Question 1

Which of the following explains why moral hazard often arises in the workplace?

Accepted Answer

A) Employees do not directly benefit from their effort, but rather their time spent at work. 
B) Employees receive the same compensation no matter the effort put forth. 
C) Employees are hesitant to work their hardest for fear that will become the expectation. 
D) All of these statements are true. 
A) Employees do not directly benefit from their effort, but rather their time spent at work. 
B) Employees receive the same compensation no matter the effort put forth. 
C) Employees are hesitant to work their hardest for fear that will become the expectation. 
D) All of these statements are true.

Question 2

Which of the following is an effect of adverse selection?

Accepted Answer

A) Some transactions do not take place, which would have occurred with complete information. 
B) Too many transactions of low value occur. 
C) Transactions that would not have occurred with complete information now occur. 
D) None of these statements are true. 
A) Some transactions do not take place, which would have occurred with complete information. 
B) Too many transactions of low value occur. 
C) Transactions that would not have occurred with complete information now occur. 
D) None of these statements are true.

Question 3

Someone directly involved in a transaction can solve the problems caused by information asymmetry by:

Accepted Answer

A) proofing. 
B) building a reputation. 
C) enacting disclosure laws. 
D) mandating that information be shared. 
A) proofing. 
B) building a reputation. 
C) enacting disclosure laws. 
D) mandating that information be shared.

Question 4

Agreeing to take a drug test offered by a potential employer is a method of:

Accepted Answer

A) signaling. 
B) screening. 
C) statistical discrimination. 
D) building a reputation. 
A) signaling. 
B) screening. 
C) statistical discrimination. 
D) building a reputation.

Question 5

The presence of adverse selection:

Accepted Answer

A) reduces the efficiency of markets. 
B) increases the efficiency of markets. 
C) does not affect the efficiency of markets. 
D) makes the buyer less efficient and the seller more efficient. 
A) reduces the efficiency of markets. 
B) increases the efficiency of markets. 
C) does not affect the efficiency of markets. 
D) makes the buyer less efficient and the seller more efficient.

Question 6

Reading a Consumer Reports review of a vacuum cleaner before making a purchase solves the problem of information asymmetry in a similar way as:

Accepted Answer

A) an employer requiring a drug test. 
B) an insurance company offering different deductible-level plans. 
C) a buyer choosing a used car from a brand dealership. 
D) a college charging a high tuition relative to other schools. 
A) an employer requiring a drug test. 
B) an insurance company offering different deductible-level plans. 
C) a buyer choosing a used car from a brand dealership. 
D) a college charging a high tuition relative to other schools.

Question 7

Requiring that job applicants get drug tested is an example of:

Accepted Answer

A) signaling. 
B) screening. 
C) statistical discrimination. 
D) building a reputation. 
A) signaling. 
B) screening. 
C) statistical discrimination. 
D) building a reputation.

Question 8

People _____ have access to perfectly complete information.

Accepted Answer

A) always 
B) rarely 
C) never 
D) often 
A) always 
B) rarely 
C) never 
D) often

Question 9

Consider a market for health insurance with 1,000 potential buyers. The insurance company knows that half of the potential buyers are of poor health and will cost the insurance company $40,000 annually, while the other half are of good health and will cost the insurance company $10,000 annually. However, the insurance company does not know which individual people are of poor health or good health. The potential buyers know whether they are of poor health or good health. What would be the equilibrium price of an insurance policy in this market?

Accepted Answer

A) $25,000 
B) $40,000 
C) $10,000 
D) None of these are correct. 
A) $25,000 
B) $40,000 
C) $10,000 
D) None of these are correct.

Question 10

The problem that arises in the used car market can be alleviated by:

Accepted Answer

A) providing buyers with more complete information on the condition of a used car. 
B) offering warranties to buyers. 
C) having third parties certify the condition of a used car. 
D) All of these statements are true. 
A) providing buyers with more complete information on the condition of a used car. 
B) offering warranties to buyers. 
C) having third parties certify the condition of a used car. 
D) All of these statements are true.

Question 11

The principal-agent problem:

Accepted Answer

A) arises from an imbalance of information. 
B) is caused by the principal having imperfect information about the agent. 
C) is caused by the principal being unable to perfectly observe the actions of the agent. 
D) All of these statements are true. 
A) arises from an imbalance of information. 
B) is caused by the principal having imperfect information about the agent. 
C) is caused by the principal being unable to perfectly observe the actions of the agent. 
D) All of these statements are true.

Question 12

Adverse selection occurs in the used car market because:

Accepted Answer

A) the seller has more information than the buyer. 
B) the buyer has more information than the seller. 
C) both the buyer and the seller have incomplete information. 
D) Any of these could be the cause of adverse selection in the used car market. 
A) the seller has more information than the buyer. 
B) the buyer has more information than the seller. 
C) both the buyer and the seller have incomplete information. 
D) Any of these could be the cause of adverse selection in the used car market.

Question 13

An important type of information asymmetry is:

Accepted Answer

A) adverse selection. 
B) ethical constraint. 
C) advantage imbalance. 
D) information hazard. 
A) adverse selection. 
B) ethical constraint. 
C) advantage imbalance. 
D) information hazard.

Question 14

Statistical discrimination is taking action to:

Accepted Answer

A) reveal private information about someone else. 
B) reveal one's own private information. 
C) find out the opportunity cost of acquiring more information. 
D) fill gaps in your information by generalizing based on observable characteristics. 
A) reveal private information about someone else. 
B) reveal one's own private information. 
C) find out the opportunity cost of acquiring more information. 
D) fill gaps in your information by generalizing based on observable characteristics.

Question 15

An employer asking potential job candidates to perform a skills test is an example of:

Accepted Answer

A) screening. 
B) signaling. 
C) statistical discrimination. 
D) building a reputation. 
A) screening. 
B) signaling. 
C) statistical discrimination. 
D) building a reputation.

Question 16

If the cost of acquiring more information about a good outweighs the benefit of having that extra information, then we can predict that the exchange:

Accepted Answer

A) will definitely not take place. 
B) may take place anyway. 
C) will not benefit anyone. 
D) will take place, but will be regretted in the future. 
A) will definitely not take place. 
B) may take place anyway. 
C) will not benefit anyone. 
D) will take place, but will be regretted in the future.

Question 17

Which of the following statements about moral hazard is true?

Accepted Answer

A) Individuals engage in risk when making exchanges in the grey market. 
B) People tend to behave in a riskier way when they're insured. 
C) It occurs when one party acts unethically in a market exchange. 
D) It occurs when both parties act unethically in a market exchange. 
A) Individuals engage in risk when making exchanges in the grey market. 
B) People tend to behave in a riskier way when they're insured. 
C) It occurs when one party acts unethically in a market exchange. 
D) It occurs when both parties act unethically in a market exchange.

Question 18

What is moral hazard?

Accepted Answer

A) The tendency for people to engage in behavior that is considered highly desirable by the person who bears the cost of the behavior. 
B) A situation in which buyers and sellers have different information about the quality of a good or the riskiness of a situation. 
C) An agreement made between buyers and sellers who have the same information about the quality of a good or the riskiness of a situation. 
D) The tendency for people to behave in a riskier way or put forth less effort when they do not face the full consequences of their actions. 
A) The tendency for people to engage in behavior that is considered highly desirable by the person who bears the cost of the behavior. 
B) A situation in which buyers and sellers have different information about the quality of a good or the riskiness of a situation. 
C) An agreement made between buyers and sellers who have the same information about the quality of a good or the riskiness of a situation. 
D) The tendency for people to behave in a riskier way or put forth less effort when they do not face the full consequences of their actions.

Question 19

Akiko and her friend Priyana both work for an electronics store. Akiko's pay is entirely based on commission. Priyana is one of 25 salaried customer service workers who are overseen by one manager. There is a _____ possibility of _____ arising in Priyana's job than in Akiko's job.

Accepted Answer

A) greater; signaling 
B) lesser; moral hazard 
C) greater; the principal-agent problem 
D) lesser; adverse selection 
A) greater; signaling 
B) lesser; moral hazard 
C) greater; the principal-agent problem 
D) lesser; adverse selection

Question 20

What is the opportunity cost of taking an unfair advantage in a deal when you have more information than the other party involved?

Accepted Answer

A) Likely nothing if the transaction is only taking place once. 
B) Building a reputation for being untrustworthy if the deal is likely to be repeated. 
C) Future deals may not occur or may come at a much higher cost. 
D) All of these are true. 
A) Likely nothing if the transaction is only taking place once. 
B) Building a reputation for being untrustworthy if the deal is likely to be repeated. 
C) Future deals may not occur or may come at a much higher cost. 
D) All of these are true.

Exam 10: Information

Which of the following explains why moral hazard often arises in the workplace?

Which of the following is an effect of adverse selection?

Someone directly involved in a transaction can solve the problems caused by information asymmetry by:

Agreeing to take a drug test offered by a potential employer is a method of:

The presence of adverse selection:

Reading a Consumer Reports review of a vacuum cleaner before making a purchase solves the problem of information asymmetry in a similar way as:

Requiring that job applicants get drug tested is an example of:

People _____ have access to perfectly complete information.

The problem that arises in the used car market can be alleviated by:

The principal-agent problem:

Adverse selection occurs in the used car market because:

An important type of information asymmetry is:

Statistical discrimination is taking action to:

An employer asking potential job candidates to perform a skills test is an example of:

If the cost of acquiring more information about a good outweighs the benefit of having that extra information, then we can predict that the exchange:

Which of the following statements about moral hazard is true?

What is moral hazard?

Akiko and her friend Priyana both work for an electronics store. Akiko's pay is entirely based on commission. Priyana is one of 25 salaried customer service workers who are overseen by one manager. There is a _____ possibility of _____ arising in Priyana's job than in Akiko's job.

What is the opportunity cost of taking an unfair advantage in a deal when you have more information than the other party involved?

Economics and Life

Specialization and Exchange

Markets

Elasticity

Efficiency

Government Intervention

Consumer Behavior

Behavioral Economics: a Closer Look at Decision Making

Game Theory and Strategic Thinking

Time and Uncertainty

The Costs of Production

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

The Facts of Production

International Trade

Externalities

Public Goods and Common Resources

Taxation and the Public Budget

Poverty, Inequality, and Discrimination

Political Choices

Public Policy and Choice Architecture

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Akiko and her friend Priyana both work for an electronics store. Akiko's pay is entirely based on commission. Priyana is one of 25 salaried customer service workers who are overseen by one manager. There is a _ possibility of _ arising in Priyana's job than in Akiko's job.