Question 1

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

By better monitoring their employees' work efforts, employers can reduce the risk of employees shirking their responsibilities and behaving in ways that are not in the best interest of the employer. This helps to mitigate the moral-hazard problem by aligning the incentives of the employer and employee more closely. The other options either do not address the root cause of the problem or may make it worse.

Question 2

Which of the following relationships involves asymmetric information?
A)An employee knows more than his employer knows about his work effort.
B)A borrower knows more than the lender about his ability to repay the loan.
C)The seller of a 30-year-old house knows more than the buyer about the condition of the house.
D)All of the above are correct.

Accepted Answer

In option A, the employee has more information about his work effort than the employer, which leads to asymmetric information. In option B, the borrower knows more about his ability to repay the loan than the lender, which creates asymmetric information. In option C, the seller has more information about the condition of the 30-year-old house than the buyer, which leads to asymmetric information. Therefore, all of the above choices involve asymmetric information.

Question 3

Which of the following would be an example of a principal trying to deal with a moral hazard problem?
A)The parents of an infant secretly place video cameras in their house before the baby-sitter arrives.
B)An insurance company checks police records to determine if its policyholders have received traffic citations.
C)An employer examines his workers' output on a daily basis.
D)All of the above are correct.

Accepted Answer

D

Question 4

Shawn buys automobile insurance from Safe-T Insurance Company.If Shawn avoids having an accident for three years,Safe-T will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.
A)This adverse selection problem could be fixed by reducing Shawn's insurance rates now. By doing this, Shawn will drive more carefully now to prevent his rates being increased after an accident.
B)Safe-T has an ongoing adverse selection problem with Shawn and other customers since it is difficult for Safe-T to select good customers.
C)This is a typical principal-agent problem.
D)Both A and C are correct.

Accepted Answer

This is a typical principal-agent problem because Shawn (the agent) has different incentives than Safe-T Insurance (the principal), leading to reckless driving behavior that Safe-T cannot easily monitor or control.

Question 5

In the worker-employer relationship,"inappropriate" or "immoral" behavior
A)generally takes the form of workers shirking their responsibilities.
B)generally takes the form of employers being unfair to their workers.
C)is not regarded as a significant problem.
D)is regarded as a significant problem, but it does not arise from asymmetric information.

Accepted Answer

The answer of In the worker-employer relationship,"inappropriate" or "immoral" behavior
A)generally...

Question 6

The buyer runs a risk of being sold a good of low quality when there is
A)a principal-agent problem.
B)a moral-hazard problem.
C)a problem involving hidden actions.
D)a problem involving hidden characteristics.

Accepted Answer

A problem involving hidden characteristics, also known as adverse selection, occurs when one party in a transaction has more information about the quality of a good than the other party. In this case, the seller may have knowledge that the good is of low quality but does not disclose this to the buyer, resulting in the buyer being sold a good of low quality.

Question 7

Robert borrowed some money from Granite Bank,telling the loan officer that he intended to use the money to make repairs to his home.After getting the loan,Robert and his girlfriend immediately took the money and headed to the nearest riverboat casino for a weekend of gambling and entertainment.
A)This is an example of adverse selection since banks have difficulty selecting their customers.
B)This is a typical example of the Condorcet Paradox.
C)From the given information, Robert is the principal and his girlfriend is the agent.
D)From the given information, Granite Bank is the principal and Robert is the agent.

Accepted Answer

Granite Bank is the principal in this scenario as they are providing the loan to Robert. Robert is the agent as he is responsible for using the money as he promised, but instead, he used it for a different purpose. This is a classic example of moral hazard, where the agent takes actions that are not in the best interest of the principal.

Question 8

Which of the following practices would indicate that an employer is trying to overcome a moral-hazard problem with his employees?
A)The employer pays his workers wages that are unusually high for the industry and region.
B)The employer has voluntarily removed video cameras from the factory floor.
C)The employer has discontinued the practice of giving his employees' year-end bonuses.
D)Both A and B are correct.

Accepted Answer

Unusually high wages can motivate employees to work harder and take their job responsibilities more seriously because they feel their job is more valuable to them. This can reduce the moral hazard problem where employees may shirk their duties knowing that they'll still collect their regular wage. Option B is incorrect since removing video cameras can increase the moral hazard problem as employees may feel less oversight and accountability. Option C provides little information about the situation and does not relate to overcoming a moral hazard problem.

Question 9

Which of the following statements is correct?
A)The moral-hazard problem is a problem involving hidden actions.
B)Adverse selection is a problem involving hidden actions.
C)Adverse selection is a problem involving principals and agents.
D)Moral hazard always involves asymmetric information; asymmetric information always involves adverse selection.

Accepted Answer

The moral-hazard problem arises when one party engages in risky behavior because they are protected from the consequences of that behavior by another party (such as an insurance company). This hidden action creates a problem for the other party, who bears the costs of the behavior. Adverse selection, on the other hand, refers to a situation where one party has better information than another party, leading to the selection of undesirable insurance risks. This does not necessarily involve hidden actions but rather hidden information. Principal-agent problems refer to situations where an agent (such as an employee) acts on behalf of a principal (such as a manager or company owner), creating potential conflicts of interest. It does not necessarily involve hidden actions or information. Finally, moral hazard and adverse selection are not always interchangeable—they are distinct issues with their own unique characteristics.

Question 10

Tom owns a small business in Sioux Falls.He travels frequently,meeting with important customers,attending conferences,and the like.Tom hired Susan to work in the Sioux Falls office as the day-to-day general manager of the business.
A)This is a moral hazard problem since Susan may not work as hard as Tom would like.
B)Tom choosing to hire Susan is an example of adverse selection since it is possible that Susan will not work as hard as Tom expects.
C)Tom will most likely pay Susan a lower salary than normal since Tom will not be there to monitor Susan's work effort, and since Susan will not likely work hard knowing Tom cannot monitor her effort.
D)The Condorcet Paradox implies that Susan will not work as hard as Tom would like even though he will likely pay her an above equilibrium wage.

Accepted Answer

The situation described is one of moral hazard, where the actions of the agent (Susan) may not align with the interests of the principal (Tom) since he cannot fully monitor her work effort.

Answer: None of the other choices are correct.

Adverse selection refers to the problem of selecting individuals who have high-risk characteristics (such as poor work ethic) before hiring them, which is not the case here. Tom's salary decisions for Susan are not necessarily linked to his ability to monitor her effort, and the Condorcet Paradox does not apply to this situation.

Question 11

When asymmetric information affects a relationship between two parties,it is always the case that
A)neither party is well informed.
B)one party is better informed than the other party.
C)both parties are equally well informed.
D)the government is better informed than either of the two parties.

Accepted Answer

Asymmetric information means that one party has more information than the other party. Therefore, one party is better informed than the other party.

Question 12

Moral hazard is a problem that arises when
A)an agent performs a task on behalf of a principal.
B)a principal performs a task on behalf of an agent.
C)a moral person trusts an immoral person to perform a task for him.
D)an immoral person bribes a moral person to perform a task for him.

Accepted Answer

Moral hazard arises when an agent has an incentive to take more risks or act in their own interest because they do not bear the full consequences of their actions. This is typically a problem that occurs in principal-agent relationships where the agent is acting on behalf of the principal, such as in an employment or contracting relationship. Choices B, C, and D do not accurately describe the problem of moral hazard.

Question 13

The problem that arises when one person performs a task on behalf of another person is called
A)the hidden characteristics problem.
B)the lemons problem.
C)moral hazard.
D)adverse selection.

Accepted Answer

Moral hazard is the problem that arises when one person takes risks because they know that someone else bears the cost of those risks. It is a common issue in principal-agent relationships, where an agent may not act in the best interest of the principal because the agent does not face the consequences of their actions. The other choices are related to information asymmetry, but not specifically to the problem of one person performing a task on behalf of another.

Question 14

The 2001 Nobel prize in economics was awarded to George Akerlof,Michael Spence,and Joseph Stiglitz for their work on
A)asymmetric information.
B)monopoly.
C)oligopoly and monopolistic competition.
D)labor markets.

Accepted Answer

George Akerlof, Michael Spence, and Joseph Stiglitz were awarded the 2001 Nobel prize in economics for their work on asymmetric information, which refers to situations where one party in a transaction has more information than the other. They studied how this affects markets and economic outcomes, including adverse selection and moral hazard.

Question 15

Which of the following relationships involves asymmetric information?
A)Patients can look up information regarding certain prescription drugs giving them the same information as their doctors.
B)Consumer Reports allows customers of DVD players to know as much about the quality of various players as the store salesperson.
C)Car Fax allows car buyers to obtain used-vehicle histories providing them with the same information as the dealership salesperson.
D)The batter in a baseball game must guess whether the pitcher is going to throw a fastball, curveball, or change-up.

Accepted Answer

In a baseball game, the batter does not know for sure what type of pitch the pitcher will throw, making it a situation involving asymmetric information. The other options involve equal access to information between two parties.

Question 16

Frequently it is the case that: (1)A worker knows more than his employer about how much effort he puts into his job,and (2)the seller of a used car knows more than the buyer about the car's condition.
A)Neither (1) nor (2) serves as an example of asymmetric information.
B)Both (1) and (2) serve as examples of asymmetric information.
C)Neither (1) nor (2) serves as an example of a hidden action.
D)Both (1) and (2) serve as examples of hidden action.

Accepted Answer

Asymmetric information occurs when one party has more information than the other party in a transaction. In (1), the worker has more information about his effort level than the employer. In (2), the seller of the used car has more information about the car's condition than the buyer. Both (1) and (2) are examples of asymmetric information.

Question 17

Asymmetric information
A)is rare in economic transactions.
B)can take the form of a hidden action or a hidden characteristic.
C)is the underlying problem with the Condorcet Paradox.
D)Both B and C are correct.

Accepted Answer

The answer of Asymmetric information
A)is rare in economic transactions.
B)can take...

Question 18

A worker knows more than his employer about how much effort he puts into his job.This is an example of
A)a hidden action.
B)a hidden characteristic.
C)adverse selection.
D)the Condorcet Paradox.

Accepted Answer

This is an example of a hidden action because the employer cannot observe or monitor the exact amount of effort the worker is putting into his job. The worker has private information about his effort level and the employer may not know if the worker is slacking off, working hard or putting in extra effort.

Question 19

In economics,a difference in access to relevant knowledge is called a(n)
A)behavioral gap.
B)frontier gap.
C)information asymmetry.
D)access imperfection.

Accepted Answer

Information asymmetry refers to when one party in a transaction has more or better information than the other party. This can lead to imbalances in power and outcomes that benefit one party over the other. In the context of economics, information asymmetry can lead to market failures and inefficiencies.

Question 20

The temptation of imperfectly-monitored workers to shirk their responsibilities is
A)an example of the adverse-selection problem.
B)an example of the "lemons" problem.
C)an example of the principal-agent problem.
D)an example of signaling.

Accepted Answer

The principal-agent problem arises when a principal (e.g. employer) hires an agent (e.g. worker) to perform a task but the interests of the principal and agent do not completely align, leading to the possibility of the agent shirking their responsibilities if not properly monitored. Option A refers to a situation where a seller has more information than a buyer, Option B is related to the problem of asymmetric information in the market for used goods, and Option D refers to the process of conveying information about oneself to signal their abilities or characteristics.

Quiz 22: Frontiers of Microeconomics

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

Which of the following relationships involves asymmetric information?

Which of the following would be an example of a principal trying to deal with a moral hazard problem?

Shawn buys automobile insurance from Safe-T Insurance Company.If Shawn avoids having an accident for three years,Safe-T will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.

In the worker-employer relationship,"inappropriate" or "immoral" behavior

The buyer runs a risk of being sold a good of low quality when there is

Robert borrowed some money from Granite Bank,telling the loan officer that he intended to use the money to make repairs to his home.After getting the loan,Robert and his girlfriend immediately took the money and headed to the nearest riverboat casino for a weekend of gambling and entertainment.

Which of the following practices would indicate that an employer is trying to overcome a moral-hazard problem with his employees?

Which of the following statements is correct?

Tom owns a small business in Sioux Falls.He travels frequently,meeting with important customers,attending conferences,and the like.Tom hired Susan to work in the Sioux Falls office as the day-to-day general manager of the business.

When asymmetric information affects a relationship between two parties,it is always the case that

Moral hazard is a problem that arises when

The problem that arises when one person performs a task on behalf of another person is called

The 2001 Nobel prize in economics was awarded to George Akerlof,Michael Spence,and Joseph Stiglitz for their work on

Which of the following relationships involves asymmetric information?

Frequently it is the case that: (1) A worker knows more than his employer about how much effort he puts into his job,and (2) the seller of a used car knows more than the buyer about the car's condition.

Asymmetric information

A worker knows more than his employer about how much effort he puts into his job.This is an example of

In economics,a difference in access to relevant knowledge is called a(n)

The temptation of imperfectly-monitored workers to shirk their responsibilities is