MRU24.3: Video Activity: Moral Hazard

Which of the following most clearly demonstrates the major problem with moral hazard and information asymmetry? -A car owner gets talked into buying new tires when technically the old ones could have lasted a little longer. -A car owner tries to sell the car in the used car market but asks for more than the car is worth. -A car owner visits three mechanics to get several opinions and estimates for repair work. -A car owner skips necessary preventive maintenance for fear of being ripped off.

-A car owner skips necessary preventive maintenance for fear of being ripped off.

Which of the following is NOT presented in the video as an example of moral hazard? -A doctor recommending that a patient get a second opinion -An employee goofing off at work -A mechanic recommending more repairs than are actually necessary -A taxi driver taking a longer route to get a higher fare

-A doctor recommending that a patient get a second opinion

Which of the following is true about the market for auto repair? -The buyers of auto repair prefer that they have less information about automobiles than do the sellers of auto repair. -The sellers of auto repair generally know a lot more about automobiles than do the buyers. -The buyers of auto repair generally know a lot more about automobiles than do the sellers. -The buyers and sellers of auto repair have access to the same information about automobiles.

-The sellers of auto repair generally know a lot more about automobiles than do the buyers.

Which of the following is true when a tourist uses a taxi to get around an unfamiliar city? -The city's government is the principal and the tourist is the agent. -The tourist is the principal and the taxi driver is the agent. -The taxi driver is the principal and the taxi company is the agent. -The taxi company is the principal and the city's government is the agent.

-The tourist is the principal and the taxi driver is the agent.

In principle, what is the best way to solve the principal-agent problem? -To solve the information asymmetry problem by providing information to the principal -To align the incentives of the agent with the incentives of the principal -To solve the information asymmetry problem by providing information to the agent -To encourage principals to hire only agents with the same amount of information

-To align the incentives of the agent with the incentives of the principal

Bottled water is presented in the video as an example of a good for which: -the market thrives despite ongoing problems of asymmetric information. -information asymmetry is not much of a problem. -the market has collapsed as a result of information asymmetry. -problems of information asymmetry have been overcome by market forces.

-information asymmetry is not much of a problem.

Asymmetric information occurs when: -one party to an exchange has more or better information than the other party. -neither party in an exchange has all of the relevant information. -there is more available information about the value of a good than about the cost. -information always flows in one direction between the parties to an exchange.

-one party to an exchange has more or better information than the other party.

The principal-agent problem occurs when: -the person you hire to do work for you has more information than you do. -one person you hire to do work for you has more information than another person you hire to do work for you. -the person you hire to do work for you has less information than you do. -you do not hire anyone to do work for you because you have more information than anyone else.

-the person you hire to do work for you has more information than you do.

The biggest problem with moral hazard caused by information asymmetry is: -getting ripped off is economically inefficient, because it reduces total surplus. -the potential for a rip-off may cause people to avoid certain transactions altogether. -it creates incentives for people to take certain actions that actually make the asymmetry worse. -it is evidence of serious on-going problems with the education of people in an economy.

-the potential for a rip-off may cause people to avoid certain transactions altogether.

Moral hazard is: -the same thing as information asymmetry. -the resistance to participate in markets where there is information asymmetry. -the temptation to exploit an information advantage. -the dangers associated with correcting problems of asymmetric information.

-the temptation to exploit an information advantage.