Chapter 20

Which is NOT an example of signaling high quality in a social setting a) wearing a business suit on a job interview b) scrimping on the tip for the waiter after a dinner date c) offering an expensive engagement ring to your bride d) Visiting the beauty salon before a big date

b) scrimping on the tip for the waiter after a dinner date

The following is NOT an example of a potential monitoring solution to moral hazard a) blocking social network sites on company computers b) termination for failing to show up to work during the probationary period c) GPS tracking devices in repair trucks d) listening in on call center conversations

b) termination for failing to show up to work during the probationary period

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

d) borrowers investing their loan proceeds differently than the bank requires

To keep employees from shirking, you can invest in greater monitoring a) even though monitoring is expensive 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

c) when employees fail to respond to incentive contracts

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

c) you should price the warranty at more than 2% of the product price

In a bad economy, a CEO has a 4% chance of meeting earnings estimates at regular effort, and a 5% chance at extraordinary effort. Extraordinary effort costs the CEO $10,000 more than regular effort. How large a bonus should the CEP be paid for meeting estimates to encourage extraordinary effort? a) $100,000 b) $200,000 c) $250,000 d) $1,000,000

d) $1,000,000

A salesperson can put in regular effort (resulting in a 40% chance of sale) or high effort (60% chance of sale). If high effort costs the salesperson $20 more than regular effort, how large a per-sale bonus is required to encourage high effort? a) $12 b) $20 c) $33.33 d) $100

d) $100

Which is NOT an example of signaling high quality in a social setting a) wearing a business suit on a job interview b) leaving a big tip for the waiter after a dinner date c) offering an expensive engagement ring to your bride d) Doing messy chores before a big date

d) Doing messy chores before a big date

Which of the following is an example of moral hazard? a) high-quality products being driven out of a market by low-quality products b) a local charity raising insufficient funds because no one contributes, expecting that their neighbors will c) a bakery defaults on its loan because of a new consumer fear of carbohydrates d) a corporation uses a business loan secured for one investment on another, higher-risk investment

d) a corporation uses a business loan secured for one investment on another, higher-risk investment

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) a) and b)

d) a) and b)

Which of the following is true about moral hazard? a) moral hazard arises from actions that cannot be observed b) shirking is a form of moral hazard c) moral hazard refers to the taking of excessive risk d) all of the above

d) all of the above

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 jour 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

d) an author on contract going to fewer book signings as one with a percentage royalty rate

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 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 versus with a doctor's prescription

b) people drive less safely with more airbags as without

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 jour 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

a) A taxi driver paid per mile taking a longer route than necessary

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

a) a pre-hire typing test for clerical employees

To keep employees from shirking, you can invest in greater monitoring a) because monitoring is inexpensive 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

a) because monitoring is inexpensive

Restrictive covenants on loans are used to avoid a) moral hazard b) adverse selection c) free riding d) none of the above

a) moral hazard

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

a) only less reckless drivers will accept the device

An example of moral hazard is a) people drive less 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 read the medicine warnings as carefully when self-medicating versus with a doctor's prescription

a) people drive less carefully in icy conditions with antilock brakes as without

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 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

a) people eat less at all-you-can-eat buffets

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 employees c) they are indifferent with regards wellness programs d) they will regret this decision

a) they are more likely to institute a wellness program for employees

An example of moral hazard is a) workers shirking when 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 exactly as the bank requires

a) workers shirking when the boss is not looking

Examples of Moral Hazard are: a. Engaging in riskier sexual practices because better HIV treatments are available. b. Skydivers being more careful when using improved parachutes with improved suspension lines. c. Borrowers skipping payments even if this becomes public to their online friends. d. Office workers coming in on Saturday to work on accounts when no one is watching.

a. Engaging in riskier sexual practices because better HIV treatments are available.

Moral Hazard occurs when: a. People are more likely to decide on a course of action when they do not bear the costs of the decision. b. Technologies that reduce risks make people more careful. c. People take fewer risks when others bear the costs of these risks. d. People are less careful when they safer technologies are not available.

a. People are more likely to decide on a course of action when they do not bear the costs of the decision.

If the lender cannot prevent the borrower from using the proceeds of a loan as proposed: a. The lender will make fewer loans b. All loan applications for profitable projects will be funded. c. A lender will prefer to fund 100% of the project costs. d. Borrowers will forgo risky projects.

a. The lender will make fewer loans

Shirking on the job is a version of moral hazard because: a. Workers will exert less effort if there is no reward to exerting more effort. b. Managers can observe the amount of effort workers exert. c. Workers get paid for exerting effort even if it does not generate a sale. d. Managers can always observe the amount of effort a worker undertakes

a. Workers will exert less effort if there is no reward to exerting more effort.

Exerting the appropriate effort to make a sale versus shirking will cost a salesman the equivalent of $40 and will increase her sales effectiveness from 20% to 40%: a. You should offer a commission only if the contribution margin is greater than $200. b. You should pay your sales force an hourly wage only if the contribution margin is greater than $200. c. You should offer a commission only if the contribution margin is greater than $100. d. You should pay your sales force an hourly wage only if the contribution margin is greater than $100.

a. You should offer a commission only if the contribution margin is greater than $200.

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 jour 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

b) a piece-rate garment worker shirking less than a per jour worker

US law was recently changed so that some airplane manufacturers are immune from liability from accidents involving their decades old aircraft. 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

b) accident rates fell due to less moral hazard

Loan applicants require a lot of information from applicants to avoid a) moral hazard b) adverse selection c) free riding d) none of the above

b) adverse selection

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 now c) drivers will believe they can now drive more recklessly d) it does not affect care in driving

b) drivers will want to drive more carefully now

To keep employees from shirking, you can invest in greater monitoring a) even though monitoring is expensive 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

b) especially when monitoring is efficient

An example of moral hazard is a) workers working diligently even though the boss is not looking b) health care insured 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

b) health care insured forgoing their diet and exercise

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 not 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

b) loggers select the most profitable trees to harvest even when they are not paying per tree felled

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

b) moral hazard deals with post-contractually determined private information

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

b) moral hazard has to do with unobservable actions of individuals

Moral hazard occurs in lending because: a. Lenders have an incentive to fund riskier projects after the funds have been allocated. b. Borrowers have an incentive to fund riskier projects after the funds have been allocated. c. Lenders are eventually paid in full even when borrowers must default because a project failed. d. Borrowers only want to allocate funds to lender approved projects.

b. Borrowers have an incentive to fund riskier projects after the funds have been allocated.

Insured customers: a. Exercise more care because they have less incentive to do so. b. Exercise less care because they have less incentive to do so. c. Exercise more care because they have more incentive to do so. d. Exercise less care because they have more incentive to do so.

b. Exercise less care because they have less incentive to do so.

A lender offers a low interest rate to a firm because the proposed project has a high probability of success. a. The firm will want to allocate the funds to a less risky project. b. The firm will want to allocate the funds to a risker project. c. The lender does not care how the funds are allocated. d. The firm does not care how the funds are allocated.

b. The firm will want to allocate the funds to a risker project.

Insurers protect themselves from moral hazard by: a. charging premiums based on lower risks due to customers taking extra precautions since they are not uninsured. b. charging premiums based on higher risks due to customers not taking precautions they would have if uninsured. c. charging premiums based on the average riskiness across customers taking precautions or not. d. charging premiums based on lower risks due to customers not taking precautions they would have if uninsured.

b. charging premiums based on higher risks due to customers not taking precautions they would have if uninsured.

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 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

c) Drivers of heavier, safer cares are less likely to run stop signs

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 jour 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

c) an hourly salesman working less hard than a commission salesman

Which of the following is not an example of moral hazard? a) people are more likely to lock their own car more than a rental car b) skateboarders attempt more difficult maneuvers when wearing a helmet c) bad salespeople are less drawn to commission-based jobs d) people with fire insurance are less likely to install smoke alarms

c) bad salespeople are less drawn to commission-based jobs

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 texting on their phones while driving d) borrowers investing their loan proceeds exactly as the bank requires

c) drivers of safer cars texting on their phones while driving

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 'spear' with their heads when tackling more often with safer helmets d) people read the medicine warnings as carefully when self-medicating versus with a doctor's prescription

c) football players 'spear' with their heads when tackling more often with safer helmets

Which of the following is not an example of a process designed to combat moral hazard problems? a) banks include restrictive covenants in loan agreements b) universities have students complete evaluations of professor performance at the end of a class c) insurance companies require applicants to provide medical history information as part of the application process d) employers regularly monitor employee performance

c) insurance companies require applicants to provide medical history information as part of the application process

Which of the following is true? a) moral hazard is primarily an issue prior to a transaction b) adverse selection is primarily an issue after a transaction c) moral hazard is the result of an information asymmetry d) resolving adverse selection also resolves moral hazard

c) moral hazard is the result of an information asymmetry

Which is NOT an example of signaling high quality in a social setting a) wearing a business suit on a job interview b) leaving a big tip for the waiter after a dinner date c) offering a cheap engagement ring to your bride d) Visiting the beauty salon before a big date

c) offering a cheap engagement ring to your bride

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

c) requiring a kitchen remodeling contractor to be 'bonded'

Which of the following are examples of moral hazard: a. Apartment renters have more domestic accidents than home owners. b. Home owners have more domestic accidents than apartment renters. c. Apartment renters have more domestic accidents when they have renter's insurance. d. Home owners have fewer domestic accidents when they have homeowners' insurance.

c. Apartment renters have more domestic accidents when they have renter's insurance.

Foreclosure protection for homeowners and expanding borrower rights in the aftermath of the financial crisis: a. Benefited responsible homeowners who did not purchase houses they could not afford. b. Benefited responsible homeowners because the terms for new loans became less expensive. c. Benefited irresponsible homeowners because they did not have to pay back the full loans on expensive houses. d. Benefited irresponsible homeowners because the terms for new loans became less expensive.

c. Benefited irresponsible homeowners because they did not have to pay back the full loans on expensive houses.

If you develop a cheap, new monitoring mechanism that reduces the amount of shirking by workers: a. Firms are better off, but workers are worse off because they have to work harder. b. Firms are worse off because they have pay workers more for their extra work. c. Both firms and workers are better off because the value of the additional work to the firm exceeds the cost to the worker. d. Both firms and workers are worse off because cost to the worker of the additional work exceeds the value to the firm.

c. Both firms and workers are better off because the value of the additional work to the firm exceeds the cost to the worker.

When a bank's loans begin to default, the equity stake in the bank decreases and the bank may engage in moral hazard by making risky loans. A preferable solutions is to: a. Have the government guarantee loans so that the bank no longer wants to make risky loans. b. Have the bank combine with another failing bank to increase the percent equity stake. c. Have the bank get taken over by a "healthy" bank to increase the percent equity stake. d. Have the government withhold guaranteeing the banks loans so that it can make riskier loans.

c. Have the bank get taken over by a "healthy" bank to increase the percent equity stake.

The difference between moral hazard and adverse selection is: a. Moral hazard has to do with hidden information about counter-party types. b. Adverse selection refers to actions taken after a transaction has occurred. c. Moral hazard has to do with hidden information about counter-party behaviors. d. Adverse selection has to do with hidden information about counter-party behaviors.

c. Moral hazard has to do with hidden information about counter-party behaviors.

The difference between moral hazard and adverse selection is: a. Moral hazard is when parents who know they will be with distracted by kids buy safer cars. b. Adverse selection is when a renter whose utilities are included keeps his apartment toasty warm in the winter. c. Moral hazard is when drivers are less careful of insured rental cars than their own vehicles. d. Adverse selection is when parties at bars can get rowdier than parties in friends' homes.

c. Moral hazard is when drivers are less careful of insured rental cars than their own vehicles.

If moral hazard exists in insurance markets: a. There are no uninsured customers who would like insurance. b. Insurance companies have sold insurance to all potential customers. c. There is the potential for another transaction to be wealth-creating. d. No customers bear more risk than they would like to.

c. There is the potential for another transaction to be wealth-creating.

Which of the following is an example of moral hazard? a) reckless drivers are the ones most likely to buy automobile insurance b) retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas c) drivers who have many accidents prefer to buy cars with air bags d) employees recently covered by the company health plan start going to the doctor every time they get a cold

d) employees recently covered by the company health plan start going to the doctor every time they get a cold

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

d) people fail to read the medicine warnings more often when self-medicating versus with a doctor's prescription

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'

d) requiring physicians to be 'board certified'

To keep employees from shirking, you can invest in greater monitoring a) even though monitoring is expensive 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

d) when incentives fail to solve either moral hazard and adverse selection problems with employees

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 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

d) workers paid an hourly wage work harder than those on commission

Examples of Moral Hazard are: a. Dock workers without back-support belts lift heavier weights. b. A company borrowing for mobile phone spectrum paying off all debts even if the system is losing money. c. A football player with less protective gear playing rougher. d. A driver with all passenger airbags driving slightly more recklessly.

d. A driver with all passenger airbags driving slightly more recklessly.

Examples of insurance companies protecting themselves against moral hazard are: a. Free annual physical exams. b. Buying locks for insured bicycles. c. Requiring repairs that homeowners make to their houses conform to building codes. d. All of the above.

d. All of the above.

To avoid moral hazard in lending, lenders try to: a. Place tight restrictions on how the lent funds can be used. b. Require that a portion of the project is funded by the borrowers own funds. c. Lend to borrowers who have assets to seize in case of default. d. All of the above.

d. All of the above.

When insurance companies cannot tell if customers are taking appropriate precautions: a. There is an unconsummated wealth-creating transaction. b. Getting insurance will cause some customers to forgo taking precautions. c. All customers pay premiums higher than if the insurance company could detect the precautions taken d. All of the above.

d. All of the above.

Which of the following are examples of moral hazard: a. Poor drivers purchase cars with anti-lock brakes. b. People living in areas with more theft buy more theft insurance. c. People living along the river buy more flood insurance. d. Drivers with anti-lock brakes drive in ice and rain.

d. Drivers with anti-lock brakes drive in ice and rain.

When managers choose to allow workers to engage in some shirking, it is because: a. It would be profitable to set a high enough reward to induce the appropriate effort. b. The metric used to evaluate workers is a perfect measure of the effort they exerted. c. Workers do not receive any payment when they shirk. d. The amount workers would have to be compensated to stop shirking is not worth it.

d. The amount workers would have to be compensated to stop shirking is not worth it.

Progressive's Snapshot addresses moral hazard by: a. Letting customers drive more recklessly. b. Selecting only safe drivers as customers. c. Tying customers' insurance premiums to past accident history. d. Tying customers' insurance premiums to how careful they drive.

d. Tying customers' insurance premiums to how careful they drive.