Hidden actions and characteristics

Question 1

Screening device

Answer 1

A way of a uniformed party figuring out whats going on (reducing asymmetric information) An example would be making an undercover cop do a crime

Question 2

Adverse selection

Answer 2

This happens when one party knows more about a hidden characteristic then the other (i.e. life insurance)

Question 3

Moral hazard

Answer 3

When the better informed party takes advantage of a less informed party through a hidden action

Question 4

How do markets respond to adverse selection ?

Answer 4

• pooling
• seperation

Question 5

Seperation

Answer 5

Using signals (such as having a degree on your CV) and screens (such as job interviews) so that less informed parties can become more informed

Question 6

Pooling

Answer 6

A singular system where everyone receives the same rates

Question 7

The role of government to intervene with adverse selection

Answer 7

Forcing universal participation (NHS)

Question 8

Expected value

Answer 8

The long run average outcome

Question 9

Expected utility

Answer 9

The weighted average utility across all possible outcomes

Question 10

Risk Averse

Answer 10

Preferences describes by a utility function with a diminishing marginal utility of wealth. We assume most people are risk averse

Question 11

Risk Seeking

Answer 11

Preferences described by a utility function with increasing marginal utility of wealth

Question 12

Risk Neutral

Answer 12

Preferences described with a constant marginal utility of wealth