Week 15 Quiz

A person selling a used car knows that its transmission slips on hills, a fault a buyer cannot see on a short test drive. Before any sale happens, which problem does this hidden fault create?

Select one.

• Moral hazard, because the seller may take less care after the sale
• Adverse selection, because a hidden trait exists before the deal
• A negative externality, because the fault harms people outside the trade
• A binding price ceiling, because buyers cannot pay what the car is worth

In the course's illustrative used-car market, half the cars of one model are good and half are lemons. A good car is worth 10,000 dollars to a buyer and 9,000 dollars to its owner; a lemon is worth 4,000 dollars to a buyer and 3,000 dollars to its owner. A buyer who cannot tell the two kinds of car apart offers the average of the two buyer values. How much does the buyer offer?

Select one.

• 6,000 dollars
• 10,000 dollars
• 4,000 dollars
• 7,000 dollars

In the course's illustrative used-car market, half the cars of one model are good and half are lemons. A good car is worth 10,000 dollars to a buyer and 9,000 dollars to its owner; a lemon is worth 4,000 dollars to a buyer and 3,000 dollars to its owner. A buyer who cannot tell them apart offers the average of the two buyer values for any car. Which owners accept that offer?

Select one.

• Only the owners of lemons, because the offer is above what lemon owners need but below what good-car owners need
• Only the owners of good cars, because the offer is closer to what a good car is worth
• Both kinds of owner, because the offer is the average value of the cars
• Neither kind of owner, because the offer is below what a buyer values a good car at

Before buying a used car, a shopper pays an independent mechanic to check it for hidden problems. Which response to hidden information is the shopper using?

Select one.

• Signaling, because a costly action reveals the car's quality
• Moral hazard, because the shopper is protected after the sale
• Screening, because the less-informed side is gathering information to sort sellers
• Anchoring, because the mechanic's first estimate pulls the price

After buying insurance that pays for any damage to their car, a driver starts parking carelessly in tight spots, something the insurer cannot observe. Which problem is this?

Select one.

• Adverse selection, because the driver's skill was hidden before the deal
• Moral hazard, because a hidden action changes after the deal
• A positive externality, because other drivers gain from the insurance
• Anchoring, because the insurance price set the driver's expectations

Most people say that losing a 20-dollar bill would bother them more than finding a 20-dollar bill would please them, even though the amounts are the same. Which pattern from behavioral economics does this describe?

Select one.

• Loss aversion
• Present bias
• Anchoring
• The power of defaults

True or false: Madrian and Shea (2001) found that automatic enrollment raised participation in one firm's retirement plan, so that finding alone settles whether employers ought to enroll every new worker automatically.

True or false.

• True
• False

In the course's illustrative income quintiles, households ranked from the poorest fifth to the richest receive 5, 10, 15, 25, and 45 percent of income. A Lorenz curve plots cumulative shares. At 60 percent of households, what share of income has this Lorenz curve reached?

Select one.

• 15 percent
• 30 percent
• 55 percent
• 60 percent

In the course's illustrative income quintiles, households ranked from the poorest fifth to the richest receive 5, 10, 15, 25, and 45 percent of income. Using five trapezoids, the area under its Lorenz curve is 0.31 on a chart whose axes both run from 0 to 1. The Gini coefficient equals 1 minus 2 times that area. What is the Gini coefficient?

Select one.

• 0.31
• 0.62
• 0.69
• 0.38

Which of these statements about inequality is normative rather than positive?

Select one.

• The region's Gini coefficient, measured with the Census Bureau's method, was lower ten years ago.
• Automatic enrollment raised retirement-plan participation in the firm that was studied.
• When buyers cannot see quality, good used cars can be driven out of the market.
• A society in which the richest fifth receives almost half of all income is unfair.