Question 1

Suppose you are covered under health insurance or belong to a Health Maintenance Organization (HMO), and you are insured against all or most of the costs of visits to the doctor. As a result you are likely to make greater use of medical services of all kinds. This tendency of people with insurance to change their behavior in a way that leads to more claims against the insurance company is called

Accepted Answer

The tendency of people with insurance to change their behavior in a way that leads to more claims against the insurance company is known as moral hazard. Adverse selection refers to the tendency of high-risk individuals to seek out insurance coverage, while screening and signaling refer to the process of insurers evaluating the risk of potential insured individuals.

Question 2

Which of the following is not a common response to the moral hazard problem that employers face?

Accepted Answer

Offering all employees some funding for additional education can actually exacerbate the moral hazard problem, as it may incentivize employees to use the funds for personal benefit rather than skill development for the job. The other options listed are more common responses to the moral hazard problem that employers face.

Question 3

Kim owns a small business in Denver. She travels frequently, meeting with important customers, and attending conferences. Kim hired Matt to work in the Denver office as the day-to-day general manager of the business.

Accepted Answer

This is a classic example of a moral hazard problem. Since Kim is not present to monitor Matt's work effort, he may not work as diligently as he would if she were present. This is a concern for Kim.

Question 4

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. Which of the following is a strategy the consulting firm may employ to discourage Peter from shirking his responsibilities?

Accepted Answer

The answer of Peter was recently hired as a salesman...

Question 5

When a night watchman only performs two walk-throughs per night when he is being paid to perform five walk- throughs per night, it is an example of

Accepted Answer

Moral hazard occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party because the latter cannot adequately monitor the former's behavior. In this case, the night watchman's failure to perform the agreed number of walk-throughs, due to the employer's inability to monitor every action, is a classic example of moral hazard. It is not an example of adverse selection, which refers to a situation where one party has more or better information than the other before the transaction occurs, leading to a poor selection of risks.

Question 6

Employers may choose to pay their workers a wage that exceeds the equilibrium wage according to

Accepted Answer

Efficiency-wage theories suggest that employers may choose to pay their workers a higher wage than the equilibrium wage in order to improve their performance and reduce turnover. By offering a higher wage, employers can attract more productive workers and motivate their current employees to work harder, resulting in higher profits for the company in the long run.

Question 7

Which of the following is a plausible explanation for a firm paying above-equilibrium wages to its workers?

Accepted Answer

By paying above-equilibrium wages, the firm can motivate workers to work harder and deter them from shirking out of fear of losing their high-paying job. This is known as the efficiency wage theory. Option A is incorrect because paying high wages does not increase the probability of catching a shirking worker. Option C is incorrect because the Condorcet Paradox is unrelated to wage determination. Option D is incorrect because adverse selection refers to selecting workers with certain characteristics, which is not related to paying high wages.

Question 8

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. Which of the following is a strategy the consulting firm may employ to discourage Peter from shirking his responsibilities?

Accepted Answer

Paying Peter commissions on what he sells after the work has been completed is a strategy that incentivizes him to actively pursue new sales and attend conferences to meet potential clients. This would discourage him from shirking his responsibilities as his pay is directly tied to his performance. Option A may not be effective as simply telling Peter that shareholders want a large profit may not directly affect his behavior. Option C may actually encourage Peter to shirk his responsibilities as working from home may reduce his accountability. Option D may not be effective in motivating Peter to perform well as he may still be able to find a similar job with better pay elsewhere.

Question 9

An efficiency wage

Accepted Answer

An efficiency wage is one that is intentionally set above the equilibrium wage for the position and region. This incentive helps motivate the worker to be more productive and efficient, reducing the likelihood of shirking or low-quality work. Therefore, choice A is incorrect. Additionally, choice B is incorrect because an efficiency wage is intentionally set above the equilibrium wage.

Question 10

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. His firm is paying him a wage that is higher than the equilibrium wage, but he receives much of his income in quarterly bonuses based on how much he sells.

Accepted Answer

The consulting firm is using a compensation strategy that is based on performance bonuses to reduce the moral hazard problem. Peter has an incentive to perform better since his income is closely related to his effort. However, he may be tempted to misrepresent information or take undue risks in order to maximize his income if his salary was based on a fixed wage.

Question 11

Susan buys automobile insurance from Provident Insurance Company. If Susan avoids having an accident for three years, Provident will reduce the premiums she has to pay for her insurance. Nevertheless, she routinely drives while eating or texting and speeds up to try to make it through yellow lights.

Accepted Answer

This is a moral hazard problem. Susan's behavior while driving is risky and increases the likelihood of an accident, which would result in a claim against her insurance policy. However, the fact that she would receive lower premiums for not having an accident may not deter her from engaging in risky behavior. This is a classic example of moral hazard, where the availability of insurance leads to riskier behavior.

Question 12

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

Accepted Answer

The answer of Studies show that during the March Madness...

Question 13

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. In this example, you are the

Accepted Answer

In this scenario, as the owner of the ice cream store, you are the principal (the one who hired the employee and ultimately bears the responsibility for the actions of the business) and the employee is the agent (acting on behalf of the business). Therefore, as the principal, it is your responsibility to monitor and ensure that the agent (employee) is acting in the best interest of the business and not engaging in any misconduct.

Question 14

A college professor hires a student to babysit her children and pays the student an efficiency-wage. Which of the following is correct about the wage the student earns?

Accepted Answer

An efficiency-wage is intentionally set higher than the market wage in order to motivate workers to put forth greater effort and reduce the likelihood of shirking responsibilities. Therefore, the wage the student earns is likely higher than what they could earn at a similar job elsewhere.

Question 15

A radio story reported a study on the makes and models of cars that were observed going through intersections in the Washington, D.C. area without stopping at the stop signs. According to the story, Volvos were heavily overrepresented; the fraction of cars running stop signs that were Volvos was much greater than the fraction of Volvos in the total population of cars in the D.C. area. This is initially surprising because Volvo has built a reputation as an especially safe car that appeals to sensible, safety-conscious drivers. How is this observation best explained?

Accepted Answer

This observation could be best explained by the possibility that Volvo drivers, feeling protected by the car's safety features, are more willing to take risks that they would not have taken in another less safe car, leading to a propensity to run stop signs.

Question 16

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This is an example of

Accepted Answer

This scenario is an example of a moral hazard problem, where the employee has an incentive to give generous scoops to friends and relatives at the expense of other customers because they are not the ones paying for it.

Question 17

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

Accepted Answer

By better monitoring their employees' work efforts, employers can discourage shirking behavior and reduce the moral-hazard problem. This can be done through various methods, such as setting clear performance goals, providing regular feedback, conducting performance reviews, and using technology to monitor work activities. Paying employees more often or requiring pre-employment work effort tests may not necessarily address the moral hazard problem, and paying employees below-equilibrium wages can create other negative outcomes such as reduced motivation and high turnover rates.

Question 18

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. If you want your employee to stop giving larger scoops to friends and relatives, which of the following is not a good approach?

Accepted Answer

The answer of You own an ice cream store and...

Question 19

Steve borrowed some money from Summit Bank, telling the loan officer that he intended to use the money to remodel his restaurant. After getting the loan, Steve and his girlfriend immediately took the money and went gambling in Vegas.

Accepted Answer

The answer of Steve borrowed some money from Summit Bank,...

Question 20

In the case of a moral-hazard problem, which of the following is not a way for the principal to encourage the agent to act more responsibly? The principal could

Accepted Answer

The answer of In the case of a moral-hazard problem,...

Quiz 22: Frontiers of Microeconomics