Question 1

An employer-employee relationship is

Accepted Answer

An employer-employee relationship is a principal-agent relation where the employer (principal) hires the employee (agent) to perform certain tasks and expects them to act in the best interest of the company. This relationship is based on a contract where the employee receives compensation in return for their services.

Question 2

When sellers have more information about hidden characteristics of a good than buyers have, more low-quality units are likely to be sold than high-quality units. This is

Accepted Answer

The description given is the classic example of the lemons problem, which occurs in markets with information asymmetry. In this case, the seller has more information about the quality of the product than the buyer, leading to a situation where more low-quality goods are sold than high-quality ones.

Question 3

Why is the principal-agent problem less likely when getting a haircut than when getting a car repaired?

Accepted Answer

When getting a haircut, there are no hidden actions that the hair stylist can take, unlike in car repairs where there may be hidden repairs or unneeded services recommended by the mechanic. This reduces the likelihood of a principal-agent problem where the agent (mechanic in this case) may act in their own interest rather than the principal (car owner).

Question 4

The lemons problem is that when there are hidden characteristics known only to the seller of a used car,

Accepted Answer

When there are hidden characteristics known only to the seller of a used car, the seller has a higher incentive to sell lemons because they can get away with selling them at a higher price. This leads to a higher ratio of lemons to high-quality cars on the market.

Question 5

Principal-agent problems are less likely to arise

Accepted Answer

Principal-agent problems arise when there is an information asymmetry between the two parties, and when their goals conflict. Therefore, if principals have easy access to information about the actions of their agents, and if there is alignment between their goals, then principal-agent problems are less likely to arise.

Question 6

The principal-agent problem arises because of

Accepted Answer

The principal-agent problem arises due to hidden actions or information asymmetry between the principal and the agent. The agent may have private information or incentives that are not aligned with the principal's objectives. This creates a risk of the agent taking actions that benefit themselves rather than the principal. The other options listed are not directly related to the principal-agent problem.

Question 7

In which of the following situations is the principal-agent problem least likely to occur?

Accepted Answer

In a bartender serving at a bar scenario, there is a direct exchange of service between the bartender and the customer. The bartender does not have any incentive to deceive or take advantage of the customer because they directly receive tips and feedback based on their customer service. Therefore, the principal-agent problem is least likely to occur in this scenario.

Question 8

Copious Corp. is owned by 2 million stockholders who elect a board of directors that selects a management team responsible for hiring workers to serve customers by selling and repairing computer mice. Which of the following statements is true?

Accepted Answer

The answer of Copious Corp. is owned by 2 million...

Question 9

Bad risks may be the most willing to pay high interest rates and thus get loans. This describes an example of

Accepted Answer

Adverse selection refers to the situation where one party has more information than the other party and uses it to their advantage. In this case, bad risks (who are aware of their high risk) are more likely to take out high-interest loans, resulting in adverse selection. The lenders may not have full information about the borrower's risk level, leading to a higher probability of default. Therefore, lenders may only find out about a borrower's riskiness after the loan is approved and the borrower defaults.

Question 10

With increased specialization in the economy, principal-agent problems become

Accepted Answer

With increased specialization, there are more divisions of labor and therefore more opportunities for principal-agent problems to arise.

Question 11

Which of the following is not a principal-agent relationship?

Accepted Answer

Marriage is not a principal-agent relationship. It is a legal and social contract between two individuals. The other options involve one party (the principal) hiring another party (the agent) to act on their behalf.

Question 12

A situation in which one party makes a contractual agreement with a second party in the expectation that the second party will act on its behalf is known as

Accepted Answer

A principal-agent relation is a situation in which one party (the principal) hires another party (the agent) to act on its behalf. The principal expects the agent to act in the best interest of the principal, but there may be a conflict of interest between the two parties. This type of relation is commonly found in business and politics, where companies and governments hire agents to represent their interests.

Question 13

Which of the following will not reduce the likelihood of a principal-agent problem when getting your car repaired?

Accepted Answer

Not paying until after the repair job is finished may actually exacerbate the principal-agent problem by giving the mechanic an incentive to cut corners or use lower-quality parts since they won't receive payment until the end. The other options all involve increasing the information asymmetry between the principal (car owner) and the agent (mechanic), which can help to reduce the likelihood of the mechanic taking advantage of the situation.

Question 14

Suppose the refrigerator repairman charges you for two hours of labor even though he could have fixed it in ten minutes. This is an example of

Accepted Answer

The answer of Suppose the refrigerator repairman charges you for...

Question 15

The used car market may be inefficient because the purchase of a used car often involves

Accepted Answer

The purchase of a used car involves hidden characteristics, such as the true condition and history of the vehicle. This can lead to inefficiencies in the market, as buyers may not be able to accurately assess the value of the car and sellers may not disclose all relevant information.

Question 16

The academic dean at Esoteric University hires a philosopher to teach one of the 12 sections of a course called "Why Nerf Balls Ingest Hair." Which of the following is true?

Accepted Answer

The answer of The academic dean at Esoteric University hires...

Question 17

When those on the informed side of a market self-select, the problem of __________ occurs.

Accepted Answer

Adverse selection occurs when those who have more information about their situation are more likely to make a certain choice, leading to a negative outcome for those on the other side of the market who have less information. This can create a situation where only those with limited information participate in the market, leading to a decrease in overall market efficiency.

Question 18

One effect of the lemons problem in the used car market is that

Accepted Answer

Without reliable information, buyers cannot distinguish between a good car and a lemon. As a result, sellers of good cars are hesitant to enter the market, while sellers of lemons may try to pass their low-quality vehicles off as good ones. This leads to lemons becoming more common in the market.

Question 19

A principal-agent problem arises when

Accepted Answer

The answer of A principal-agent problem arises when
...

Question 20

Adverse selection is more likely when a job requires intangible or unmeasurable abilities.

Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, leading to an imbalance in risk. This is more likely to happen in jobs that require intangible or unmeasurable abilities, as it may be difficult for the employer to accurately assess the candidate's qualifications, increasing the risk of hiring someone who is not a good fit for the position.

Quiz 14: Transaction Costs, Imperfect Information, and Behavioral Economics