Question 1

One way that employers respond to the moral-hazard problem is by monitoring their employees.

Accepted Answer

Employers monitor their employees to ensure they are working efficiently and effectively, addressing the moral-hazard problem where employees might not work as hard when their efforts are not directly observed.

Question 2

Economists have found that asymmetric information is not very prevalent.

Accepted Answer

Asymmetric information is quite prevalent in many markets, such as the used car market, insurance markets, and financial markets, where one party often has more or better information than the other, leading to market inefficiencies and potential failures.

Question 3

In a moral hazard problem, the agent is unable to perfectly monitor the principal's behavior so the principal applies less effort than the agent considers desirable.

Accepted Answer

In a moral hazard problem, the principal is unable to perfectly monitor the agent's behavior, leading the agent to possibly apply less effort than the principal considers desirable.

Question 4

An example of asymmetric information is when a seller of a house knows more than the buyer about the house's condition.

Accepted Answer

Asymmetric information occurs when one party in a transaction has more or superior information compared to another. In the context of a house sale, the seller typically knows more about the condition of the house than the buyer, exemplifying asymmetric information.

Question 5

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

Accepted Answer

The problem described is known as the "principal-agent problem," not the lemons problem. The lemons problem refers to issues of asymmetric information in markets, particularly when sellers have more information about the quality of a product than buyers.

Question 6

The moral-hazard problem and the desire of firms to lessen that problem serve as a plausible explanation for a firm paying above-equilibrium wages to its workers.

Accepted Answer

Paying above-equilibrium wages can reduce the moral-hazard problem by increasing worker productivity and loyalty, thereby reducing the risks associated with shirking and turnover. This approach aligns with the efficiency wage theory, where firms voluntarily pay more than the market-clearing wage to boost worker efficiency and motivation.

Question 7

The classic example of adverse selection is the market for used cars.

Accepted Answer

Adverse selection in the market for used cars, famously described by George Akerlof in his paper "The Market for Lemons," illustrates how information asymmetry between sellers (who know the quality of the car) and buyers (who do not) can lead to a market failure where only low-quality goods are sold.

Question 8

Moral hazard and adverse selection are similar asymmetric information problems but moral hazard involves hidden actions while adverse selection involves hidden characteristics.

Accepted Answer

Moral hazard occurs when one party takes risks because they know the other party bears the consequences, often due to hidden actions that the other party cannot observe. Adverse selection, on the other hand, happens before a transaction occurs, when one party has more or better information about a relevant characteristic, leading to a potentially unfavorable selection based on hidden characteristics.

Question 9

The problem of moral hazard is a problem of hidden action.

Accepted Answer

Moral hazard refers to situations where one party engages in risky behavior or fails to act in an appropriate manner because they know another party bears the consequences or risks, typically due to asymmetric information about actions taken.

Question 10

The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and Adelphia are an example of moral hazard.

Accepted Answer

Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk. The criminal actions of top managers in these corporations, who engaged in fraudulent activities knowing they might not bear the full consequences of their actions due to their positions and the complex structures of their corporations, are examples of moral hazard. They took advantage of their roles and the trust placed in them for personal gain, assuming they could avoid the full repercussions of their actions.

Question 11

The two major problems caused by asymmetric information are the moral-hazard problem and the principal-agent problem.

Accepted Answer

The two major problems caused by asymmetric information are the moral-hazard problem and adverse selection. The principal-agent problem is related to but distinct from these, often arising in contexts where asymmetric information exists.

Question 12

In economics, a difference in access to relevant knowledge is called a behavioral asymmetry.

Accepted Answer

In economics, a difference in access to relevant knowledge is called "information asymmetry," not behavioral asymmetry. Information asymmetry occurs when one party in a transaction has more or better information than the other.

Question 13

An example of signaling is a boyfriend giving an expensive, romantic gift to his girlfriend to convey his love for her.

Accepted Answer

Signaling is an action taken by an individual to convey information or intentions to another party. In this context, the boyfriend giving an expensive, romantic gift serves as a signal of his love and commitment to his girlfriend.

Question 14

Screening is an action taken by an uninformed party to induce an informed party to reveal information.

Accepted Answer

Screening is a strategy used by the uninformed party to gather information from the informed party, often through mechanisms or incentives that lead the informed party to reveal their private information.

Question 15

An example of an information asymmetry is when a worker knows more than his employer about his work effort.

Accepted Answer

Information asymmetry occurs when one party in a transaction has more or better information than the other. In this case, the worker has more information about his own work effort than the employer does, exemplifying information asymmetry.

Question 16

The science of economics is a finished jewel, perfect and unchanging.

Accepted Answer

Economics is an evolving field, constantly adapting to new data, theories, and global changes, making it neither perfect nor unchanging.

Question 17

Signaling is an action taken by an uninformed party to induce an informed party to reveal information.

Accepted Answer

Signaling is an action taken by an informed party to reveal information to an uninformed party.

Question 18

One of the things that employers can do to lessen the moral hazard problem involving their employees is to pay them in advance for their work.

Accepted Answer

Paying employees in advance can actually increase moral hazard because it reduces the incentive for employees to perform well after they have already received their compensation.

Question 19

In the employer-worker relationship, the employer is regarded as the "principal" and the worker is regarded as the "agent."

Accepted Answer

In the context of agency law, the employer is considered the "principal" who authorizes the worker, or the "agent," to perform tasks or make decisions on the principal's behalf.

Question 20

Informational asymmetry may apply to a hidden action or hidden characteristic where the informed party may be reluctant to reveal relevant information.

Accepted Answer

Informational asymmetry occurs when one party in a transaction has more or superior information compared to another. This can involve hidden actions (where one party cannot observe the actions of the other) or hidden characteristics (where one party cannot observe the attributes of the other), leading the informed party to potentially withhold relevant information to their advantage.

Quiz 22: Frontiers in Microeconomics