1. If a life insurance company knows that smoking increases the risk of death but is unable to determine which applicants smoke, the problem of _______________ refers to _______________ being more likely to buy insurance.
a. adverse selection, nonsmokers’
b. screening, nonsmokers’
c. adverse selection, smokers’
d. screening, smokers’

2. An insurance company offers doctors malpractice insurance. Assume that settling malpractice claims against careful doctors costs $5,000 and settling malpractice claims against reckless doctors costs $30,000. Doctors themselves know whether they are reckless or careful, but the insurance company can only assume that 10% of doctors are reckless. How much do insurance companies have to charge for malpractice insurance to break even (assume that every doctor will be sued for malpractice once during the term of the policy)?
a. $5,000
b. $7,500
c. $27,500
d. $30,000

3. To combat the problem of adverse selection, _______________ informed parties can employ _______________ techniques.
a. more; signaling
b. less; signaling
c. equally; screening
d. equally; signaling

4. Which of the following is not an example of adverse selection?
a. A business bets the proceeds of a bank loan on the over/under on the next NFL game.
b. An accident-prone driver buys auto insurance.
c. A patient suffering from a terminal disease buys life insurance.
d. A really hungry person decides to go to the all-you-can-eat buffet for dinner.

5. To overcome the problem of adverse selection, employers can use _______________ techniques, such as _______________ .
a. signaling; monitoring employee performance
b. screening; monitoring employee performance
c. screening; checking employee references
d. signaling; checking employee references