Marketing MCQ: Markets with Asymmetric Information

Which of the following is NOT an example of moral hazard in business?

(a) A bank buys risky mortgage securities because they believe the government will provide a bail-out if the investment performs badly.
(b) A firm uses venture capital to speculate in the commodity futures market.
(c) A firm does not hire adequate security protection for its warehouse after it pays for insurance on the property.
(d) Firms with the large debt problems are more likely to apply for bank loans than financially stable firms.

Answer: d

Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet). What is the source of the asymmetric information problem in this case?

(a) The bank has more information about the true cost of the corporate jet than the firm.
(b) The bank has more information about the opportunity cost of the loaned funds.
(c) The firm has more information about the actual use of the funds than the bank.
(d) The firm has more information about the interest rate on the loan than the bank.

Answer: c

In insurance markets, moral hazard creates economic inefficiency because:

(a) insurance companies are price setters rather than price takers.
(b) insurance products are not homogenous goods.
(c) there are many buyers but only a few sellers.
(d) insured individuals do not correctly perceive the costs or benefits of their actions.

Answer: d

Which of the following is TRUE about producers' willingness to offer warranties on products?

(a) Producers are equally likely to offer warranties on high-quality and low-quality goods.
(b) Producers are more likely to offer warranties on low-quality goods, because without the signal that the warranty provides, the low-quality good wouldn't sell.
(c) Producers are more likely to offer warranties on high-quality goods, because the expected cost of repairs is lower for those goods.

Answer: c

Because the presence of a warranty for a good is a signal that the good is of high quality,

(a) consumers are willing and able to pay more for a good that carries a warranty.
(b) consumers are willing to buy goods if and only if the goods come with warranties.
(c) producers do not need to charge extra for warranties.
(d) producers must make warranties available on all goods.

Answer: a

If grades are to be a successful signal to potential employers of a student's qualities, then higher grades must be

(a) easier for high-productivity students to earn than for low-productivity students to earn.
(b) easier for low-productivity students to earn than for high-productivity students to earn.
(c) easy for employers to check.
(d) often referred to in the hiring process.

Answer: a

Credit histories allow firms to

(a) identify high-risk borrowers, so they can be eliminated and interest rates kept down
for others.
(b) increase the number of credit cards issued, and interest rates go down as a result.
(c) lower the number of credit cards issued, and interest rates go up as a result.
(d) increase market power in the credit card industry, raising interest rates.

Answer: a

When provinces make car insurance mandatory for all drivers, it

(a) raises rates for everyone because it brings bad drivers into the pool.
(b) raises rates for high-risk drivers.
(c) may lower rates for all drivers to the extent that it keeps low-risk drivers in the pool.
(d) prevents high-risk drivers from "selecting out" to the detriment of low-risk drivers.

Answer: c

Julia is a 28-year-old nonsmoking, non-drinking female of normal weight. Because of adverse selection in health insurance,

(a) She will be charged less for her premiums than people who are higher risks.
(b) She is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is.
(c) When she get health insurance, she will be less likely to take care of herself.
(d) She is more likely than the average person to buy health insurance, because she is more likely to be offered it.

Answer: b

The problem of adverse selection in insurance results is a situation in which

(a) people choose inappropriate or inadequate coverage because they do not understand
the complex information in the policies.
(b) people choose too much coverage because they do not understand the complex information in the policies.
(c) people choose too little coverage because they do not understand the complex information in the policies.
(d) unhealthy people become more likely to buy insurance than healthy people, which
drives premiums up, which drives even more healthy people away from the market.
(e) healthy people become more likely to buy insurance than unhealthy people, which
drives premiums up, which drives even more unhealthy people away from the market
even though they are the ones who need it most.

Answer: d

Used cars sell for much less than new cars because

(a) of imperfect competition in the automobile industry.
(b) buyers know much more about the quality of used cars than sellers do.
(c) sellers know much more about the quality of used cars than buyers do.
(d) physical depreciation of used cars is very high.

Answer: c