemons model describes ______.

how asymmetric information affects the average quality of the used goods offered for sale

_____ is one way that people can signal that they are high-ability.

Conspicuous consumption

The practice of making judgments about the quality of people, goods or services based on the characteristics of the groups to which they belong is called:

statistical discrimination

Commitment problems:

arise due to incomplete information
Reason:
When information is incomplete the possibility of finding a better option (for example, a better-paying job or a cheaper apartment) may make people reluctant to enter into agreements that could end as soon as a better option comes along.

When buyers and sellers are not equally well-informed about the characteristics of products and services, this is referred to as:

asymmetric information

The _____ arises because politicians are often reluctant to speak about some issues publicly for fear that doing so may imply that they hold unpopular beliefs about other issues.

problem of disappearing political discourse

The pattern in which insurance tends to be disproportionately purchased by those who are the most costly for companies to insure is called:

adverse selection

Moral hazard is:

the tendency of people to expend less effort protecting those goods and services that are insured against damage or theft

Because of adverse selection in unregulated private insurance markets, ______.

insurance becomes unaffordable for most people

The three main provisions of the ACA of 2010 are designed to help solve the "downward spiral" associated with ______.

rising insurance premiums in an unregulated private insurance market
adverse selection in the insurance market

According to the textbook, the problem of disappearing political discourse arises because:

people who support a position may remain silent because speaking out would create a risk of being misunderstood

Adverse selection is the pattern in which insurance tends to be purchased disproportionately by those who are the _____ costly for companies to insure.

most

Why are unregulated private insurance markets a flawed mechanism for providing health care?

adverse selection

Three provisions of the ACA of 2010 are ______.

subsidies provided to low-income households
individuals are required to purchase health insurance by mandate
insurance offered without regard for preexisting conditions