ECO 365 Exam Guide: Personal Choice in Microeconomics

ECO 365 Final Exam Answer Guide for Personal Choices

Personal choice is the fundamental driver of all economic activity. Let’s take a look at some of topics that center around the concept of personal choice. 

Liz starts driving rashly

Liz starts driving rashly after buying insurance. This is an example of a(n):

Moral Hazard Problem

Explanation: A moral-hazard problem occurs when a person behaves is a risky way because they know they are protected for harm or loss.

Negative Externality

Which of the following is an example of a negative externality?­

Tom playing music loudly in his room, disturbing his roommate who has an exam the next day

Explanation: A negative externality is a cost or harm that is incurred by a third party as a result of another transaction. In this case, Tom’s music is affecting a third party and not providing compensation.

Adverse Selection

Which of the following is an example of adverse selection?

Harry refuses to buy health insurance at high premiums because he feels that he is in good health

Explanation: In this case adverse selection requires identifying groups that are more or less healthy compared to the general population. Harry believes he is healthy, so he is adversely opting out of owning health insurance.

Paula wants to buy 3 packs of frozen yoghurt

Paula wants to buy 3 packs of frozen yoghurt when it is priced at $2 per pack. When the price increases to $3.50 per pack, she wants to buy 2 packs. This reflects the.

Law of Demand

 
  • Student: Sandy Lopez
  • Textbook:  Principles of Microeconomics
  • Course: ECO 365 Microeconomics 2017 Final Exam
 

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