Question 1

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. Which of the following is a strategy the consulting firm may employ to discourage Peter from shirking his responsibilities?
A)Tell Peter that the shareholders want to earn a large profit this year.
B)Stop paying Peter bonuses based on how much he's sold.
C)Allow Peter to set his own schedule and work from home frequently.
D)Pay Peter an above-equilibrium wage.

Accepted Answer

The answer of Peter was recently hired as a salesman...

Question 2

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This is an example of
A)a moral hazard problem.
B)adverse selection.
C)behavioral economics.
D)signaling.

Accepted Answer

This is an example of a moral hazard problem because the employee has an incentive to give larger scoops to friends and family even if it means giving smaller scoops to other customers. This behavior creates a risk for the business owner who is not present to monitor the employee's actions.

Question 3

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. Which of the following is a strategy the consulting firm may employ to discourage Peter from shirking his responsibilities?
A)Tell Peter that the shareholders want to earn a large profit this year.
B)Pay Peter commissions on what he sells after the work has been completed.
C)Allow Peter to set his own schedule and work from home frequently.
D)Pay Peter a lower wage than he would earn in a similar job at another firm.

Accepted Answer

By paying Peter commissions on what he sells after the work has been completed, the consulting firm provides an incentive for him to work diligently and effectively. This strategy aligns Peter's interests with those of the firm and makes it less likely that he will shirk his responsibilities. Option A may motivate Peter initially, but it does not provide an ongoing incentive to perform at a high level. Option C may result in Peter being less productive due to distractions at home. Option D may lead Peter to seek better-paying opportunities elsewhere.

Question 4

Which of the following practices are, at least in part, attempts to reduce moral hazard problems?
A)The income of waiters and waitresses depends heavily on tips.
B)An employer pays below equilibrium wages because he thinks his employees are not working as hard as they could be.
C)The professors leaves the room to prevent cheating on exams.
D)Tenure professors are not supervised closely.

Accepted Answer

The answer of Which of the following practices are, at...

Question 5

An efficiency wage
A)gives an employee an incentive to shirk his duties.
B)is lower than the equilibrium wage for that position and region.
C)is higher than the equilibrium wage for that position and region.
D)both a and b are correct.

Accepted Answer

An efficiency wage is a wage that is higher than the equilibrium wage for that position and region. This is because the employer believes that paying a higher wage will increase worker productivity and reduce turnover, ultimately benefiting the company. A) is incorrect because the purpose of an efficiency wage is to give an employee an incentive to work harder, not to shirk their duties. B) is also incorrect because, as mentioned, an efficiency wage is higher than the equilibrium wage.

Question 6

Which of the following is not a common response to the moral hazard problem that employers face?
A)offering all employees some funding for additional education
B)paying efficiency wages
C)requiring employees to provide itemized receipts for reimbursable expenses
D)paying year-end bonuses rather than higher monthly earnings

Accepted Answer

Offering all employees some funding for additional education can be a common response to mitigate adverse selection problem but it is not a common response to the moral hazard problem that employers face. Paying efficiency wages, requiring employees to provide itemized receipts for reimbursable expenses, and paying year-end bonuses rather than higher monthly earnings are all common responses to the moral hazard problem.

Question 7

Rick goes to work 8 hours per day, but while he is at work he spends most of his time visiting internet sites monitoring his fantasy football teams. This is an example of
A)the Condorcet Paradox.
B)signaling.
C)moral hazard.
D)screening.

Accepted Answer

Rick's behavior is an example of moral hazard, where an individual may take greater risks or engage in undesirable behavior due to a lack of consequences or monitoring. In this case, Rick is not using his time at work effectively and is instead engaging in personal activities, potentially putting his job at risk.

Question 8

Pedro, who knows nothing about construction, paid Benito to remodel a room in his house. Two years later, one wall in the remodeled room crumbled because Benito used poor-quality materials. This illustrates which economic problem?
A)adverse selection
B)screening
C)moral hazard
D)signaling

Accepted Answer

This is an example of moral hazard, where the contractor (Benito) was incentivized to cut corners and use poor-quality materials because he would not bear the full cost of any future damages. Pedro, who had no knowledge of construction, could not monitor or prevent this behavior, leading to an outcome that was detrimental to him. Adverse selection refers to the situation where one party has better information than the other and chooses to act on it, while signaling and screening refer to strategies that parties can use to convey or acquire information about themselves. None of these concepts apply to the given scenario.

Question 9

Which of the following is not an example of a moral hazard problem?
A)A manager stays late one evening so that her employee can leave early to attend his child's music recital.
B)A small child takes an extra cookie from the cookie jar when he thinks his mom isn't watching him closely.
C)An employee plays solitaire on her computer at 4:30 p.m. on a Friday when her boss has left for the day.
D)A customer whose new eyeglasses come with a "60-day insurance policy in case of breakage" leaves her glasses out where her new puppy can chew on them.

Accepted Answer

A manager staying late to allow an employee to attend a child's music recital is not an example of moral hazard because it does not involve an increased risk-taking behavior due to the presence of insurance or protection. The other options all involve some form of increased risk-taking behavior due to insurance or protection, which is the essence of moral hazard.

Question 10

Which of the following is an example of moral hazard?
A)a driver is arrested for drunk driving
B)a pet-sitter being paid to walk a dog for one hour per day only walks the dog for 20 minutes per day
C)a thief steals a car
D)All of the above are examples of moral hazard.

Accepted Answer

Moral hazard refers to the situation where one party takes more risks because they know that another party will bear the cost of those risks. In this case, the pet-sitter taking money for one hour of work but only doing 20 minutes of work is an example of moral hazard because they are taking advantage of the fact that the owner of the dog will still pay them the same amount even if they don't do the full hour of work. The other choices (drunk driving and car theft) are not examples of moral hazard, but rather illegal activities.

Question 11

Studies show that during the March Madness college basketball tournament, the productivity of the average company in the US falls considerably. This is an example of
A)the Condorcet Paradox.
B)signaling.
C)moral hazard.
D)screening.

Accepted Answer

The situation described in the question fits the definition of moral hazard, which is the possibility that someone will take risks or behave irresponsibly because someone else bears the cost of those actions. In this case, employees may be distracted by the tournament and spend more time watching games or discussing them with coworkers instead of focusing on their work, but the cost of this lost productivity is borne by the company rather than the employees themselves.

Question 12

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. His firm is paying him a wage that is higher than the equilibrium wage, but he receives much of his income in quarterly bonuses based on how much he sells.
A)The consulting firm is trying to prevent adverse selection with its compensation strategy.
B)Peter has an incentive to go golfing with his buddies rather than conducting sales meetings.
C)The consulting firm is responding to the moral hazard problem with its compensation strategy.
D)Peter should quit this job and take a job where he gets paid an equilibrium wage more frequently.

Accepted Answer

The consulting firm is responding to the moral hazard problem with its compensation strategy. By paying Peter a higher than equilibrium wage and basing much of his income on sales bonuses, the firm is incentivizing Peter to work harder and sell more in order to earn a higher income. This addresses the moral hazard problem because it aligns Peter's interests with those of the firm. If Peter were paid only an equilibrium wage, he would not have as much of an incentive to work hard and sell as much as possible because he would not be able to earn a higher income. Therefore, option C is the correct answer. Options A and B are not the best choices because there is no indication of adverse selection or Peter shirking his job responsibilities. Option D is not a good choice because there is no indication that Peter would be better off taking a job that pays an equilibrium wage more frequently.

Question 13

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. In this example, you are the
A)principal and the your employee is the agent.
B)agent and the your employee is the principal.
C)signaler and the your employee is the screener.
D)screener and the owner of the coffee ship is the signaler.

Accepted Answer

The owner of the ice cream store is the principal, as they own the business and are responsible for ensuring its success. The employee is the agent, as they are acting on behalf of the owner in serving customers and handling transactions. The owner has a vested interest in making sure that all customers receive the same amount of ice cream, regardless of whether they are friends or family of the employee or not. This is because giving preferential treatment to some customers could lead to dissatisfaction and reduced sales from those who feel they are not being treated fairly. Therefore, the owner should take steps to monitor the employee's behavior and ensure that all customers receive the same level of service.

Question 14

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. If you want your employee to stop giving larger scoops to friends and relatives, which of the following is not a good approach?
A)Make visits to the store at the same time each day.
B)Pay employees an above equilibrium wage.
C)Give your employees a monthly bonus based on profits.
D)None of the above are good approaches.

Accepted Answer

The answer of You own an ice cream store and...

Question 15

A college professor hires a student to babysit her children and pays the student an efficiency-wage. Which of the following is correct about the wage the student earns?
A)The wage is higher than the wage the student could earn working a similar job elsewhere.
B)The wage is the same as the wage the student could earn working a similar job elsewhere.
C)The wage is lower than the wage the student could earn working a similar job elsewhere.
D)The wage is likely to result in the student shirking responsibilities.

Accepted Answer

The efficiency-wage paid by the college professor is likely higher than the prevailing wage for a similar job because the professor wants to attract high-quality babysitters who will perform well and ensure the safety of her children. By paying a higher wage, the professor can select from a larger pool of potential babysitters and attract more skilled and responsible candidates, which ultimately benefits her and her children.

Question 16

Employers can try to overcome the moral-hazard problem involving their employees by
A)paying their employees more often.
B)paying their employees below-equilibrium wages since the employees will likely shirk some of their responsibilities.
C)better monitoring their employees' work efforts.
D)requiring their employees to take a pre-employment work effort test.

Accepted Answer

Better monitoring of employees' work efforts can help overcome the moral-hazard problem by reducing the likelihood of shirking or other forms of opportunistic behavior. Paying above-equilibrium wages and offering other incentives can also help motivate employees to work harder and more productively. However, paying below-equilibrium wages is likely to backfire by promoting high turnover rates, low morale, and poor performance, and requiring a pre-employment work effort test may not be feasible or effective in all situations.

Question 17

Which of the following practices are, at least in part, attempts to reduce moral hazard problems?
A)Parking ramps require customers to take a ticket with the time stamped on it from a machine in order to gain entrance.
B)Factory workers are paid by the hour.
C)A restaurant owner works long hours in order to make more profit.
D)None of the above are correct.

Accepted Answer

The answer of Which of the following practices are, at...

Question 18

When new professors are hired, their job performance is monitored closely. If they meet their institution's standards, they will eventually receive tenure. After receiving tenure, professors' job performance is less closely monitored, and they become difficult to fire. Tenure thus creates
A)adverse selection.
B)a Condorcet paradox.
C)a screening problem.
D)a moral hazard problem.

Accepted Answer

Tenure creates a moral hazard problem, as it reduces the incentives for tenured professors to perform well or innovate, since their job security is assured. This can lead to complacency and a decline in productivity.

Question 19

In the case of a moral-hazard problem, which of the following is not a way for the principal to encourage the agent to act more responsibly? The principal could
A)better monitor the agent.
B)pay the agent above-equilibrium wages.
C)delay payment to the agent.
D)stop paying bonuses.

Accepted Answer

The answer of In the case of a moral-hazard problem,...

Question 20

Employers may choose to pay their workers a wage that exceeds the equilibrium wage according to
A)efficiency-wage theories.
B)equilibrium wage theories.
C)screening theories.
D)signaling theories.

Accepted Answer

Efficiency-wage theories suggest that employers may choose to pay their workers a wage that exceeds the equilibrium wage in order to motivate and retain higher-quality workers, increase productivity, and lower turnover costs.

Quiz 22: Frontiers in Microeconomics

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This is an example of

Which of the following practices are, at least in part, attempts to reduce moral hazard problems?

An efficiency wage

Which of the following is not a common response to the moral hazard problem that employers face?

Rick goes to work 8 hours per day, but while he is at work he spends most of his time visiting internet sites monitoring his fantasy football teams. This is an example of

Pedro, who knows nothing about construction, paid Benito to remodel a room in his house. Two years later, one wall in the remodeled room crumbled because Benito used poor-quality materials. This illustrates which economic problem?

Which of the following is not an example of a moral hazard problem?

Which of the following is an example of moral hazard?

Studies show that during the March Madness college basketball tournament, the productivity of the average company in the US falls considerably. This is an example of

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. In this example, you are the

A college professor hires a student to babysit her children and pays the student an efficiency-wage. Which of the following is correct about the wage the student earns?

Employers can try to overcome the moral-hazard problem involving their employees by

Which of the following practices are, at least in part, attempts to reduce moral hazard problems?

When new professors are hired, their job performance is monitored closely. If they meet their institution's standards, they will eventually receive tenure. After receiving tenure, professors' job performance is less closely monitored, and they become difficult to fire. Tenure thus creates

In the case of a moral-hazard problem, which of the following is not a way for the principal to encourage the agent to act more responsibly? The principal could

Employers may choose to pay their workers a wage that exceeds the equilibrium wage according to