Question 1

In which of the following situations is the principal-agent problem least likely to occur?

Accepted Answer

The principal-agent problem occurs when one party (the principal) hires another party (the agent) to carry out a task or make a decision on their behalf, and the agent may have incentives that differ from the principal's interests. In situations where there is a direct interaction between the principal and agent (such as a bartender serving a customer at a bar), the principal can easily observe the agent's actions and ensure they are acting in their best interests. Therefore, the principal-agent problem is least likely to occur in situations where there is a close and direct interaction between the principal and agent, such as in a bartender serving a customer at a bar.

Question 2

Which of the following is not a principal-agent relationship?

Accepted Answer

Repairing your own car does not involve a principal-agent relationship as there is no hiring of an external party to perform a task on your behalf.

Question 3

By requiring that applicants for insurance policies fill out lengthy forms and take a physical examination,insurers attempt to guard against

Accepted Answer

By requiring applicants to fill out lengthy forms and take physical exams, insurers are trying to guard against adverse selection, where individuals with a higher likelihood of making claims are more likely to apply for insurance policies. This helps insurers avoid an imbalance in their risk pool, which could lead to higher costs and premiums for all policyholders.

Question 4

The tendency for the poorest risks to buy health insurance and the tendency of the insured to take more risks with their health are known as moral hazard and adverse selection,respectively.

Accepted Answer

The answer of The tendency for the poorest risks to...

Question 5

Which of the following problems best describes what may occur when Dixie hires an attorney to help in her child-custody suit?

Accepted Answer

Hiring an attorney creates a principal-agent problem as Dixie is trusting the attorney (the agent) to act in her best interests, but the attorney may have their own incentives or goals that do not align with Dixie's. This creates a potential conflict of interest and can result in the attorney taking actions that are not in Dixie's best interest.

Question 6

Which of the following will not reduce the likelihood of a principal-agent problem when getting your car repaired?

Accepted Answer

Not paying until after the repair job is finished does not reduce the likelihood of a principal-agent problem as the mechanic may still cut corners or provide subpar work to save time and increase their profit. The other choices (A, B, C, E) all involve gaining more information or having more direct involvement in the repair process, which can help to reduce the information asymmetry between the principal (car owner) and agent (mechanic) and therefore reduce the likelihood of the agent taking advantage of the principal.

Question 7

Moral hazard occurs when a person's behavior changes in a way that

Accepted Answer

Moral hazard refers to a situation in which an individual or organization is more likely to take risks because the potential costs will be borne by someone else. In this case, the person's behavior changes in a way that increases the chances of an unfavorable outcome, as they are no longer bearing the full consequences of their actions. This can lead to problems in various contexts, such as insurance, banking, and regulation. Options A, B, D, and E are not necessarily related to moral hazard, and may refer to different ethical, safety, or economic considerations.

Question 8

A principal-agent problem arises when

Accepted Answer

The answer of A principal-agent problem arises when
...

Question 9

With increased specialization in the economy,principal-agent problems become

Accepted Answer

With increased specialization in the economy, there are more numerous principal-agent problems. This is because specialization leads to a separation between those who have the information and those who must act on that information, creating opportunities for one party to take advantage of the other. As a result, there is a greater need for monitoring and incentives to ensure that both parties act in the best interest of the other.

Question 10

An example of a moral hazard would be Andrew leaving the washer,dryer,and dishwasher running at home while he goes to class since he is fully insured and he will not be at risk if a fire occurs.

Accepted Answer

This scenario describes Andrew taking on unnecessary risks because he is insured and not at risk of any financial loss or consequences. This is an example of moral hazard, where having insurance or protection can incentivize individuals to take on more risks and engage in risky behavior.

Question 11

Principal-agent problems are less likely to arise

Accepted Answer

Principal-agent problems arise when there is a conflict of interest between the principal (who hires the agent to act on their behalf) and the agent (who may have their own goals or incentives that do not align with the principal's goals). If it is easy for the principal to know the agent's actions, they can monitor and enforce actions that align with their goals, reducing the chance of a conflict. Similarly, if there is less conflict between their goals, the principal-agent problem is less likely to arise.

Question 12

The academic dean at Esoteric University hires a philosopher to teach one of the 12 sections of a course called "Why Nerf Balls Ingest Hair." Which of the following is true?

Accepted Answer

The answer of The academic dean at Esoteric University hires...

Question 13

The principal-agent problem arises because of

Accepted Answer

The principal-agent problem arises when the principal hires an agent to perform a task on their behalf, but the agent may have different goals or incentives than those of the principal, resulting in asymmetrical information and potentially leading to inefficient outcomes. Hidden actions, or activities that the agent engages in that are not observable by the principal, exacerbate this problem. Natural selection, diminishing marginal returns, and the winner's curse are not directly related to the principal-agent problem, while hidden characteristics are related but are not the most direct cause.

Question 14

Suppose the refrigerator repairman charges you for two hours of labor even though he could have fixed it in ten minutes.This is an example of

Accepted Answer

The answer of Suppose the refrigerator repairman charges you for...

Question 15

Copious Corp.is owned by 2 million stockholders who elect a board of directors that selects a management team responsible for hiring workers to serve customers by selling and repairing computer mice.Which of the following statements is true?

Accepted Answer

The answer of Copious Corp.is owned by 2 million stockholders...

Question 16

An employer-employee relationship is

Accepted Answer

An employer-employee relationship is a principal-agent relation, in which the employer is the principal and the employee is the agent. The employer hires the employee to perform specific tasks and entrusts them with decision-making authority to carry out those tasks on their behalf.

Question 17

A situation in which one party makes a contractual agreement with a second party in the expectation that the second party will act on its behalf is known as

Accepted Answer

A principal-agent relation is a situation where one party (the principal) contracts with another party (the agent) to act on their behalf. The principal expects the agent to make decisions and take actions that are consistent with the principal's goals and interests. This type of relationship often arises in situations where the principal lacks the time, expertise, or resources to perform certain tasks themselves, and so hires an agent to do the work for them.

Question 18

Why is the principal-agent problem less likely when getting a haircut than when getting a car repaired?

Accepted Answer

When getting a haircut, there are no hidden actions as the process is visible to the customer. In contrast, when getting a car repaired, the process is often hidden and the customer relies on the mechanic's expertise and honesty. This creates a potential principal-agent problem where the mechanic may have an incentive to overcharge or misrepresent the repairs needed.

Question 19

Adverse selection is more likely when a job requires intangible or unmeasurable abilities.

Accepted Answer

Adverse selection occurs when one party to a transaction has more information than the other and uses that information to their advantage. In the context of employment, this can happen when a job requires intangible or unmeasurable abilities, such as creativity or problem-solving skills, that may be difficult for employers to assess in the hiring process. As a result, job candidates who may not possess these abilities may be more likely to apply for the job, leading to adverse selection.

Question 20

Which of the following is not a principal-agent relationship?

Accepted Answer

Getting married does not involve a principal and an agent relationship. All the other options involve one party (principal) hiring another (agent) to perform a task on their behalf.

Quiz 14: Transaction Costs, imperfect Information, and Market Behavior

In which of the following situations is the principal-agent problem least likely to occur?

Which of the following is not a principal-agent relationship?

By requiring that applicants for insurance policies fill out lengthy forms and take a physical examination,insurers attempt to guard against

The tendency for the poorest risks to buy health insurance and the tendency of the insured to take more risks with their health are known as moral hazard and adverse selection,respectively.

Which of the following problems best describes what may occur when Dixie hires an attorney to help in her child-custody suit?

Which of the following will not reduce the likelihood of a principal-agent problem when getting your car repaired?

Moral hazard occurs when a person's behavior changes in a way that

A principal-agent problem arises when

With increased specialization in the economy,principal-agent problems become

An example of a moral hazard would be Andrew leaving the washer,dryer,and dishwasher running at home while he goes to class since he is fully insured and he will not be at risk if a fire occurs.

Principal-agent problems are less likely to arise

The academic dean at Esoteric University hires a philosopher to teach one of the 12 sections of a course called "Why Nerf Balls Ingest Hair." Which of the following is true?

The principal-agent problem arises because of

Suppose the refrigerator repairman charges you for two hours of labor even though he could have fixed it in ten minutes.This is an example of

Copious Corp.is owned by 2 million stockholders who elect a board of directors that selects a management team responsible for hiring workers to serve customers by selling and repairing computer mice.Which of the following statements is true?

An employer-employee relationship is

A situation in which one party makes a contractual agreement with a second party in the expectation that the second party will act on its behalf is known as

Why is the principal-agent problem less likely when getting a haircut than when getting a car repaired?

Adverse selection is more likely when a job requires intangible or unmeasurable abilities.

Which of the following is not a principal-agent relationship?