Question 1

Which of the following best demonstrates the problem of moral hazard?

Accepted Answer

A)   Josephine doesn't buy health insurance because it is too expensive and she is healthy.
B)   A life insurance company forces Sally to have a medical examination prior to selling her insurance.
C)   Sally drives more recklessly after she buys car insurance.
D)   Fatima chooses to attend a well-respected college.E) B) and C)
F) A) and C)

Question 2

Moral hazard occurs when

Accepted Answer

A)   an employer closely monitors an employee.
B)   two people consider a trade with each other and one person has relevant information about some aspect of the product's quality that the other person lacks.
C)   an employee lacks an incentive to promote the best interests of the employer, and the employer cannot observe the actions of the employee.
D)   an employee closely monitors the actions of her employer.E) C) and D)
F) None of the above

Question 3

How have insights from the field of psychology influenced the thinking of economists in recent years?

Accepted Answer

Insights from psychology have led some e...

Question 4

Severe adverse-selection problems may result in

Accepted Answer

A)   too few good used cars being offered for sale.
B)   wages that are too low relative to equilibrium levels.
C)   too many good drivers buying too much automobile insurance.
D)   people with average health buying too much health insurance.E) B) and C)
F) A) and D)

Question 5

The principal-agent problem is more serious in large firms than in small firms because

Accepted Answer

A)   monitoring employee activity in large firms is generally more difficult.
B)   employees in large firms have less information.
C)   profits increase with the size of the firm.
D)   customers expect better treatment from small firms and they usually get it.E) B) and D)
F) B) and C)

Question 6

Provide three examples of screening.

Accepted Answer

Banks will want to screen customers who ...

Question 7

John's car is in need of repair so John decides to sell it to avoid the repair bill. Unaware of the problem, Suzanne buys the car. This is an example of

Accepted Answer

A)   hidden actions.
B)   adverse selection.
C)   efficiency wages.
D)   moral hazard.E) A) and C)
F) B) and C)

Question 8

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

Accepted Answer

A)   hidden characteristics.
B)   signaling.
C)   moral hazard and hidden action
D)   screening.E) B) and C)
F) None of the above

Question 9

Alex, who knew nothing about construction, paid Stewart to build an extension on his house. Two years later, a wall of the new extension crumbled because Stewart used poor quality materials. This is an example of

Accepted Answer

A)   adverse selection.
B)   screening.
C)   moral hazard.
D)   signalling.E) A) and B)
F) C) and D)

Question 10

Which of the following offers an explanation as to why the principal-agent problem exists for a firm?

Accepted Answer

A)   The firm cares less about profit and more about cost when there are many competitors in the market.
B)   The firm offers an employee-incentive program in which employees share in the firm's profits.
C)   The firm operates in a market with many competitors forcing the firm to pay its employees more to keep them from switching to another firm.
D)   The firm operates to maximize profit while the employees attempt to work as little as possible to earn their paychecks.E) A) and B)
F) C) and D)

Question 11

When one party is better informed about an economic situation than another party, economists describe the problem as one of

Accepted Answer

A)   asymmetric information.
B)   moral hazard.
C)   political economy.
D)   behavioral economicsE) C) and D)
F) B) and D)

Question 12

Explain how the ultimatum theory works and its likely results.

Accepted Answer

Two volunteers are chosen and a coin tos...

Question 13

Since people tend to care about fairness, firms may give bonuses during particularly profitable years to be fair and to avoid retaliation from the workers.

Accepted Answer

A) True 
 B)False

Question 14

Nicole wants to avoid buying a car that is a lemon. She takes a car she would like to buy to her mechanic before she purchases it. This is known as

Accepted Answer

A)   screening.
B)   signalling.
C)   moral hazard.
D)   adverse selection.E) B) and D)
F) B) and C)

Question 15

Effective signals

Accepted Answer

A)   convey useful information from informed parties to uninformed parties.
B)   impose little or no cost on the signaler.
C)   cannot be conveyed accurately when there is an information asymmetry.
D)   can be used by employers to alleviate the moral hazard problem in the workplace.E) C) and D)
F) None of the above

Question 16

What is the purpose of signalling?

Accepted Answer

Signalling is an action taken by an info...

Question 17

Which of the following is an example of a signal that is used to reveal private information?

Accepted Answer

A)   Max carefully chooses a special gift for Josephine.
B)   Josephine graduates from university.
C)   Lexus advertises its cars during the football World Cup Final.
D)   All of these answers are correct.E) None of the above
F) B) and D)

Question 18

A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

Accepted Answer

A)   moral hazard problem.
B)   screening device.
C)   signal of how much she cares for him.
D)   All of the above are correct.E) A) and D)
F) A) and C)

Question 19

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of something that will give rise to

Accepted Answer

A)   adverse selection.
B)   monitoring.
C)   moral hazard.
D)   irrational behaviour.E) All of the above
F) A) and B)

Question 20

To avoid the problem of adverse selection, insurance companies screen their prospective customers to discover hidden health problems.

Accepted Answer

A) True 
 B)False

Exam 12: Information and Behavioural Economics

When one party is better informed about an economic situation than another party, economists describe the problem as one of

Correct AnswerverifiedShow Answer

How have insights from the field of psychology influenced the thinking of economists in recent years?

Correct AnswerverifiedInsights from psychology have led some e...View AnswerShow Answer

Nicole wants to avoid buying a car that is a lemon. She takes a car she would like to buy to her mechanic before she purchases it. This is known as

Correct AnswerverifiedShow Answer

Provide three examples of screening.

Correct AnswerverifiedBanks will want to screen customers who ...View AnswerShow Answer

Since people tend to care about fairness, firms may give bonuses during particularly profitable years to be fair and to avoid retaliation from the workers.

Correct AnswerverifiedShow Answer

Moral hazard occurs when

Correct AnswerverifiedShow Answer

Which of the following is an example of a signal that is used to reveal private information?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Effective signals

Correct AnswerverifiedShow Answer

To avoid the problem of adverse selection, insurance companies screen their prospective customers to discover hidden health problems.

Correct AnswerverifiedShow Answer

John's car is in need of repair so John decides to sell it to avoid the repair bill. Unaware of the problem, Suzanne buys the car. This is an example of

Correct AnswerverifiedShow Answer

Which of the following offers an explanation as to why the principal-agent problem exists for a firm?

Correct AnswerverifiedShow Answer

Severe adverse-selection problems may result in

Correct AnswerverifiedShow Answer

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of something that will give rise to

Correct AnswerverifiedShow Answer

Alex, who knew nothing about construction, paid Stewart to build an extension on his house. Two years later, a wall of the new extension crumbled because Stewart used poor quality materials. This is an example of

Correct AnswerverifiedShow Answer

A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

Correct AnswerverifiedShow Answer

Which of the following best demonstrates the problem of moral hazard?

Correct AnswerverifiedShow Answer

The principal-agent problem is more serious in large firms than in small firms because

Correct AnswerverifiedShow Answer

Explain how the ultimatum theory works and its likely results.

Correct AnswerverifiedTwo volunteers are chosen and a coin tos...View AnswerShow Answer

What is the purpose of signalling?

Correct AnswerverifiedSignalling is an action taken by an info...View AnswerShow Answer

Correct Answer
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Correct Answer
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Insights from psychology have led some e...
View Answer

Correct Answer
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Correct Answer
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Banks will want to screen customers who ...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Two volunteers are chosen and a coin tos...
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Correct Answer
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Signalling is an action taken by an info...
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