Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. If the insurance companies are pessimistic and set their price according to their pessimistic expectations:
A. the companies' pessimism is not justified.
B. the market will include some low-cost and some high-cost customers.
C. the market will include only low-cost customers.
D. the market will include only high-cost customers.
Answer: D
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Procyclical variables ________ during expansions and ________ during recessions
A) fall; fall B) rise; fall C) fall; rise D) rise; rise
To choose, based on the principle of rational choice, among combinations of goods with a cost in money, one must compare:
A. total utility of the combination of goods and their price. B. marginal utility of each additional good and its price. C. total utility only. D. marginal utility only.
The endowment effect is the tendency:
A. to have a harder time parting with wealth people have held the longer the amount of time they hold it. B. for people to want to bestow their own beliefs on others when making decisions. C. for a person to believe they hold a particular skill because someone told them they do. D. to place a higher value on something a person already owns simply because they own it.
With ________, the quality of what is being offered in a transaction matters and is not easily demonstrated.
A. adverse selection B. asymmetric information C. moral hazard D. risk aversion