Econ 2303 Ch 16

What phenomenon does this example​ illustrate? A. Adverse selection. B. Moral hazard. C. ​Principal-agent relationship. D. Signaling.

A. Adverse selection.

Efficiency wages are​ ____________. A. only paid to​ high-paid workers. B. wages above the lowest pay that workers would accept. C. wages slightly below the lowest pay that workers would accept. D. wages below the​ top-paid workers at a company.

B. wages above the lowest pay that workers would accept.

How do​ third-party certifications and warranties solve the adverse selection problem in the used car​ market? A. They pass on the costs of a​ "lemon" to a third party in the transaction. B. They make the market more efficient and eliminate the deadweight loss. C. They eliminate the moral hazard involved in selling a​ "lemon." D. They signal that a good car is not a lemon.

D. They signal that a good car is not a lemon.

The U.S.​ government, like many governments throughout the​ world, bailed out large financial institutions that were thought to be​ "too big to​ fail" during the 2008 financial crisis. Suppose a bank has the opportunity to invest in a risky project. If the project is​ successful, the bank will earn ​$80​; if it is​ unsuccessful, the bank will lose ​$100. The probability that the project will be successful is 0.50. The expected value of investing in this project is ​$__

(0.50 x $80) + (0.50x $-100) = $-10

Adverse selection occurs in the health insurance market because​ ____________. A. unless there are deductibles and​ co-payments, those who buy insurance will not have​ "skin in the​ game." B. buyers have private information about their health that health insurance companies do not. C. people with health insurance are more likely to undertake risky activities since they know that any injuries or illnesses will be paid for by the insurance company. D. only people who are sick will buy health​ insurance, thus signaling the health of those who buy and those who do not.

B. buyers have private information about their health that health insurance companies do not.

Since buyers cannot distinguish between a lemon and a​ peach, there is asymmetric information in the used car market. According to Michael​ Spence's signaling​ model, individuals could choose costly signals in order to reveal their private information. How does this example fit in with​ Spence's model? A. Owners of lemons will not offer their cars for sale and so owners of peaches are signaling the true quality of their cars by offering them for sale. B. Sellers will set the price of their car​ appropriately, thus signaling the true quality of their car. C. With the​ certificate, sellers are sending a signal to buyers about the true quality of their car. D. Owners of peaches will not offer their cars for sale and so owners of lemons are signaling the true quality of their cars by offering them for sale.

C. With the​ certificate, sellers are sending a signal to buyers about the true quality of their car.

Now suppose the government in this town passes a law that requires everyone to purchase medical insurance and sets the price of insurance at ​$1 comma 6001,600. The total surplus under this law is ​$

Total willingness to pay: (100 x 1,200) + (100x2,400)=360,000 Total producer cost is: (100 x 1,000) +(100x2,000)=300,000 360,000-300,000=60,000

If the bank is risk​ neutral, the bank ▼ will not make will make is indifferent about making this investment.

will make

If the bank is risk​ neutral, the bank ▼ is indifferent about making will make will not make this investment.

will not make

Which of the following are not examples of adverse​ selection? ​(Check all that apply.​) A. A new car salesman knows how the car was rated by Consumer Reports prior to selling it to a buyer. B. An employee at a company learns that a big deal is about to be signed and buys the​ company's stock because​ he's sure it is going to go up in value once the deal is announced. C. An actor knows whether or not he memorized his lines prior to auditioning for a part in a play. D. A student knows whether or not she studied for an exam prior to taking it.

A,C,D

Which of the following are not examples of moral​ hazard? ​(Check all that apply.​) A. You go skydiving and sign a waiver stating you​ can't sue the skydiving company if you get hurt. B. You wear your helmet when riding your bike. C. You rent a car and purchase the optional insurance. D. Your employer pays you wages that are higher than the market rate.

A,D

How can crime and punishment be modeled as a​ principal-agent problem? A. Crime can be viewed as a​ principal-agent relationship under moral hazard because the actions of the​ agent, whether he or she has broken the law or committed a​ crime, are not perfectly observable by the​ principal, in this​ case, the state​ (or the​ government). B. Crime can be viewed as a​ principal-agent relationship under adverse selection because the characteristics of the​ agent, whether he or she is a​ criminal, are not perfectly observable by the​ principal, in this​ case, the state​ (or the​ government). C. Crime can be viewed as a​ principal-agent relationship under adverse selection because the characteristics of the​ principal, whether he or she is a​ criminal, are not perfectly observable by the agents​ (police officers) of the state​ (or the​ government). D. Crime can be viewed as a​ principal-agent relationship under moral hazard because the actions of the​ principal, whether he or she has broken the law or committed a​ crime, are not perfectly observable by the agents​ (police officers).

A. Crime can be viewed as a​ principal-agent relationship under moral hazard because the actions of the​ agent, whether he or she has broken the law or committed a​ crime, are not perfectly observable by the​ principal, in this​ case, the state​ (or the​ government).

What role does equity or fairness play in this​ case? A. If innocent people are sometimes mistakenly thought to have committed a​ crime, this would be inconsistent with what most people would regard as a fair or equitable justice system. B. There is moral hazard in accusing innocent people of​ crimes, which most people would regard as an unfair outcome. C. If guilty people get away with their​ crimes, it is not fair to the victims. D. The police will spend a disproportionate amount of time chasing innocent​ people, which most people would regard as unfair.

A. If innocent people are sometimes mistakenly thought to have committed a​ crime, this would be inconsistent with what most people would regard as a fair or equitable justice system.

How much money per person will an insurance company​ make, on​ average, if it offers medical insurance at a price of ​$1 comma 6001,600​? A. It will​ lose, on​ average, ​$400400 per person. B. It will​ make, on​ average, ​$400400 per person. C. It will​ make, on​ average, ​$800800 per person. D. It will​ lose, on​ average, ​$800800 per person

A. It will​ lose, on​ average, ​$400400 per person.

Therefore, when the real estate agent takes an additional 9.5 days to sell his or her own​ home, an additional ​$3 comma 7003,700 is​ made, but if he or she is selling another​ person's house, ​$111 is made. So agents sell​ others' houses for ​$100,000 and their own for ​$103,700. What economic principle could explain this​ outcome? A. Moral hazard. B. ​Equity-efficiency trade-off. C. Adverse selection. D. ​"Lemons" problem.

A. Moral hazard.

If an insurance company offers medical insurance at a price of ​$2 comma 2002,200​, total surplus is ​$_____.

100 x 2,400= 240000 Total producer cost is 100x2,000=200,000 240,000-200,000=$40,000

Now suppose the government has a policy that helps banks that are suffering losses. Under this​ policy, the government will give a bank 30 percent of the​ bank's losses if a project is unsuccessful.​ Thus, if the project in this problem is​ unsuccessful, the government will give the bank 0.30×$100​, or ​$3030. The expected value of investing in this project is ​$

100-70=30 (0.50 x $80) + (0.50-$70)=5

If the real estate agent sells his or her own​ house, the agent will then get an additional ​$3 comma 7003,700 in income​ (the ​$100 comma 000100,000 home price for others times the additional 3.73.7 ​percent). How much additional commission will the real estate agent make if he or she sells​ another's home for the same 3.73.7 percent​ increase? The real estate agent will make an additional ​$ nothing in commission.

3700 x 0.3 = 111

If the informed investors realize that the IPO is weaklong dash—the company​ isn't a good betlong dash—then what is likely to​ happen? A. Only uninformed investors will​ bid; they will then lose money and exit the market. B. Only informed investors will​ bid; they will then lose money and exit the market. C. Both will​ bid, but informed investors will make more money than uninformed investors. D. Neither type of investor will bid because they know the company is a bad bet.

A. Only uninformed investors will​ bid; they will then lose money and exit the market.

How much will owners of each type of used car be able to sell their cars​ for? A. Owners of peaches will sell their cars for​ $4,000 and owners of lemons will sell their cars for​ $200. B. Owners of lemons will sell their cars for​ $200 and owners of peaches will not sell their cars. C. Owners of peaches will sell their cars for​ $4,000 and owners of lemons will not sell their cars. D. Owners of peaches and owners of lemons will sell their cars for​ $2,100, the expected value of a car to buyers.

A. Owners of peaches will sell their cars for​ $4,000 and owners of lemons will sell their cars for​ $200.

Now suppose that mistakes happen and innocent people are sometimes convicted of​ white-collar crime. Why in this case might we want to hire more investigators instead of raising​ fines? A. Some innocent people will pay a very heavy fine but some guilty people will be able to get away with their crimes. B. It is too hard to collect large fines from criminals because they have no money. C. People prefer to put criminals in jail rather than collect fines from them. D. There is moral hazard in convicting innocent people.

A. Some innocent people will pay a very heavy fine but some guilty people will be able to get away with their crimes.

Even if government intervention is not warranted to address the asymmetric information problems in markets on efficiency​ grounds, why might intervention be​ justified? A. To ensure a more equitable distribution of income and resources in the society. B. There will be many lawsuits that clog the court system and cost the taxpayers money. C. To enforce the contracts created that result from the​ principal-agent relationship. D. Unemployed workers will create moral hazard with their behavior.

A. To ensure a more equitable distribution of income and resources in the society.

Sumo wrestling tournaments typically have 66 wrestlers. Each wrestles 15 matches. A wrestler who has a winning record​ (eight wins or​ more) is guaranteed to rise in the official​ rankings; a wrestler with a losing record falls in the rankings. Suppose the last match of a tournament is between Wrestler​ A, who has won eight matches so​ far, and Wrestler​ B, who has won seven. If moral hazard is a serious problem in sumo​ wrestling, who do you think is more likely to win this​ match? A. Wrestler B. B. Both Wrestler A and Wrestler B are equally likely to win. C. Wrestler A. D. The answer cannot be determined from the information given.

A. Wrestler B.

Firms pay efficiency wages when​ ____________. A. an employer either cannot observe the actions of its employees or it is prohibitively expensive to monitor employees. B. the market equilibrium wage is higher than the wage the employer is currently paying its employees. C. an employer is looking to eliminate adverse selection when it hires its employees. D. an employer wants to be altruistic toward its employees.

A. an employer either cannot observe the actions of its employees or it is prohibitively expensive to monitor employees.

The relationship between moral hazard and efficiency wages​ ____________. A. is that efficiency wages are used by employers​ (principals) to eliminate or reduce the temptation of the employees​ (agents) to shirk work because they know the employer cannot catch them shirking. B. is that sometimes the market wage is too​ low, thus creating moral hazard for the employees​ (agents) to take an additional​ job, which reduces the marginal product of labor due to​ overwork, and so the employers​ (principals) introduce efficiency wages. C. is one in which the introduction of efficiency wages to a firm causes those workers​ (agents) who do not get the efficiency wages to​ shirk, thus creating moral hazard for the employer​ (principal) since it would like to pay some workers the higher wage. D. occurs when employers​ (principals) hire the wrong employees​ (agents) at the higher efficiency​ wage, which creates moral hazard and causes the employees to shirk.

A. is that efficiency wages are used by employers​ (principals) to eliminate or reduce the temptation of the employees​ (agents) to shirk work because they know the employer cannot catch them shirking.

The​ principal-agent relationship​ ____________. A. is where the principal designs a contract specifying the payments to the agent as a function of his or her​ performance, and the agent takes an action that influences performance and thus the payoff of the principal. B. is the economic theory that states in order for an outcome to be​ efficient, the agent must be incentivized to maximize the profits of the principal. C. determines the appropriate level of efficiency wages to be paid by the principal to the agent and sets those wages in a contract that specifies the parameters of the job to be done by the agent. D. is where the agent designs a contract specifying the payments to the principal as a function of his or her​ performance, and the principal takes an action that influences performance and thus the payoff of the agent.

A. is where the principal designs a contract specifying the payments to the agent as a function of his or her​ performance, and the agent takes an action that influences performance and thus the payoff of the principal.

The likely result from paying higher wages for more arrests is​ ____________. A. moral hazard. B. the​ principal-agent problem. C. adverse selection. D. signaling.

A. moral hazard.

Asymmetric information is when​ ____________. A. one party to a transaction has different information from the otherlong dash—information that the other party cares about. B. there is an​ equity-efficiency trade-off in the outcome of a transaction. C. both parties to a transaction have the same information but fail to conclude the transaction. D. both parties to a transaction are missing the same important piece of information.

A. one party to a transaction has different information from the otherlong dash—information that the other party cares about.

Explain the potential costs of​ high-powered incentives by considering the case of providing incentives to police officers. Would it be a good idea to pay higher wages to police officers if they make more​ arrests? A. ​No, it is likely a large number of the arrests made would not be warranted and would only be made in order to earn higher wages. B. ​Yes, because as Becker and Stigler​ showed, the expected punishment needs to go up to disincentivize​ criminals, and one way to do this is to increase the probability of detection. C. ​Yes, because then more criminals would be taken off the street and the crime rate would drop as criminals have less incentive to do illegal things. D. ​No, prisons are overcrowded already and taxes would have to increase to pay the higher wages that would result from more arrests.

A. ​No, it is likely a large number of the arrests made would not be warranted and would only be made in order to earn higher wages.

Which of the following is an example of​ signaling? A. An individual buying a used car purchases a warranty to protect against it being a​ "lemon." B. A doctor displays her Harvard Medical School diploma in her office waiting room. C. A basketball player hits most of his​ 3-point shots to show that​ he's a good basketball player. D. The price of a​ company's stock is high relative to its peers in the industry.

B. A doctor displays her Harvard Medical School diploma in her office waiting room.

How much do firms pay college graduates and high school​ graduates? A. Firms pay both college graduates and high school graduates​ $12,000, since they cannot tell the difference between extraordinary and capable workers. B. Firms pay college graduates​ $15,000 and high school graduates​ $12,000. C. Firms pay high school graduates​ $15,000 and college graduates​ $12,000. D. Firms pay both college graduates and high school graduates​ $16,500, the expected value of a worker.

B. Firms pay college graduates​ $15,000 and high school graduates​ $12,000.

An example of the use of efficiency wages is when​ ____________. A. the United States​ re-established the federal minimum wage in 1938 at​ $0.25 per hour. B. Henry Ford increased the daily minimum wage for Ford employees to​ $5.00. C. restaurants allow their waiters and waitresses to keep the tips they receive from patrons. D. more productive workers are paid more to reflect their higher output.

B. Henry Ford increased the daily minimum wage for Ford employees to​ $5.00.

The government wants to reduce​ white-collar crime. Suppose for the moment innocent people are never wrongly convicted of a crime. According to the Becker model of crime and​ punishment, why should we increase the fines people pay if they are convicted instead of hiring more people to investigate​ white-collar crime? A. Detecting crimes is difficult due to the​ principal-agent problem. B. It is more expensive to increase the probability of detection than to increase the fine. C. The expected punishment is too low even when more investigators are hired. D. Fines bring in more money for the​ government, which can then be used for socially useful projects.

B. It is more expensive to increase the probability of detection than to increase the fine.

What effect would grade inflation have on the effectiveness of college degrees and grades as​ signals? A. It has no impact on the effectiveness of grades as a signal in the job market. B. It reduces the effectiveness of grades as a signal in the job market. C. It increases the effectiveness of grades as a signal in the job market. D. It increases the effectiveness of grades as a signal in the job market for those with high grades and reduces the effectiveness for those with low grades.

B. It reduces the effectiveness of grades as a signal in the job market.

Some critics of the bailouts argued that these policies created a​ problem: banks would undertake too many risky projects if they knew that the government would bail them out if the project failed. What type of problem did these critics think was​ created? A. Moral hazard and adverse selection problems. B. Moral hazard problem. C. Adverse selection problem. D. ​Principal-agent problem.

B. Moral hazard problem.

All used cars are lemons​ (low quality) or peaches​ (high quality). Owners know whether or not their car is a​ lemon, but buyers do not. That​ is, the quality of a car is private information. There are many more buyers than sellers. Buyers value a peach at​ $4,000 and a lemon at​ $200; owners value a peach at​ $3,000 and a lemon at​ $100. Owners can have their cars inspected for​ $100. If they do have their car​ inspected, they will receive a certificate that shows whether the car is a lemon or a peach. Which owners will get their cars​ inspected? A. Neither owners of peaches nor lemons will get their cars inspected. B. Owners of peaches will get their cars inspected and owners of lemons will not. C. Owners of lemons will get their cars inspected and owners of peaches will not. D. Both owners of peaches and lemons will get their cars inspected.

B. Owners of peaches will get their cars inspected and owners of lemons will not.

When a major league baseball​ player's contract has​ expired, he can either sign a new contract with his current team or become a free agent and sign a contract to play with a different team. If adverse selection is a problem in the market for major league baseball​ players, who do you think are more likely to be injured the season after they sign a new​ contract, players who​ re-sign with their current team or players who sign with a new​ team? A. Players who​ re-sign with their current team. B. Players who sign with a new team. C. Both types of players are equally likely to be injured the season after they sign a contract. D. It cannot be determined with the information given.

B. Players who sign with a new team.

Given that there is information asymmetry in the​ market, why are IPOs often underpriced​? A. Underwriters​ don't know how to value the company.​ Therefore, the underwriters will have to make sure the price is below the actual​ value, which leads to underpricing. B. Since the number of informed investors is very​ low, underwriters need to attract uninformed investors to subscribe to the IPO.​ Therefore, the underwriters will have to price the IPO at a low​ price, which leads to underpricing. C. Underwriters know that uninformed investors will bid up the price anyway.​ Therefore, the underwriters will price the IPO at a low​ price, which leads to underpricing. D. Since there are many uninformed​ investors, the underwriters need to price the IPO at a low price so that more people are able to buy the​ stock, which leads to underpricing.

B. Since the number of informed investors is very​ low, underwriters need to attract uninformed investors to subscribe to the IPO.​ Therefore, the underwriters will have to price the IPO at a low​ price, which leads to underpricing.

Grade inflation is​ widespread; college students receive higher grades on tests and exams today for work that would have received lower grades in the past. One recent study found that 41 percent of students had grade point averages of​ A-minus or higher in​ 2009, compared to just 7 percent in 1969. In other​ words, grades improve while actual learning does not. Why might someone go to college to earn a college degree and work hard to earn high​ grades? A. It reduces the moral hazard for employers when they hire those with college degrees and high grades. B. To send a signal to potential employers that they are smarter and harder working than the rest of the job applicants. C. Earning a college degree and obtaining high grades has a low marginal cost. D. It forces employers to reveal whether or not they value smart workers.

B. To send a signal to potential employers that they are smarter and harder working than the rest of the job applicants.

This chapter explains that signaling refers to an action that an individual with private information takes in order to convince others about his information. Screening also involves private information but is somewhat different from signaling. Screening refers to an action taken by an uninformed person to learn about someone​ else's private information.​ So, for​ example, you are engaged in screening if you have a mechanic inspect a used car you are considering buying. The biblical story of King Solomon is ​in ​1 Kings ​3:16dash-28​ (see also http://en.wikipedia.org/wiki/Judgment_of_Solomon​). Two young women who both had an infant son came to Solomon for a judgment. One of the women claimed that the​ other, after accidentally smothering her own son while​ sleeping, had exchanged the two children to make it appear that the living child was hers. The other woman denied this and so both women claimed to be the mother of the living son and said that the dead boy belonged to the other. After some​ deliberation, Solomon declared the live son must be split in​ two, each woman receiving half of the child. At that​ point, the​ boy's true mother cried​ out, "Oh​ Lord, give the baby to​ her, just​ don't kill​ him!" The liar​ said, "It shall be neither mine nor yourslong dash—divide ​it!" The king then declared the first mother as the true mother and gave her the baby. We know that King Solomon understood screening very well because his solution​ ___________. A. avoided the moral hazard that would have been involved in splitting the baby in half. B. forced the women to reveal their private information about who the real mother was. C. forced the women to reveal their public information about who the real mother was. D. signaled to the women that he knew who the true mother was.

B. forced the women to reveal their private information about who the real mother was.

Efficiency wages are used to​ ____________. A. increase​ signaling, thus minimizing adverse selection. B. increase motivation and​ productivity, thus minimizing moral hazard. C. decrease an​ employer's "skin in the​ game." D. decrease inequitable wage distribution in a company.

B. increase motivation and​ productivity, thus minimizing moral hazard.

Moral hazard occurs when​ ____________. A. the buyer in a transaction knowingly purchases a​ "lemon." B. one party in a market transaction takes a hidden action that is relevant​ for, but not observed​ by, the other party. C. one party in a market transaction has a hidden characteristic that is relevant​ for, but not observed​ by, the other party. D. the seller in a transaction unknowingly sells a​ "lemon."

B. one party in a market transaction takes a hidden action that is relevant​ for, but not observed​ by, the other party.

The market for baseball players is most like the market for​ ____________. A. labor because better players get paid a higher salary. B. used cars because unhealthy players are like lemons. C. labor because teams have to pay efficiency wages. D. insurance because players will need more medical care if they go to a new team.

B. used cars because unhealthy players are like lemons.

Why do​ "bad cars drive out the good​ ones" in the market for used​ cars? A. Sellers of good used cars ask too much for their​ cars, and since buyers are unwilling to pay the high​ prices, sellers of good cars eventually stop trying to sell their​ cars, leaving only bad cars in the market. B. Sellers of used cars are not able to determine which buyers are willing and able to pay for the good​ cars, so only owners of bad cars offer their cars for sale. C. Buyers are not able to tell the difference between good cars and bad​ cars, and so they are not willing to pay a high price for a used car because of the significant chance it will be​ lemon, which makes owners of good cars unwilling to sell them. D. Buyers of used cars​ don't have enough money to buy good​ cars, so only bad cars are sold in the market.

C. Buyers are not able to tell the difference between good cars and bad​ cars, and so they are not willing to pay a high price for a used car because of the significant chance it will be​ lemon, which makes owners of good cars unwilling to sell them.

What does the model suggest about crime​ prevention? A. There will always be moral​ hazard, so there is not much that can be done to prevent crime. B. Crime can be solved with the appropriate design of contracts that criminals​ (agents) will sign and follow. C. Crime can be solved with the right​ incentives, which will be in part a function of the expected punishment. D. It can be solved through the observation of the signals that people put out when they are undertaking criminal activity.

C. Crime can be solved with the right​ incentives, which will be in part a function of the expected punishment.

There are 100 ​low-risk people in a town and 100 ​high-risk people. A​ low-risk person has an average of ​$1,000 in medical expenses each year and is willing to pay ​$1,200 for medical insurance​ (this person is risk​ averse). A​ high-risk person has an average of ​$2,000 in medical expenses each year and is willing to pay ​$2,400 for medical insurance. Insurance companies are unable to tell who is high risk and who is low risk. If an insurance company offers medical insurance at a price of ​$1,600​, who will buy​ it? A. Neither​ high-risk people nor​ low-risk people will buy it. B. Only​ low-risk people will buy it. C. Only​ high-risk people will buy it. D. Both​ high-risk people and​ low-risk people will buy it.

C. Only​ high-risk people will buy it.

Adverse selection occurs when​ ____________. A. the buyer in a transaction unknowingly purchases a​ "lemon." B. one agent in a market transaction knows about a hidden action and trades​ (or not) on the basis of that information. C. one agent in a transaction knows about a hidden characteristic and trades​ (or not) on the basis of that information. D. the seller in a transaction unknowingly sells a​ "lemon."

C. one agent in a transaction knows about a hidden characteristic and trades​ (or not) on the basis of that information.

Is there an efficiency argument in favor of the individual​ mandate? A. ​Yes, because everyone is better off with health insurance. B. ​No, because consumer surplus is lower with the mandate. C. ​Yes, because total surplus with the mandate is higher than total surplus without the mandate. D. ​No, because people​ shouldn't have to buy health insurance if they​ don't want to.

C. ​Yes, because total surplus with the mandate is higher than total surplus without the mandate.

Suppose some workers are capable and others are extraordinary. Firms are willing to pay capable workers a salary of​ $12,000 and extraordinary workers a salary of​ $15,000. Workers know if they are capable or extraordinary but firms do notlong dash—that ​is, ability is private information. It would cost capable persons​ $6,000 to earn a college​ degree, but it would cost extraordinary persons just​ $2,000 to earn a college degree since they can finish their education much faster. Workers without college degrees have high school diplomas. Which workers will go to school and earn a college​ degree? A. Both extraordinary workers and capable workers will earn a college degree. B. Neither extraordinary nor capable workers will earn a college degree. C. Capable workers will earn a college degree and extraordinary workers will not. D. Extraordinary workers will earn a college degree and capable workers will not.

D. Extraordinary workers will earn a college degree and capable workers will not.

Janet​ Yellen, the chair of the Federal​ Reserve, is married to the Nobel​ Prize-winning economist George A. Akerlof. When they hired babysitters in the​ 1980s, they decided to pay wages that were higher than the going wage for babysitters. If they could get a babysitter at a lower​ wage, what could explain why they decided to pay​ more? A. They wanted to signal to others that they were wealthy and could afford the best. B. By paying a higher​ wage, they were​ "putting skin in the​ game." C. The market for babysitters has a​ "lemons" problem, and by paying higher​ wages, they only get the best babysitters. D. This is an example of efficiency​ wages, and paying efficiency wages has been shown to attract the best talent.

D. This is an example of efficiency​ wages, and paying efficiency wages has been shown to attract the best talent.

Unemployment benefits might create a moral hazard problem​ ____________. A. because workers are incentivized to lie about their skills to get a job when their unemployment benefits run out. B. if the government requires the worker receiving unemployment benefits to pay back the benefits once he or she gets a new​ job, which leads to workers taking the first job offered even if​ it's not the best job for the worker in order to reduce repayment to the government. C. if the government paying the unemployment benefits requires employers of those workers who received the benefits to pay efficiency wages before the worker can take the job. D. because how hard a worker is trying to find a job is private information and unemployment benefits imply weaker incentives to find a​ job, which leads to a longer duration of unemployment.

D. because how hard a worker is trying to find a job is private information and unemployment benefits imply weaker incentives to find a​ job, which leads to a longer duration of unemployment.

Moral hazard refers to​ ____________. A. hidden characteristics that individuals have that affect the payoff of others. B. hidden actions that individuals take and hidden characteristics that individuals have that affect the payoff of others. C. the absence of a contract in a​ principal-agent relationship, thus leading to an inefficient market outcome. D. hidden actions that individuals take that affect the payoff of others.

D. hidden actions that individuals take that affect the payoff of others.

The two kinds of asymmetric information are​ ____________. A. ​"lemons" and​ "peaches." B. moral hazard and adverse selection. C. ​principal-agent relationship and signaling. D. hidden characteristics and hidden actions.

D. hidden characteristics and hidden actions.

In​ economics, signaling is an action taken by an individual​ ____________. A. who has private information to hide the information from others. B. to convince someone who has private information to reveal his information to others. C. to discourage someone from attempting to discover his or her private information. D. who has private information to convince others about his information.

D. who has private information to convince others about his information.

IPO stands for initial public offering​; it refers to the sale of the stock of a private company to the public for the first time. Since a private company does not publish data about its financial​ performance, it is difficult for an investor to gauge the​ company's prospects or the possible future value of its stock. Suppose there are two groups of investors in the market for a particular​ company's IPO: informed investors and uninformed investors. Will the two groups bid for stock in the same​ way? A. ​No, because informed investors have a higher willingness to pay than uninformed investors. B. ​Yes, because they both want to make money from the IPO. C. ​Yes, because they have to pay the market price. D. ​No, informed investors will only bid on stocks that they know are worth investing in and uninformed investors will bid on an IPO irrespective of the quality of the stock.

D. ​No, informed investors will only bid on stocks that they know are worth investing in and uninformed investors will bid on an IPO irrespective of the quality of the stock.

Does the presence of asymmetric information necessarily imply that governments should intervene in a​ market? A. ​No, with asymmetric​ information, even the government​ doesn't know how to make private information​ public, preventing the government from correcting the market failure. B. ​Yes, only the government can correct market failures that result from asymmetric information. C. ​No, because government regulation creates moral hazard for government administrators. D. ​No, there may be market solutions or it might be difficult for the government to gain enough market knowledge to improve market outcomes.

D. ​No, there may be market solutions or it might be difficult for the government to gain enough market knowledge to improve market outcomes.

Steven Levitt and Chad Syverson compared instances of home sales in which real estate agents are hired by others to sell a home to instances in which an agent sells his or her own home. They found that homes owned by real estate agents sold for 3.73.7 percent more than other houses and stayed on the market 9.5 days​ longer, everything else being equal. In the United​ States, a real estate agent typically earns a 33 percent commission on the sale of a house. If a real estate agent sells someone​ else's home for ​$100,000​, the agent will make ​$___ in commission.

Since a real estate agent typically earns a 33 percent commission on the sale of the​ house, a ​$100 comma 000100,000 house earns the agent $ 100 comma 000 times 0.03 equals $ 3 comma 000$100,000×0.03=$3,000.