Question 1

Adverse selection is a situation in which one party, as a result of a contract, has an incentive to alter their behavior in a way that harms the other party to the contract.

Accepted Answer

Adverse selection refers to a situation where one party in a transaction has more information than the other, often leading to the less informed party making a poor decision. The scenario described is more akin to moral hazard.

Question 2

One way to overcome the problem of adverse selection in labor markets is to

Accepted Answer

The answer of One way to overcome the problem of...

Question 3

One way for a company like McDonalds to overcome principal-agent problems is to advertise for franchisees.

Accepted Answer

The answer of One way for a company like McDonalds...

Question 4

McDonald's requires that franchisees provide at least 40 percent of the cost of the franchise with their own funds and work full-time daily in the restaurant. It does this in order to avoid

Accepted Answer

McDonald's requirement that franchisees provide at least 40 percent of the cost of the franchise with their own funds and work full-time daily in the restaurant is a measure to avoid moral hazard. This is because it ensures that franchisees have a significant financial stake in the business's success, which incentivizes them to work hard and make sound decisions to ensure profitability.

Question 5

Which of the following is not related to adverse selection in insurance markets?

Accepted Answer

Adverse selection occurs when an insurance company must charge a higher price to applicants who are good health risks, not when it must charge a higher price to applicants who are poor health risks. This is because good health risks are less likely to file claims, so they may not be willing to pay the higher price, while poor health risks are more likely to file claims, so they may be willing to pay the higher price.

Question 6

Employers rely on a job applicant's signals

Accepted Answer

Employers often rely on job applicants' signals because they are not able to directly observe their skills and abilities prior to employment. These signals can include things like educational attainment, work experience, references, and interviewing skills. However, it is important for employers to recognize that these signals are not always an accurate representation of an applicant's true abilities, and that relying too heavily on them can lead to potential biases and discrimination.

Question 7

Darryl graduated with honors from college. However, he obtained his outstanding grades by cheating on every final exam with help from his best friend; Darryl actually has the talent of a C student. Nevertheless, he gets a job with a top accounting firm in Boston. The fact that he is hired illustrates a failure of

Accepted Answer

The scenario describes a failure of signaling and screening, where Darryl's grades (an imperfect signal of his abilities) falsely indicated his potential productivity to the accounting firm.

Question 8

Universities sometimes hire professors who are poor teachers but have good research skills because

Accepted Answer

The answer of Universities sometimes hire professors who are poor...

Question 9

Screening is the attempt by the uninformed side of the market to uncover the relevant but hidden characteristics of the informed party.

Accepted Answer

This statement accurately describes the concept of screening in economics.

Question 10

The idea that paying higher wages attracts a more talented labor pool is called the

Accepted Answer

The idea that paying higher wages attracts a more talented labor pool is known as efficiency wage theory. This theory suggests that offering higher wages can motivate workers to be more productive and can attract better candidates for employment.

Question 11

A signal is

Accepted Answer

A signal is a proxy used to indicate possession of unobservable qualities required for a particular job. It could be education, work experience, or any other attribute that is not directly observable but is correlated with job performance. Signals can help employers make better hiring decisions and can help job seekers differentiate themselves in a competitive labor market.

Question 12

Which of the following may result when workers have much better information about their own productivities than employers have?

Accepted Answer

The answer of Which of the following may result when...

Question 13

In order to avoid principal-agent problems, McDonald's uses all but one of the following franchising tactics. Which is the exception?

Accepted Answer

McDonald's does not require franchisees to already have another fast-food restaurant franchise. This would limit the pool of potential franchisees and may not necessarily address principal-agent problems. Instead, McDonald's focuses on other tactics such as requiring a significant investment from the franchisee, providing training programs, and requiring full-time work in the restaurant to align the interests of the franchisor and franchisee.

Question 14

Adverse selection is a situation in which

Accepted Answer

The answer of Adverse selection is a situation in which
...

Question 15

By paying a higher-than-market wage, a firm can avoid the problem of

Accepted Answer

Paying a higher-than-market wage can help a firm avoid adverse selection by attracting higher-quality employees who may not have been interested in the job otherwise. This is because the higher wage signal to potential candidates that the firm values their skills and is willing to invest in retaining them, which is an attractive prospect for high-quality candidates.

Question 16

A signal works best if

Accepted Answer

If a signal is not acquired with equal ease by all workers, it provides a reliable indicator of the worker's ability or productivity. This allows for wages and promotions to be allocated more efficiently and motivates workers to strive for higher productivity.

Question 17

A wage offer that is above the market wage, intended to avoid the adverse selection problem, is called a(n)

Accepted Answer

An efficiency wage is a wage offer that is above the market wage and is intended to avoid the adverse selection problem, which occurs when the most qualified workers are less likely to accept a job with a low wage. By offering a higher wage, employers can attract a more talented pool of workers, reducing the risk of adverse selection. Union wage refers to wages negotiated through collective bargaining between a union and an employer. Selection wage and spurious wage are not commonly used terms in economics. Opportunity cost wage is not a standard term in labor economics.

Question 18

Which of the following involves signaling?

Accepted Answer

Signaling involves sending a message about oneself or one's product to convey certain information. Reporting one's college GPA on a resume is an example of signaling, as it provides information about the individual's academic performance and potential work ethic. The other options do not involve signaling - A) is an example of supply and demand for labor, B) is an example of transactional efficiency, D) is an example of performance-based pay, and E) is an example of incentive-based compensation.

Question 19

A signal is

Accepted Answer

A signal in the context of job search refers to a way for job applicants to communicate their skills and qualifications to employers. It is not a proxy measure of job conditions, nor is it used by employers to indicate the end of a job interview. Signals are also not necessarily an indication of an excess supply of labor or qualified labor.

Question 20

Which of the following would not be considered a signal for a job as a public relations representative?

Accepted Answer

The answer of Which of the following would not be...

Quiz 14: Transaction Costs, Imperfect Information, and Behavioral Economics

Adverse selection is a situation in which one party, as a result of a contract, has an incentive to alter their behavior in a way that harms the other party to the contract.

One way to overcome the problem of adverse selection in labor markets is to

One way for a company like McDonalds to overcome principal-agent problems is to advertise for franchisees.

McDonald's requires that franchisees provide at least 40 percent of the cost of the franchise with their own funds and work full-time daily in the restaurant. It does this in order to avoid

Which of the following is not related to adverse selection in insurance markets?

Employers rely on a job applicant's signals

Universities sometimes hire professors who are poor teachers but have good research skills because

Screening is the attempt by the uninformed side of the market to uncover the relevant but hidden characteristics of the informed party.

The idea that paying higher wages attracts a more talented labor pool is called the

A signal is

Which of the following may result when workers have much better information about their own productivities than employers have?

In order to avoid principal-agent problems, McDonald's uses all but one of the following franchising tactics. Which is the exception?

Adverse selection is a situation in which

By paying a higher-than-market wage, a firm can avoid the problem of

A signal works best if

A wage offer that is above the market wage, intended to avoid the adverse selection problem, is called a(n)

Which of the following involves signaling?

A signal is

Which of the following would not be considered a signal for a job as a public relations representative?