Question 1

In the moral hazard problem,people incur additional risks as a result of being insured.

Accepted Answer

The moral hazard problem occurs when insurance causes people to take on additional risks because they are protected against the financial consequences of those risks.

Question 2

Stockholders can use high levels of compensation and substantial severance payments to get their corporate executives to take on higher levels of risk.

Accepted Answer

Stockholders may use high levels of compensation and substantial severance payments as incentives to encourage their corporate executives to take on higher levels of risk. These incentives can motivate executives to make risky decisions that potentially result in higher profits for the company, but they can also lead to ethical and financial risks.

Question 3

Stock options create the wrong incentive in that they create a principal-agent problem.

Accepted Answer

Stock options are designed to align the interests of the principals (shareholders) and agents (executives), by giving executives an incentive to increase the company's stock price, which benefits both shareholders and executives.

Question 4

Because of adverse selection,no good used cars ever change hands.

Accepted Answer

The answer of Because of adverse selection,no good used cars...

Question 5

Distributing goods equally among consumers would be not only fair but efficient.

Accepted Answer

Distributing goods equally may seem fair, but it may not be efficient as different individuals have different needs, preferences, and may value goods differently. This means that some consumers may get more utility or satisfaction from having one good over another. Therefore, allocating goods equally among consumers may not result in maximum overall satisfaction or utility. Instead, an efficient distribution would consider individual needs, preferences, and demand to allocate goods in a way that maximizes overall satisfaction or utility.

Question 6

A golden parachute is a mechanism that stockholders employ to encourage executives to be more risky than they would be without the parachute.

Accepted Answer

The answer of A golden parachute is a mechanism that...

Question 7

According to F.A.Hayek,knowledge is lost as statistics are used to convey information.

Accepted Answer

According to F.A. Hayek's theory of knowledge, statistics convey only a part of the information on complexity, variability, and unpredictability of market phenomena, leading to a loss of knowledge in the transmission of economic data.

Question 8

Most economists believe adverse selection played no role in the 2008 financial crisis.

Accepted Answer

Adverse selection did play a role in the 2008 financial crisis, particularly in the mortgage market where subprime borrowers and risky loans were disproportionately represented. Lenders failed to sufficiently screen borrowers and assess their creditworthiness, leading to a buildup of toxic assets and mortgage defaults.

Question 9

When allocation decision are not made on the basis of price traditional methods of social gain understate the actual gain to society.

Accepted Answer

The answer of When allocation decision are not made on...

Question 10

A drafted army can be unnecessarily costly in two ways: it can be the wrong size or it can consist of the wrong people.

Accepted Answer

A drafted army that is too large or too small can result in unnecessary expenses for training, equipping, and supporting soldiers who may not be needed. Additionally, a drafted army that consists of individuals who are not well-suited or trained for military service can also result in additional costs for training and support.

Question 11

The use of signals in an economy is both individually rational and socially efficient.

Accepted Answer

While signals can be individually rational as they help individuals make informed decisions, they are not always socially efficient due to potential externalities, information asymmetries, or market failures.

Question 12

Adverse selection can cause insurance companies to limit the amount of insurance they provide to people who are "poor risks."

Accepted Answer

The answer of Adverse selection can cause insurance companies to...

Question 13

In the principal-agent problem,the principal is the person performing work and the agent is the one for whom the work is being done.

Accepted Answer

In the principal-agent problem, the principal is the person who hires an agent to perform work on their behalf, making the agent the one performing the work and the principal the one for whom the work is being done.

Question 14

Whether a good is distributed by a social planner or a market system,the area beneath the demand curve out to the quantity available accurately measures the value consumers receive.

Accepted Answer

The answer of Whether a good is distributed by a...

Question 15

The Fabian argument that confiscation of rents would not lower social welfare overlooks the costs of resource misallocation.

Accepted Answer

The Fabian argument assumes that the state would use the confiscated rents efficiently and effectively for the benefit of society, without acknowledging the possibility of resource misallocation and the negative impact it could have on social welfare.

Question 16

An efficiency wage is the wage that maximizes the surplus of the worker.

Accepted Answer

An efficiency wage is a wage that is higher than the market equilibrium wage in order to motivate workers to be more productive and efficient. While it may increase worker satisfaction and reduce turnover, it does not necessarily maximize the surplus of the worker.

Question 17

If employers had to pay higher than equilibrium wages to their workers,then workers would be better off but employers would be worse off.

Accepted Answer

The answer of If employers had to pay higher than...

Question 18

A draft is better for society because it is less costly than a volunteer army.

Accepted Answer

A draft can have hidden costs such as lower morale among conscripts, potential resistance or evasion, and the administrative costs of maintaining the draft system, which can outweigh the apparent savings compared to a volunteer army that may have higher direct salary costs but benefits from a more motivated and committed force.

Question 19

A market price contains no more information about a good than a good social planner would be able to obtain.

Accepted Answer

While market prices do reflect information about supply and demand for a good, they do not necessarily reveal all of the information a social planner would need to make decisions about allocating resources. Social planners would also need information about externalities, public goods, and other factors that may not be fully reflected in market prices.

Question 20

An unexpected increase in inflation,by diluting the informational content of prices,will lead to an increase in unemployment.

Accepted Answer

Unexpected inflation can distort price signals, making it harder for businesses and consumers to make informed decisions, but it does not directly lead to an increase in unemployment. Unemployment is influenced by a variety of factors including economic growth, productivity, and labor market policies.

Quiz 9: Knowledge and Information