3Â Private Information 1) Private information is a situation in which A) two parties to an exchange have information that is available to outsiders if they ask. B) one party to an exchange has information that is not available to the other. C) the marginal cost of a person’s obtaining additional information is zero. D) the marginal cost of making information available to one more person is zero. 2) Of the following, the best example of private information is when A) Michael knows the price of a gallon of milk at the minimart but Michelle doesn’t know. B) you know some of your used car’s defects but a potential buyer cannot find out about them until after buying. C) you don’t know the quality of a used car and must hire a trained mechanic who tells you all its defects. D) you pay the owner of a used car a little extra and she lets you know all of the car’s defects. 3) Moral hazard results from ________ information and adverse selection results from ________ information. A) private; private B) private; public C) public; private D) public; public 4) Private information A) creates moral hazard but eliminates adverse selection. B) creates adverse selection but eliminates moral hazard. C) creates both moral hazard and adverse selection. D) eliminates both moral hazard and adverse selection. 5) Moral hazard and adverse selection are the result of A) poorly functioning markets. B) government intervention. C) private information. D) treachery. 6) Moral hazard occurs ________ an agreement is made and when monitoring the parties to the agreement is ________. A) before; easy B) before; costly C) after; easy D) after; costly 7) Moral hazard exists chiefly because of A) economies of scale. B) diseconomies of scale. C) private information. D) public information. 8) Moral hazard is A) the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. B) when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. C) a situation in which only bad quality items are bought and sold. D) an action taken outside a market that conveys information that can be used by that market. 9) Moral hazard typically occurs because A) people are dishonest. B) agreements sometimes create incentives that are costly to monitor. C) workers possess diminishing marginal productivity. D) workers possess adverse selection. 10) Moral hazard occurs because people act A) in the interest of others at all time. B) in the best interest of society. C) in their own self interest. D) like anarchists.