Question 1

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.

Accepted Answer

Both (1) and (2) are examples of asymmetric information, where one party has more or better information than the other. In (1), the worker has more information about his own effort, and in (2), the seller knows more about the car's condition than the buyer.

Question 2

The temptation of imperfectly monitored workers to shirk their responsibilities is an example of

Accepted Answer

The moral hazard problem arises when one party in a transaction has an incentive to take undue risks or shirk responsibilities because the cost of those actions does not fall on them. In the context of employment, when workers are imperfectly monitored, they may be tempted to shirk their responsibilities because they do not bear the full consequences of their reduced productivity, which exemplifies the moral hazard problem.

Question 3

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

Accepted Answer

Tenure can lead to a moral hazard problem because once professors receive tenure, their job performance is less closely monitored, and they become difficult to fire. This situation may reduce their incentive to maintain high performance levels, as the consequences for underperforming are significantly diminished.

Question 4

The field of behavioral economics builds a more subtle and complex model of economic behavior using insights from

Accepted Answer

Behavioral economics integrates insights from psychology to understand how people make economic decisions, incorporating factors like cognitive biases and emotional states that traditional economic models often overlook.

Question 5

Bill would like to buy a gift for Ann to convey his love for her. Which of the following areas of economics would most likely study this type of decision?

Accepted Answer

The answer of Bill would like to buy a gift...

Question 6

Asymmetric information

Accepted Answer

Asymmetric information can indeed take the form of a hidden action or a hidden characteristic, where one party has more or better information than the other. This concept is fundamental in many areas of economics, especially in markets where the quality of goods or the behavior of an agent cannot be fully observed.

Question 7

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Accepted Answer

The answer of Explain how the presence of asymmetric information...

Question 8

Explain what is meant by "asymmetric information." Identify and explain the two basic types of problems that arise when there is asymmetric information.

Accepted Answer

The answer of Explain what is meant by "asymmetric information."...

Question 9

The two major problems caused by asymmetric information are

Accepted Answer

Asymmetric information often leads to the moral-hazard problem, where one party takes on excessive risk because they do not bear the full consequences, and the principal-agent problem, where there is a conflict of interest between a principal (such as an owner) and an agent (such as an employee or representative) acting on their behalf.

Question 10

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

Accepted Answer

Asymmetric information refers to a situation where one party in a transaction has more or superior information compared to the other. This imbalance can lead to inefficiencies in the market, such as moral hazard or adverse selection.

Question 11

Informational asymmetry is a difference in

Accepted Answer

Informational asymmetry refers to a situation where one party in a transaction has more or better information than the other. This difference in relevant knowledge can lead to an imbalance in the transaction.

Question 12

The fact that someone with information about a significant number of illnesses in their family history is likely to purchase health insurance is an example of

Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, particularly in insurance markets. In this case, the person with detailed knowledge of their family's health history is more likely to purchase health insurance because they are aware of the higher risk of illness, potentially leading to higher costs for insurance companies who cannot discriminate risk as accurately.

Question 13

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

Accepted Answer

The principal-agent problem arises because the goals of the principal (the firm, seeking to maximize profit) and the agent (the employee, seeking to minimize effort for the same pay) are not aligned, leading to inefficiencies and conflicts of interest.

Question 14

Lindsay and Tim are playing the ultimatum game starting with $100. Based on the coin toss, Lindsay is the player to propose a division of the $100. If Lindsay acts as economic theory assumes, she should propose that

Accepted Answer

The answer of Lindsay and Tim are playing the ultimatum...

Question 15

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

Accepted Answer

Moral hazard occurs when one party takes risks because another party bears the cost of those risks. In the context of someone performing a task on behalf of another, the person doing the task may not perform it with the same care or diligence they would if they were the direct beneficiary, leading to potential issues or losses for the person on whose behalf the task is being performed.

Question 16

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

Accepted Answer

The answer of How have insights from the field of...

Question 17

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

Accepted Answer

This is an example of moral hazard, where individuals or groups may change their behavior in a way that is riskier or less productive when they know they will not bear the full consequences of their actions. In the context of March Madness, employees might slack off because they are distracted by the games, knowing that their individual reduction in productivity might not be directly noticeable or attributable to them.

Question 18

Lindsay and Tim are playing the ultimatum game starting with $100. Based on the coin toss, Lindsay is the player to propose a division of the $100. If Lindsay acts as economic theory assumes and Tim acts as experimental evidence shows, Tim will

Accepted Answer