Question

QUESTION 43
Which of the following is an example of adverse selection?
A. People spend too much money on high-quality chocolate because it is so delicious.
B. A homeowner offers to pay a very low amount of money for mowing his yard, and those who respond are bad at mowing lawns.
C. Voters don't know which policy proposals are effective and which are scams, so they approve more policy proposals than they should.
D. People buy too much clothing because they feel better when they shop.
QUESTION 44
During the Great Leap Forward, China experienced a dramatic fall in food production, causing 20 to 40 million deaths. What caused this fall in food production?
A. Extreme income inequality caused the rich to buy all of the food, leaving little for the poor to eat.
B. A virus-infected most of the livestock, and farmers needed five years of quarantine before they could resume their production.
C. War with Japan destroyed shipping lanes, preventing China from trading with other countries.
D. The government switched food production from common property to private property.
E. The government switched food production from private property to common property.

QUESTION 45
College students are offended when their boyfriends/girlfriends to give them gifts of cash instead of goods. However, college students are happy when their parents give them gifts of cash instead of goods. Why is there a difference?
A. Gifts of goods may be mismatched with your preferences, so they give you an opportunity to signal your high quality to your boyfriend/girlfriend whenever you receive a bad gift. Your parents already know your quality level, SO signaling is unnecessary.
B. According to the counter signaling model, your parents are in the middle tier and are desperately trying to impress you with cash. Your boyfriend/girlfriend is in the high tier and is counter signaling by giving you goods instead of cash.
C. There is asymmetric information between you and your boyfriend/girlfriend, so gifts can signal your boyfriend/girlfriend's quality. There is no asymmetric information between you and your parents.
D. Your boyfriend/girlfriend is counter signaling. Your parents are signaling.

QUESTION 46
In an experiment, single women were given the choice of pursuing single men or attached men, and they showedmore interest in attached men. Which of the following is a signaling explanation for this?
A. Single women wanted to send a signal that they were so desirable that they could convince men to leave their existing relationships for them.
B. Attached men sent a signal that they were responsible and mature enough to be in a relationship with someone.
C. Single women had more in common with attached men than single men.
D. Single women didn't want to look desperate by pursuing single men, so they countersigned by pursuing
men who were unavailable.

QUESTION 47
Which of the following is a reason why most economists prefer a wage subsidy to a minimum wage?
A. A wage subsidy decreases low-skilled employment while a minimum wage increases it.
B. A wage subsidy helps low-skilled labor to accumulate human capital; a minimum wage impedes the accumulation of human capital.
C. A wage subsidy helps businesses while a minimum wage helps workers.
D. A wage subsidy does not require more government spending while a minimum wage requires more government spending.

Answer 1

Q43. Answer:

B.A homeowner offers to pay a very low amount of money for mowing his yard, and those who respond are bad at mowing lawns.

Adverse selection occurs when one party has more information about the market.

There are both good and bad lawn mowers. Logically, good lawn mowers charge higher price than the bad lwan mowers. Here, the problem arises because of lack of information.

The homeowner doesn't know to differentiate between good and bad lawn mower. Because if the amount offered is high, then both good and bad lawn mowers would respond. At that time, there is a risk of paying high amount to a bad lawn mower because the homeowner can't differentiate between good and bad lawn mowers. So, teh homeowner would offer low amount in order to escape that risk.

Since good lawn mowers charge higher amount and only bad lawn mowers are ready to work at low amount, only bad lawn mowers respond.

This is generally called as the problem of adverse selection.