Deck 18: The Problem of Moral Hazard

Question 1

Because employer-provided health insurance was too expensive,a major employer decided to self-insure and simply pay for medical bills itself rather than a premium to an insurance company.As a result

A)​they are more likely to institute a wellness program for employees
B)they are less likely to institute a wellness program for emp
C)they are indifferent with regards wellness programs
D)​they will regret this decision

Answer 1

A

Question 2

​An example of moral hazard is

A)​A taxi driver paid per mile taking a longer route than necessary
B)a piece-rate garment worker shirking more than a per hour worker
C)an hourly salesman working harder than a commission salesman
D)​an author on contract going to as many book signings as one with a percentage royalty rate 

Answer 2

A

Question 3

An example of moral hazard is​

A)​people drive as carefully in icy conditions with antilock brakes as without
B)people drive as safely with more airbags as without
C)football players avoid 'spearing' with their heads even with safer helmets
D)​people fail to read the medicine warnings more often when self-medicating versus with a doctor's prescription         

Answer 3

D

Question 4

​Use the following setup for questions
Tom wants to avoid any accidents on the work floor of his factory.If an accident does occur,it would cost him $500,000 in damages.Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%.However,the equipment costs $20,000 to install. 
​What is his expected loss after installing the safety equipment

A)​$20,000
B)$50,000
C)$100,000
D)​$125,000

Question 5

​The difference between moral hazard and adverse selection is

A)​moral hazard has to do with unobservable characteristics of individuals
B)moral hazard has to do with unobservable actions of individuals
C)adverse selection is when individuals change their behaviors because of a contract
D)​adverse selection is when you choose the wrong answer on a test

Question 6

​An example of moral hazard is

A)​workers working diligently even though the boss is not looking
B)health care insured employees forgoing their diet and exercise
C)drivers of safer cars turning their phones off before driving
D)​borrowers investing their loan proceeds exactly as the bank requires

Question 7

​An example of moral hazard is

A)​people drive as carefully in icy conditions with antilock brakes as without
B)people drive as safely with more airbags as without
C)football players with safer helmets 'spear' with their heads more often when tackling 
D)​people read the medicine warnings as carefully when self-medicating as with a doctor's prescription

Question 8

​Individuals with homeowner's insurance tend to be more forgetful about locking their possessions safely before heading out.This is an example of

A)​Adverse selection
B)Moral hazard
C)Screening
D)​None of the above

Question 9

​US law was recently changed so that some airplane manufacturers are immune from liability from accidents involving their decades old aircraft,laying all the responsibility on the pilots.As a result

A)​accident rates fell due to less adverse selection
B)accident rates fell due to less moral hazard
C)accident rates rose due to less adverse selection
D)​accident rates rose due to less moral hazard

Question 10

​An example of moral hazard is

A)​people drive as carefully in icy conditions with antilock brakes as without
B)people drive less safely with more airbags than without
C)football players avoid 'spearing' with their heads even with safer helmets
D)​people read the medicine warnings as carefully when self-medicating as with a doctor's prescription

Question 11

​Progressive Insurance's 'Tripsense' monitors driving patterns of the people who purchase the related insurance policy.This lowers insurance costs because

A)​only less reckless drivers will accept the device
B)only more reckless drivers will accept the device
C)drivers will believe they can now drive more recklessly
D)​it does not affect care in driving

Question 12

​Use the following setup for questions
Tom wants to avoid any accidents on the work floor of his factory.If an accident does occur,it would cost him $500,000 in damages.Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%.However,the equipment costs $20,000 to install. 
​Would Tom install the safety equipment?

A)​Yes because it costs him less than it is worth
B)Yes because it costs him more than it is worth
C)No because it costs him more than it is worth
D)​No because it costs him less than it is worth

Question 13

​An example of moral hazard is

A)​A taxi driver paid per mile taking the shortest route
B)a piece-rate garment worker shirking less than a per hour worker
C)an hourly salesman working harder than a commission salesman
D)​an author on contract going to as many book signings as one with a percentage royalty rate 

Question 14

​You offer an extended warranty for your product that is purchased by a few customers.If the product typically fails 2% of the time,

A)​you should price the warranty at less than 2% of the product price
B)you should price the warranty at exactly 2% of the product price
C)you should price the warranty at more than 2% of the product price
D)​Cannot tell from this information

Question 15

​A difference between moral hazard and adverse selection is that

A)​moral hazard deals with pre-contractually determined public information
B)moral hazard deals with post-contractually determined private information
C)adverse selection deals with pre-contractually determined private information
D)​adverse selection deals with post-contractually determined public information

Question 16

​Progressive Insurance's 'Tripsense' monitors driving patterns of the people who purchase the related insurance policy.This lowers insurance costs because

A)​only more reckless drivers will accept the device
B)drivers will want to drive more carefully knowing they are being monitored
C)drivers will believe they can now drive more recklessly
D)​it does not affect care in driving

Question 17

​You offer an extended warranty for your product that is purchased by a few customers.If the product typically fails 2% of the time,the claim rate will exceed 2% of warranty purchasers because

A)​adverse selection will lead those who are more reckless to purchase the warranty
B)moral hazard will lead those who purchase to be more reckless
C)you systematically underestimate product failure rates
D)​Both A&B

Question 18

​An example of moral hazard is

A)​people drive less carefully in icy conditions with antilock brakes than without
B)people drive as safely with more airbags as without
C)football players avoid 'spearing' with their heads even with safer helmets
D)​people read the medicine warnings as carefully when self-medicating as with a doctor's prescription

Question 19

​An example of moral hazard is

A)​A taxi driver paid per mile taking the shortest route
B)a piece-rate garment worker shirking more than a per hour worker
C)an hourly salesman working less hard than a commission salesman
D)​an author on contract going to as many book signings as one with a percentage royalty rate 

Question 20

​An example of moral hazard is

A)​A taxi driver paid per mile taking the shortest route
B)a piece-rate garment worker shirking more than a per hour worker
C)an hourly salesman working harder than a commission salesman
D)​an author on contract going to fewer book signings as one with a percentage royalty rate 

Question 21

​Which is NOT an example of moral hazard

A)​people eat more at all-you-can-eat buffets
B)loggers select the most profitable trees to harvest even when they are paying a fixed fee
C)Drivers of heavier,safer cares are more likely to run stop signs
D)​workers on commission work harder than those paid an hourly wage

Question 22

​Firms that have high cost of monitoring,choose their employees much more carefully because

A)​They are afraid that the employee would be too productive
B)They are  more confident that after getting the job,the employee would not shirk
C)They are afraid that without screening,the employee would be more likely to shirk
D)​B & C

Question 23

​Which is NOT an example of moral hazard

A)​people eat more at all-you-can-eat buffets
B)loggers clear-cut a tract of land when paying a fixed fee rather than when paying per tree felled
C)Drivers of heavier,safer cares are less likely to run stop signs
D)​workers on commission work harder than those paid an hourly wage

Question 24

​Surgical weight loss procedures are cheaper and safer than ever.As a consequence,we could expect:

A)​An increase in the amount of care individuals take of their diet
B)A decrease in the amount of care individuals take of their diet
C)An increase in pre-surgery obesity
D)​Both B&C

Question 25

​To incentivize R&D,the government proposes to take on a company's costs if its product does not succeed.This would lead to

A)​The company developing a lot more products with a low risk of failure
B)The company developing a lot more products with a high risk of failure
C)The company developing no high risk products
D)​The company going bankrupt

Question 26

​There is an influenza epidemic at Sally's office.If she got the flu shot this winter,Sally would still go to the office instead of working from home even though it increases the likelihood of her catching the flu.This is an example of a

A)​Adverse selection
B)Moral hazard
C)Screening
D)​None of the above

Question 27

​A firm that screens candidates to determine how well they would work with limited supervision is afraid of facing

A)​Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)​None of the above

Question 28

​There is an influenza epidemic at Sally's office.If she got the flu shot this winter,how does this affect her decision of going to work or working from home?

A)​She would choose to work from home since the marginal cost of going to the office is high
B)She would choose to go to work since the marginal benefit of working from home is too low
C)She would stay home since the marginal cost of going to work so is too low
D)​She would stay home-who wants to go to work

Question 29

​The Department of Education noticed that for loans granted to students without any strings,the average grade point average of the students decreases dramatically over time,while the students whose loans renew only if they pass their courses tends to stay stable.This could be due to a

A)​Adverse selection problem
B)Moral hazard problem
C)Typical college life phenomenon
D)​None of the above

Question 30

​Lazy Lucy's parents decided that they would only pay her tuition if she passes all her classes.They would stop paying her tuition if she procrastinates and fails her courses.Lucy's parent's decision is a solution to a ________problem.

A)​Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)​None of the above

Question 31

​Which is NOT an example of moral hazard

A)​people eat less at all-you-can-eat buffets
B)loggers clear-cut a tract of land when paying a fixed price rather than when paying per tree felled
C)Drivers of heavier,safer cares are more likely to run stop signs
D)​workers on commission work harder than those paid an hourly wage

Question 32

An auto-insurance company introduces an anti-theft device that records how well the customer has secured his car.If the driver locks his car with the monitored lock every day,the rates go down.The company is trying to solve a __________problem

A)​Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)​None of the above

Question 33

​Moral hazard is caused by

A)​Hidden actions
B)Hidden information
C)Both of the above
D)​None of the above

Question 34

​Which is NOT an example of moral hazard

A)​people eat more at all-you-can-eat buffets
B)loggers clear-cut a tract of land when paying a fixed fee rather than when paying per tree felled
C)Drivers of heavier,safer cares are more likely to run stop signs
D)​workers paid an hourly wage work harder than those on commission

Question 35

​Safe drivers buying "accident forgiveness" insurance tend to

A)​Become even safer drivers
B)Engage in more risky driving
C)Engage in less risky driving
D)​Not change their driving patterns

Question 36

​Which of the following problems are created by an information asymmetry

A)​Moral hazard
B)Adverse selection
C)Both of the above
D)​None of the above

Question 37

​Moral hazard would lead to

A)​Only risky drivers buying insurance
B)More risky drivers buying more insurance
C)Drivers taking on a lot more risk after buying insurance
D)​Drivers becoming a lot more careful after buying insurance

Question 38

The Department of Education noticed that for loans granted to students without any strings,the average grade point average of the students decreases dramatically over time.Which one of the following can it use as a solution?​

A)​Renew the loans only if the students pass their courses
B)Renew the loans regardless of students' passing
C)Never renew the loans
D)​Shut down the Department of Education

Question 39

A firm deciding to hire a secretary,bases its decision on how well the candidate is trained on certain software.This practice addresses:​

A)​Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)​None of the above

Question 40

Lindsey's auto-insurance company issued her a policy that required the installation of a devise that monitors her driving habits.Lindsey is confused because she had never gotten into an accident before she bought the insurance.The insurance company is protecting itself against

A)​Adverse selection 
B)Moral hazard
C)Bad drivers
D)​None of the above

Question 41

​____________is the problem of preventing you from acting opportunistically after buying insurance

A)​Moral hazard
B)Adverse selection
C)Decision making
D)​None of the above

Question 42

________is the problem of separating good from bad drivers​

A)​Moral hazard
B)Adverse selection
C)Decision making
D)​None of the above

Question 43

​A shoe salesman working on commission must decide whether to work hard or shirk.Working hard would increase the probability of a sale from 20% to 70% but the effort would cost him $5.If the commission on a typical pair of shoes was $12,would he decide to work hard?

A)​Yes because it is higher than what it costs him in effort
B)Yes because it is higher than zero
C)No,because it costs him more in effort
D)​None of the above

Question 44

A shoe salesman working on commission must decide whether to work hard or shirk.Working hard would increase the probability of a sale from 20% to 70% but would cost him $5.If the average price of shoes is $100,what is the minimum commission rate would induce him to work hard?

A)​4%
B)6%
C)8%
D)​10%

Question 45

​Many spouses complain that their partners tend to "let themselves go" after getting married.This is an example of

A)​Moral hazard
B)Adverse selection
C)Terrible husbands
D)​None of the above

Question 46

​To decrease anxiety in its most accomplished teachers,a school decides to offer them tenure,to help them concentrate on teaching better.Instead it notices that even the best of the teachers started to get sloppy with their work.The school did not foresee

A)​Adverse selection
B)Moral hazard
C)All of the above
D)​None of the above

Question 47

One difference between moral hazard and adverse selection is

A)​Moral hazard has to do with unobservable characteristics of individuals
B)Adverse selection has to do with unobservable actions of individuals
C)Adverse selection occurs when individuals least appropriate for positions are most likely to apply for them
D)​Adverse selection is when you choose the wrong answer on a test

Question 48

​One difference between moral hazard and adverse selection is

A)​Adverse selection has to do with unobservable characteristics of individuals
B)Moral hazard has to do with unobservable actions of individuals
C)Adverse selection is individuals change their behaviors because of a contract
D)​Only A&B

Question 49

One difference between moral hazard and adverse selection is

A)​Moral hazard has to do with unobservable characteristics of individuals
B)Moral hazard has to do with unobservable actions of individuals
C)Adverse selection is individuals change their behaviors because of a contract
D)​Adverse selection is when you choose the wrong answer on a test

Question 50

​One difference between moral hazard and adverse selection is

A)​Adverse selection has to do with unobservable characteristics of individuals
B)Adverse selection has to do with unobservable actions of individuals
C)Adverse selection is when individuals most appropriate for positions are most likely to apply for them
D)​Adverse selection is when you choose the wrong answer on a test

Question 51

​Solving a moral hazard problem in a transaction would benefit

A)​The seller only
B)The buyer only
C)Both the parties
D)​None of the parties

Question 52

Moral hazard in a transaction hurts​

A)​The seller only
B)The buyer only
C)Both parties
D)​None of the parties

Question 53

​Moral hazard implies that

A)​Insured individuals exercise less care because they have less incentive to do so
B)Insured individuals exercise more care because they have less incentive to do so
C)Insured individuals exercise more care because they have more incentive to do so
D)​Insured individuals exercise less care because they have more incentive to do so

Question 54

​Many spouses complain that their partners put less effort into their relationship after getting married.This is an example of

A)​Moral hazard
B)Adverse selection
C)Terrible husbands
D)​None of the above

Question 55

A commission-paid shoe salesman must decide whether to work hard or shirk.Working hard would increase the probability of a sale from 20% to 40% but would cost him $20.If the salesman is paid a $40 commission per sale and a $20 fixed salary and is under monitoring where he would get fired if he doesn't work hard,what would he choose to do?

A)​Work hard
B)Shirk
C)Walk away from the job
D)​None of the above

Question 56

​Children who play in playgrounds with rubber surfaces instead of gravel surfaces tend to

A)​Play safer
B)Play rougher
C)Not change their play patterns
D)​Not like playing in the playground

Question 57

​A shoe salesman working on commission must decide whether to work hard or shirk.Working hard would increase the probability of a sale from 20% to 70% but the effort would cost him $5.If the typical commission on a pair of shoes was $8,would he decide to work hard?

A)​Yes because it is higher than what it costs him in effort
B)Yes because it is higher than zero
C)No,because it costs him more in effort
D)​None of the above

Question 58

The introduction of seat belts increased the number of accidents,even though the number of fatalities decreased.This is most likely a result of​

A)​Moral hazard
B)Adverse selection
C)seat belts distracting drivers
D)​None of the above

Question 59

Adverse selection is caused by​

A)​Hidden actions
B)Hidden information
C)Both of the above
D)​None of the above

Question 60

​Economists disagree with constant government bailouts of large,struggling companies because it can give a rise to

A)​Moral hazard
B)Adverse selection
C)Lazy managers
D)​None of the above

Question 61

​The following is NOT an example of a potential monitoring solution to moral hazard

A)​blocking social network sites on company computers
B)rejecting a job candidate that fails to show up at the allotted interview time
C)GPS tracking devices in repair trucks
D)​listening in on call center conversations

Question 62

Banks are more willing to lend money to those who have a sizable amount of their own money at risk because

A)​They like lending to individuals who usually don't need the money
B)Those with their own money at risk are more likely to only propose viable projects to the bank.
C)Borrowers with their own capital invested are more likely to make payments on any loan that is made.
D)​Both B&C

Question 63

​The following is NOT an example of a potential monitoring solution to moral hazard

A)​a pre-hire typing test for clerical employees
B)closed circuit TVs throughout a warehouse
C)GPS tracking devices in repair trucks
D)​listening in on call center conversations

Question 64

​An example of moral hazard is

A)​workers working diligently even though the boss is not looking
B)health care insured workers dieting and exercising
C)drivers of safer cars texting on their phones while driving
D)​borrowers investing their loan proceeds exactly as the bank requires

Question 65

​For a mortgage lender that makes mortgage loans to borrowers,which one of the following would be an example of adverse selection?

A)​After the loan has been made,individuals become careless with their finances
B)Individuals most likely to default are the ones most likely to apply for the loan
C)Borrowers investing their loan proceeds differently than the bank requires
D)​None of the above

Question 66

​To keep employees from shirking,invest in greater monitoring

A)​when monitoring is expensive relative to its benefits
B)especially when monitoring is efficient
C)when employees respond well to incentive contracts
D)​when incentives solve both moral hazard and adverse selection problems with employees

Question 67

​Sam,after taking a $200 loan from the bank to finance an investment that pays $1000 50% of the time and $0 50% of the time at a 100% interest,discovers another riskier investment that pays out $5,000 but only 10% of the time,while the other 90% of the time it pays zero.Would the he want to switch to the riskier investment?

A)​Yes because his return has increased
B)No because his liability to the bank has increased
C)No because his return has decreased
D)​None of the above

Question 68

​The following is NOT an example of a potential monitoring solution to moral hazard

A)​blocking social network sites on company computers
B)closed circuit TVs throughout a warehouse
C)requiring a kitchen remodeling contractor to be 'bonded'
D)​listening in on call center conversations

Question 69

​To keep employees from shirking,invest in greater monitoring

A)​when monitoring is expensive relative to its benefits
B)especially when monitoring is not very efficient
C)when employees fail to respond to incentive contracts
D)​when incentives solve both moral hazard and adverse selection problems with employees

Question 70

​Economists discourage homeowner bailouts because

A)​They encourage irresponsible borrowings
B)It increases moral hazard among borrowers
C)It punishes responsible borrowers
D)​All of the above

Question 71

To keep employees from shirking,invest in greater monitoring

A)​when monitoring is expensive relative to its benefits
B)especially when monitoring is not very efficient
C)when employees respond well to incentive contracts
D)​when incentives fail to solve either moral hazard and adverse selection problems with employees

Question 72

​To keep employees from shirking,invest in greater monitoring

A)if monitoring is inexpensive relative to its benefits
B)especially when monitoring is not very efficient
C)when employees respond well to incentive contracts
D)when incentives solve both moral hazard and adverse selection problems with employees

Question 73

An example of moral hazard is​

A)​workers working diligently even though the boss is not looking
B)health care insured dieting and exercising
C)drivers of safer cars turning their phones off before driving
D)​borrowers investing their loan proceeds differently than the bank requires

Question 74

​A bank can decrease the degree of moral hazard if it

A)​Monitors the borrowers behaviors
B)Placing covenants on the loan
C)Both of the above
D)​None of the above

Question 75

​An example of moral hazard is

A)​workers shirking when the boss is not looking
B)health care insured workers dieting and exercising
C)drivers of safer cars turning their phones off before driving
D)​borrowers investing their loan proceeds exactly as the bank requires

Question 76

​One difference between moral hazard and adverse selection is

A)​Moral hazard has to do with unobservable characteristics of individuals
B)Adverse selection has to do with unobservable actions of individuals
C)Adverse selection is when individuals change their behaviors because of a contract
D)​Adverse selection is when you choose the wrong answer on a test

Question 77

​For a mortgage lender that makes mortgage loans to borrowers,which one of the following would be an example of moral hazard?

A)​After the loan has been made,individuals become careless with their finances
B)Individuals most likely to default are the ones most likely to apply for the loan
C)Lenders performing a credit check on all potential borrowers
D)​None of the above

Question 78

​The following is NOT an example of a potential monitoring solution to moral hazard

A)​blocking social network sites on company computers
B)closed circuit TVs throughout a warehouse
C)GPS tracking devices in repair trucks
D)​requiring physicians to be 'board certified'

Question 79

​Which of the following is true?

A)​Borrowers take bigger risks with their money than they would with other peoples' money
B)Borrowers take bigger risks with other peoples' money than they would with their own
C)Borrowers take big risks on investments regardless of whether it is their own money or not
D)​Borrowers should not be investing at all

Question 80

​Smart Sam can make a $200 investment that yields $1000 50% of the time and $0 50% of the time.What is his expected return on the investment?

A)​$200
B)$300
C)$400
D)​$500