Question 1

Because people with hidden health problems are more likely to buy health insurance than are other people,

Accepted Answer

This is known as adverse selection, where those with hidden health problems are more likely to buy health insurance, which leads to higher costs for insurance providers. Insurance providers then reflect these costs onto the price of health insurance, making it more expensive for everyone.

Question 2

Which of the following is not a method firms use to avoid the moral hazard problem in the employment relationship? They:

Accepted Answer

The answer of Which of the following is not a...

Question 3

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

Accepted Answer

The answer of Which of the following is an example...

Question 4

An apparel company employs Jabulile as a designer. In this employment relationship, the apparel company is the

Accepted Answer

In an employment relationship, the company is considered the principal, as they are the entity that hires and directs the work of the employee (designer). The other options do not accurately describe the role of the company in this relationship.

Question 5

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

Accepted Answer

Moral hazard refers to the tendency of people to take greater risks when they are insured against losses. In this case, Lerato drives more recklessly after buying car insurance, knowing that if she gets into an accident, her insurer will cover the costs. This behavior increases the likelihood of accidents and ultimately leads to increased costs for the insurer and potentially higher premiums for other insured drivers.

Question 6

Markus is a travelling salesman for an insurance company. In this employment relationship, Markus is the

Accepted Answer

Markus is the agent in this employment relationship because he is representing and selling insurance products on behalf of the insurance company. The principal is the party that hires the agent and entrusts them with certain tasks, which in this case is the insurance company. Screener and signaller are not relevant terms in this context.

Question 7

Moral hazard occurs when

Accepted Answer

Moral hazard occurs when an employee lacks an incentive to promote the best interests of the employer, and the employer cannot observe the actions of the employee. This can lead to the employee taking risks or acting in their own self-interest without fear of consequences.

Question 8

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

Accepted Answer

This scenario is an example of adverse selection, as the seller (Jan) had more information about the car's condition than the buyer (Pieter), leading to an unequal exchange.

Question 9

Yusuf is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of

Accepted Answer

This is an example of adverse selection, where Yusuf is hiding information about the house's defects, leading potential buyers to make decisions without knowing the full extent of the issues.

Question 10

Severe adverse selection problems may result in

Accepted Answer

Severe adverse selection problems in the market for used cars can lead to a situation where only low-quality cars are offered for sale, as sellers of high-quality cars are driven out of the market due to the high prices demanded by buyers who want to avoid buying a lemon. This leads to a reduced supply of good used cars, which can also drive up their prices even further.

Question 11

Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. This is an example of

Accepted Answer

This is an example of a moral hazard problem because your friend is taking advantage of their position at the coffee shop to give away free coffee, which may not align with the interests of their employer.

Question 12

Which of the following is not an example of signalling?

Accepted Answer

Screening is a method of selecting among different types of individuals or products, not a form of signalling. Advertising, getting an education, and gift giving are all examples of signalling, as they communicate information about an individual's qualities, abilities, or intentions.

Question 13

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 information than the other. In (1), the worker has more information about his own effort level than the employer does. In (2), the seller has more information about the car's condition than the buyer does.

Question 14

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 interests of the firm (to maximize profit) may not align with the interests of the employees (to work as little as possible to earn their paychecks). This discrepancy creates a potential conflict of interest where the employees may shirk their responsibilities or engage in opportunistic behavior, which ultimately affects the firm's profitability.

Question 15

Ricky 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

Ricky's behavior of spending time on fantasy football instead of working is an example of moral hazard and hidden action. His employer cannot fully observe how he spends his time at work, and this creates an incentive for Ricky to shirk his responsibilities and engage in non-work related activities. This is a classic example of moral hazard, where the behavior of one party (Ricky) is hidden from the other party (his employer), leading to adverse consequences.

Question 16

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

Accepted Answer

Screening refers to the process of gathering information about a product or service before making a purchase in order to avoid potential risks and hidden defects. In this case, Nicole is screening the car by taking it to her mechanic before buying it. Signalling, moral hazard, and adverse selection are all related to the risks and uncertainties in transactions, but do not accurately describe the action Nicole is taking.

Question 17

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

Accepted Answer

The gift is a signal of how much the woman cares for her boyfriend.

Question 18

Which of the following must be true about a signal that is used to reveal private information in order for the signal to be effective? It must be:

Accepted Answer

The effectiveness of the signal in revealing private information depends on it being costly to the signalling party, as this indicates a greater investment in the quality of their product. However, it must be less costly for the party with the higher-quality product in order for the signal to reveal accurate information. Thus, option C (costly to the signalling party but less costly to the party with the higher-quality product) is the correct choice. Options A, B, and D do not accurately describe the characteristics of an effective signal in this context.

Question 19

Effective signals

Accepted Answer

Effective signals convey useful information from informed parties to uninformed parties, helping to reduce information asymmetry.

Question 20

Which of the following is an example of an adverse selection problem?

Accepted Answer

Adverse selection occurs when one party has more information than the other party in a transaction, leading to the selection of undesirable or risky options. In this case, the man whose father had a heart attack has more information about his own health risks than the insurance company, which may lead to him selecting a higher coverage option that could potentially be more costly for the insurance company.

Quiz 12: Information and Behavioural Economics