Question 1

Moral hazard typically occurs because

Accepted Answer

A)  people are dishonest. 
B)  agreements sometimes create incentives that are costly to monitor. 
C)  workers possess diminishing marginal productivity. 
D)  workers possess adverse selection. 
A)  people are dishonest. 
B)  agreements sometimes create incentives that are costly to monitor. 
C)  workers possess diminishing marginal productivity. 
D)  workers possess adverse selection.

Question 2

Suppose Nara could invest her $1000 in a savings account or she could invest in the stock market. After one year, the savings account has a guaranteed 5 percent interest rate and the stock market has a 10 percent chance of tripling her money, and 90 percent chance of losing it all. What is the difference in Nara's expected wealth between these two options?

Accepted Answer

A)  $1050 
B)  $300 
C)  $750 
D)  $50 
A)  $1050 
B)  $300 
C)  $750 
D)  $50

Question 3

-Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will

Accepted Answer

A)  choose option A. 
B)  choose option B. 
C)  be indifferent between option A and option B because they have the same risk. 
D)  be indifferent between option A and option B because they have the same expected utility. 
A)  choose option A. 
B)  choose option B. 
C)  be indifferent between option A and option B because they have the same risk. 
D)  be indifferent between option A and option B because they have the same expected utility.

Question 4

Explain the concept of moral hazard. Give an example.

Accepted Answer

Moral hazard exists when one of the part

Question 5

In the market for automobile insurance, adverse selection implies that

Accepted Answer

A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  insured and uninsured alike will take greater risks. 
D)  drivers with greater risks are more likely to buy insurance. 
A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  insured and uninsured alike will take greater risks. 
D)  drivers with greater risks are more likely to buy insurance.

Question 6

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected utility from taking this job?

Accepted Answer

A)  100 
B)  150 
C)  175 
D)  200 
A)  100 
B)  150 
C)  175 
D)  200

Question 7

Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. The pirate activity means that the expected utility of wealth of risk averse boat owners who do not have insurance and sail near Somalia is ________.

Accepted Answer

A)  increasing 
B)  decreasing 
C)  staying the same 
D)  not able to be determined without knowing the extent of risk aversion 
A)  increasing 
B)  decreasing 
C)  staying the same 
D)  not able to be determined without knowing the extent of risk aversion

Question 8

Paying salespeople a fixed wage contract, one in which income does not depend on the volume of sales, avoids

Accepted Answer

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

Question 9

If you have private information that you are a safer driver than your record indicates, you are likely to buy an insurance policy with

Accepted Answer

A)  a higher than average deductible. 
B)  a positive but lower than average deductible. 
C)  an average deductible. 
D)  no deductible. 
A)  a higher than average deductible. 
B)  a positive but lower than average deductible. 
C)  an average deductible. 
D)  no deductible.

Question 10

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is the maximum amount that Beatrice would be willing to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane?

Accepted Answer

A)  $10,000 
B)  $30,000 
C)  $40,000 
D)  $60,000 
A)  $10,000 
B)  $30,000 
C)  $40,000 
D)  $60,000

Question 11

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected wealth?

Accepted Answer

A)  $10,000 
B)  $50,000 
C)  $90,000 
D)  $100,000 
A)  $10,000 
B)  $50,000 
C)  $90,000 
D)  $100,000

Question 12

-Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. To maximize his expected utility, which job should Nick take?

Accepted Answer

A)  Nick is indifferent between the two jobs. 
B)  Nick is better off if he takes the economist job. 
C)  Nick is better off if he takes the job of financial planner. 
D)  Nick should look around for another job. 
A)  Nick is indifferent between the two jobs. 
B)  Nick is better off if he takes the economist job. 
C)  Nick is better off if he takes the job of financial planner. 
D)  Nick should look around for another job.

Question 13

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. Andrew would have the same expected utility as he currently has if his wealth was ________ and he faced no uncertainty.

Accepted Answer

A)  $30,000 
B)  $27,000 
C)  $21,000 
D)  $18,000 
A)  $30,000 
B)  $27,000 
C)  $21,000 
D)  $18,000

Question 14

Insurance works because

Accepted Answer

A)  all policyholders pay in according to risks and all then receive a pay out in return. 
B)  all policyholders pay in according to risks and then receive a pay out only if they incur a loss. 
C)  all policyholders pay in according to risks and nobody receives any pay out. 
D)  only high risk policyholders pay in while everyone is entitled to a pay out. 
A)  all policyholders pay in according to risks and all then receive a pay out in return. 
B)  all policyholders pay in according to risks and then receive a pay out only if they incur a loss. 
C)  all policyholders pay in according to risks and nobody receives any pay out. 
D)  only high risk policyholders pay in while everyone is entitled to a pay out.

Question 15

Ashwini is thinking of buying travel insurance (which pays her if she needs to cancel her trip) for her trip to Cancun over spring break. There is a 5 percent chance that she will need to cancel her trip. Without insurance she would lose the full $2,000 price of the trip; with insurance she would get a full refund of $2,000. The premium for this insurance is $105. Which of the following is CORRECT? I. The expected value of Ashwini's loss is $100.
II) If Ashwini is risk averse she is willing to buy the insurance only if its price is less than $100.

Accepted Answer

A)  I only 
B)  II only 
C)  I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  I and II 
D)  neither I nor II

Question 16

If reckless drivers are more likely than safe drivers to buy automobile insurance, then a moral hazard problem has occurred.

Accepted Answer

A) True 
 B)False

Question 17

Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. The pirate activity and increase in premiums means that the expected wealth of boat owners who sail near Somalia is ________.

Accepted Answer

A)  decreasing 
B)  increasing 
C)  staying the same 
D)  decreasing only if they have insurance 
A)  decreasing 
B)  increasing 
C)  staying the same 
D)  decreasing only if they have insurance

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  Because information is different from typical goods and services, it cannot be provided in a market. 
B)  The marginal benefit from more information does not decrease. 
C)  Too little information is provided if the market for information is a monopoly. 
D)  Acquiring more information can never be inefficient. 
A)  Because information is different from typical goods and services, it cannot be provided in a market. 
B)  The marginal benefit from more information does not decrease. 
C)  Too little information is provided if the market for information is a monopoly. 
D)  Acquiring more information can never be inefficient.

Question 19

-Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Andrew will accept the offer that

Accepted Answer

A)  maximizes his expected income. 
B)  maximizes his expected utility. 
C)  maximizes both his expected income and expected utility. 
D)  has the highest weighted average of income and utility. 
A)  maximizes his expected income. 
B)  maximizes his expected utility. 
C)  maximizes both his expected income and expected utility. 
D)  has the highest weighted average of income and utility.

Question 20

-Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. What is Ashton's expected wealth?

Accepted Answer

A)  $30,000 
B)  $9,000 
C)  $21,000 
D)  zero 
A)  $30,000 
B)  $9,000 
C)  $21,000 
D)  zero

Moral hazard typically occurs because

-Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will

Explain the concept of moral hazard. Give an example.

In the market for automobile insurance, adverse selection implies that

Paying salespeople a fixed wage contract, one in which income does not depend on the volume of sales, avoids

If you have private information that you are a safer driver than your record indicates, you are likely to buy an insurance policy with

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected wealth?

Insurance works because

If reckless drivers are more likely than safe drivers to buy automobile insurance, then a moral hazard problem has occurred.

Which of the following statements is CORRECT?

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters

Exam 20: Uncertainty and Information

Moral hazard typically occurs because

-Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will

Explain the concept of moral hazard. Give an example.

In the market for automobile insurance, adverse selection implies that

Paying salespeople a fixed wage contract, one in which income does not depend on the volume of sales, avoids

If you have private information that you are a safer driver than your record indicates, you are likely to buy an insurance policy with

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected wealth?

Insurance works because

If reckless drivers are more likely than safe drivers to buy automobile insurance, then a moral hazard problem has occurred.

Which of the following statements is CORRECT?

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters