Question 1

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
A) both moral hazard and adverse selection.
B) neither moral hazard nor adverse selection.
C) moral hazard, but not adverse selection.
D) adverse selection, but not moral hazard.

Accepted Answer

This is an example of moral hazard because the night watchman is not performing his duties to the fullest extent even though he is being paid to do so. It is not an example of adverse selection because there is no indication that the watchman was chosen based on any type of risk factor.

Question 2

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?
A) Tell Peter that the shareholders want to earn a large profit this year.
B) Pay Peter commissions on what he sells after the work has been completed.
C) Allow Peter to set his own schedule and work from home frequently.
D) Pay Peter a lower wage than he would earn in a similar job at another firm.

Accepted Answer

By paying Peter commissions on what he sells after the work has been completed, the consulting firm is incentivizing him to put in the effort required to close deals rather than shirk his responsibilities. Since Peter's earnings will be tied to his sales results, he will have a strong motivation to work hard and generate as much business as possible. This is a common strategy used by sales organizations to incentivize their employees to perform at their best. Choices A, C, and D are unlikely to be effective in this situation since they do not address the underlying issue of Peter shirking his responsibilities while out of the office.

Question 3

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?
A) The wage is higher than the wage the student could earn working a similar job elsewhere.
B) The wage is the same as the wage the student could earn working a similar job elsewhere.
C) The wage is lower than the wage the student could earn working a similar job elsewhere.
D) The wage is likely to result in the student shirking responsibilities.

Accepted Answer

An efficiency-wage is a wage higher than the market wage in order to encourage workers to put in extra effort and perform better. So, the college professor is likely offering the student a higher wage in order to incentivize them to work harder and take better care of her children. Therefore, the wage is likely higher than what the student could earn working a similar job elsewhere.

Question 4

Employers may choose to pay their workers a wage that exceeds the equilibrium wage according to
A) efficiency-wage theories.
B) equilibrium wage theories.
C) screening theories.
D) signaling theories.

Accepted Answer

Efficiency-wage theories propose that employers may choose to pay their workers more than the equilibrium wage in order to increase productivity and reduce turnover. By paying above-market wages, employers can attract and retain high-quality workers who have a greater incentive to work hard and stay with the company. This can lead to lower training and hiring costs in the long run, among other benefits.

Question 5

Pedro,who knows nothing about construction,paid Benito to remodel a room in his house.Two years later,one wall in the remodeled room crumbled because Benito used poor-quality materials.This illustrates which economic problem?
A) adverse selection
B) screening
C) moral hazard
D) signaling

Accepted Answer

This scenario illustrates moral hazard, as Benito had no incentive to use high-quality materials since he would not bear the cost of any future problems that may arise. Pedro, having little knowledge of construction, entrusted Benito with the task, assuming he would do the job properly.

Question 6

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
A) adverse selection.
B) a Condorcet paradox.
C) a screening problem.
D) a moral hazard problem.

Accepted Answer

Tenure creates a moral hazard problem because it reduces the incentive for professors to continue performing at a high level, knowing that they cannot be easily fired. Once they receive tenure, their job security is ensured and there is less pressure to maintain or improve their job performance, leading to potential complacency or decline in productivity.

Question 7

Insurance companies charge annual premiums to collect revenue,which they then use to pay customers who file claims for damages they incur.As a result of the moral hazard problem (1)what is the effect on the percentage of policy holders making claims,and (2)what is the effect on the average premium charged when compared to a world with no moral hazard problem?
A) The percentage of policy holders making claims is higher; average annual premiums are lower.
B) The percentage of policy holders making claims is lower; average annual premiums are lower.
C) The percentage of policy holders making claims is higher; average annual premiums are higher.
D) The percentage of policy holders making claims is lower; average annual premiums are higher.

Accepted Answer

The moral hazard problem arises when individuals take more risks than they would if they were not insured, knowing that the insurance company will cover their losses. This leads to a higher percentage of policy holders making claims, as they feel less responsibility to avoid risky behavior. As a result, insurance companies raise average annual premiums to cover their increased costs. Therefore, the percentage of policy holders making claims is higher, and average annual premiums are higher.

Question 8

Kevin borrowed some money from Hi Interest Bank,telling the loan officer that he intended to use the money to make repairs to his home.After getting the loan,Kevin and his girlfriend immediately took the money and headed to the nearest riverboat casino for a weekend of gambling and entertainment.
A) This is an example of adverse selection since banks have difficulty selecting their customers.
B) This is a typical example of the Condorcet Paradox.
C) From the given information, Kevin is the principal and his girlfriend is the agent.
D) From the given information, Hi Interest Bank is the principal and Kevin is the agent.

Accepted Answer

The given information suggests that Kevin borrowed money from Hi Interest Bank, implying that Kevin is the agent and Hi Interest Bank is the principal. Moreover, Kevin's act of diverting the loan towards gambling instead of home repairs is an example of moral hazard where the principal (bank) cannot monitor or control the actions of the agent (Kevin) leading to adverse consequences. Thus, option D is correct. Option A is incorrect since adverse selection refers to the situation where the principal cannot distinguish between high-risk and low-risk borrowers. Option B is unrelated to the given information, and option C is incorrect since Kevin and his girlfriend do not represent a principal-agent relationship in this context.

Question 9

In corporations,which of the following are principals but not agents?
A) shareholders
B) the board of directors
C) managers
D) workers

Accepted Answer

Shareholders are the owners of the corporation and they are not agents because they do not act on behalf of the corporation in conducting business or making decisions. The board of directors, managers, and workers all act as agents of the corporation.

Question 10

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?
A) Volvo drivers are not willing to take risks that they would take in another, less safe car. Driving a Volvo leads to a propensity to run stop signs.
B) Volvo drivers are not willing to take risks that they would take in another, less safe car. Driving a Volvo reduces the propensity to run stop signs.
C) Volvo drivers are willing to take risks that they would not take in another, less safe car. Driving a Volvo reduces the propensity to run stop signs.
D) Volvo drivers are willing to take risks that they would not take in another, less safe car. Driving a Volvo leads to a propensity to run stop signs.

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 11

Studies show that during the March Madness college basketball tournament,the productivity of average company in the US falls considerably.This is an example of
A) the Condorcet Paradox.
B) signaling.
C) moral hazard.
D) screening.

Accepted Answer

This is an example of moral hazard, where employees may shirk their work responsibilities to follow or watch the tournament, knowing there will be no immediate consequences for their actions. This can lead to reduced productivity for the company.

Question 12

Manuel buys automobile insurance from Ax-i-Dent Insurance Company.If Manuel avoids having an accident for three years,Ax-i-Dent will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.
A) This is an adverse selection problem which should be corrected with government intervention.
B) Manuel is a principal and Ax-i-Dent is an agent in this principal-agent problem.
C) This is a moral hazard problem.
D) There is no way for Ax-i-Dent to determine whether Manuel is a cautious or risky driver.

Accepted Answer

This is a classic example of moral hazard, where Manuel may take more risks knowing that he is insured and that the cost will not affect him directly. It is up to the insurance company to mitigate this risk by setting the premium at a level that reflects Manuel's actual risk level.

Question 13

Which of the following is a plausible explanation for a firm paying above-equilibrium wages to its workers?
A) It increases the probability that a worker who shirks will be caught.
B) It discourages workers from shirking out of fear of losing their high-paying job.
C) The Condorcet Paradox suggests that paying high wages will result in greater effort by employees.
D) By paying a high wage, employers solve this adverse selection problem and motivate the employees to work harder.

Accepted Answer

Paying above-equilibrium wages can serve as a form of incentive for workers to perform better and avoid losing their high-paying job. This is known as the efficiency-wage theory, which suggests that higher wages can lead to increased productivity and reduced turnover costs.

Question 14

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
A) adverse selection.
B) moral hazard.
C) screening
D) signaling.

Accepted Answer

The tendency of people to use more medical services due to their insurance coverage is an example of moral hazard, which refers to the behavior change that comes from being insured against a certain outcome. Adverse selection (A) refers to the tendency for higher-risk individuals to disproportionately select insurance coverage, while screening (C) and signaling (D) are related to information asymmetry in the insurance market.

Question 15

In corporations,which of the following are agents but not principals?
A) shareholders
B) the board of directors
C) managers
D) workers

Accepted Answer

The answer of In corporations,which of the following are agents...

Question 16

Insurance companies charge annual premiums to collect revenue,which they then use to pay customers who file claims for damages they incur.Because of the moral hazard problem insurance companies separate customers into groups.Group 1: customers who file few claims & Group 2: customers that file a lot of claims.After creating these groups,what happens to the average annual premium within a group?
A) Group 1: average annual premium increases
Group 2: average annual premium increases
B) Group 1: average annual premium decreases
Group 2: average annual premium increases
C) Group 1: average annual premium increases
Group 2: average annual premium decreases
D) Group 1: average annual premium decreases
Group 2: average annual premium decreases

Accepted Answer

After separating customers into groups based on their claims history, insurance companies will increase the average annual premium for customers in Group 2 who have filed a lot of claims in the past. This is because they pose a higher risk to the insurance company and are more likely to file claims in the future, which will require the company to pay out more money. On the other hand, the average annual premium for customers in Group 1 who file few claims may decrease, as they are seen as less risky to the insurance company.

Question 17

An efficiency wage
A) gives an employee an incentive to shirk his duties.
B) is lower than the equilibrium wage for that position and region.
C) is higher than the equilibrium wage for that position and region.
D) both a and b are correct.

Accepted Answer

An efficiency wage is a wage that is higher than the equilibrium wage for that position and region. This is done to motivate employees to work harder and increase productivity, as they want to keep their higher-paying job. It also allows employers to attract and retain more productive workers, leading to better overall productivity and profits. Choice A is incorrect, as an efficiency wage is actually meant to discourage shirking behavior. Choice B is incorrect, as an efficiency wage is specifically above the equilibrium wage.

Question 18

Bill owns a small business in Milwaukee.He travels frequently,meeting with important customers,and attending conferences.Bill hired Nicole to work in the Milwaukee office as the day-to-day general manager of the business.
A) This is a moral hazard problem since Nicole may not work as hard as Bill would like when she is not monitored.
B) Bill choosing to hire Nicole is an example of adverse selection since it is possible that Nicole will not work as hard as Bill expects.
C) Bill will most likely pay Nicole a lower salary than normal since Bill will not be there to monitor Nicole's work effort, and since Nicole will not likely work hard knowing Bill cannot monitor her effort.
D) The Condorcet Paradox implies that Nicole will not work as hard as Bill would like even though he will likely pay her an above equilibrium wage.

Accepted Answer

The situation described in this scenario is an example of moral hazard. Moral hazard occurs when one party takes risks because they know they will not bear the full costs of those risks, in this case, Nicole may not work as hard as Bill would like when she is not monitored. Adverse selection is a situation where one party has more information than another, leading to an imbalance in the transaction, which is not applicable in this scenario. There is no information provided to suggest that Bill will pay Nicole a lower salary or that there is a connection to the Condorcet Paradox.

Question 19

In corporations,a principal-agent problem can arise when
A) the shareholders are the principal and the managers are the agent.
B) the board of directors is the principal and the managers are the agent.
C) the shareholders are the principal and the board of directors is the agent.
D) All of the above are correct.

Accepted Answer

All of the given options accurately describe potential principal-agent problems that can arise in corporations. Shareholders may have different goals than managers, which can lead to conflicts of interest. The board of directors, who are elected by shareholders to oversee management, may not always act in the shareholders' best interests. Therefore, all three scenarios can result in a principal-agent problem.

Question 20

Rick 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
A) the Condorcet Paradox.
B) signaling.
C) moral hazard.
D) screening.

Accepted Answer

Rick's behavior is an example of moral hazard, which occurs when one party (in this case, Rick) has incomplete information about another party's (his employer's) actions, and acts accordingly in a way that is detrimental to the other party's interests. In this case, Rick is being paid for 8 hours of work per day, but is not actually working for those full 8 hours as he is using his work time to check fantasy football teams. This is detrimental to his employer's interests as they are paying him for 8 hours of work but are not getting a full 8 hours of productivity in return.

Quiz 22: Frontiers in Microeconomics.

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

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?

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

Pedro,who knows nothing about construction,paid Benito to remodel a room in his house.Two years later,one wall in the remodeled room crumbled because Benito used poor-quality materials.This illustrates which economic problem?

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

Kevin borrowed some money from Hi Interest Bank,telling the loan officer that he intended to use the money to make repairs to his home.After getting the loan,Kevin and his girlfriend immediately took the money and headed to the nearest riverboat casino for a weekend of gambling and entertainment.

In corporations,which of the following are principals but not agents?

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

Manuel buys automobile insurance from Ax-i-Dent Insurance Company.If Manuel avoids having an accident for three years,Ax-i-Dent will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.

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

In corporations,which of the following are agents but not principals?

An efficiency wage

Bill owns a small business in Milwaukee.He travels frequently,meeting with important customers,and attending conferences.Bill hired Nicole to work in the Milwaukee office as the day-to-day general manager of the business.

In corporations,a principal-agent problem can arise when

Rick 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