Module 15 homework
What term do economists use to refer to the conflict between the interests of shareholders and the interests of top management?
Principal-agent problem
When processing car insurance claims, which of the following will not incentivize the customers to act appropriately after buying the insurance?
Providing double health coverage in case of accidental injuries.
Which of these is an example of how health insurance companies deal with the problem of adverse selection?
Requiring more information on potentially risky individuals
Which of the following is not a correct example of signaling?
Heavy discounts offered during the holiday season.
Which of the following is an example of signaling?
A doctor displays her Harvard Medical School diploma in her office waiting room.
Which of the following are not examples of adverse selection? (Check all that apply.)
A student knows whether or not she studied for an exam prior to taking it. B. An actor knows whether or not he memorized his lines prior to auditioning for a part in a play. Your answer is correct. C. A new car salesman knows how the car was rated by Consumer Reports prior to selling it to a buyer.
An example of the use of efficiency wages is when ____________.
Henry Ford increased the daily minimum wage for Ford employees to $5.00.
Which of these refers to the "individual mandate" in the Patient Protection and Affordable Care Act (PPACA) passed in 2010?
All United States residents are required to carry insurance or pay a fine.
In which of the following situation is the average price of insurance premiums likely to decrease?
If the possibility of adverse selection has decreased.
Which of the following does not indicate a principal-agent relationship under moral hazard?
Buyers and sellers in a perfectly competitive market.
Which of the following is not an example of moral hazard?
Buying a ticket to a lottery that has a 1 in 1000 possibility of winning.
Which of the following is not a correct explanation of government intervention in the context of moral hazard? (Check all that apply.)
C. It results in greater equity and efficiency. Your answer is correct. D. It is always better than market outcomes.
Which of the following statements is false in terms of adverse selection from the seller's perspective?
Car insurance sold to a driver with a damaged car.
Which of these is an outcome of the moral hazard problem in the market for health insurance?
Consumers of health care will buy more health care services than they would without health insurance.
Which of the following is not a proper explanation of the impacts of adverse selection?
It does not lead to market failure.
A seller has entered into a transaction to sell his used car to a buyer. He has priced his car at $15,000. The market range for his used car is $16,000 to $18,000. The car has been in an accident that caused a lot of damage to the engine, airbags, frame, and driver's side door. Some of the damages were temporarily repaired, so the buyer is unaware of the previous damage. Which of the following characteristics are true?
It is an example of a hidden characteristic and a hidden action.
__________ occurs when someone enters into a transaction and then engages in behavior that makes the other party worse off.
Moral hazard
An increase is a firm's stock price most likely reflects which of the following?
Optimism about the firm's profit prospects.
Which of these is the health care reform legislation passed by Congress and signed by President Obama in March 2010?
The Patient Protection and Affordable Care Act
What is the main reason for health insurance companies to require deductibles and coinsurance?
To deal with the moral hazard problem
Sam has completed a post-graduate degree in economics and is now looking for a job. He has registered himself with the state unemployment insurance office. In which of the following situations is he likely to exert more efforts when looking for a job?
When unemployment insurance is not provided.
Insurance companies can create incentives for clients to reveal relevant private information. One example of such an incentive is __________.
a deductible
Claire is paid an efficiency wage of $2 an hour above minimum. Her job is to make sure all of the animal cages at the local zoo are completely swept and cleaned before leaving for the night. This increased wage is most likely to prevent _____ due to ______
a hidden action, asymmetrical information
When a tenant, whose rent includes water, sewer and trash, leaves the hose running the entire time while she is washing her car, she is demonstrating ______
a moral hazard
Markets with unequal access to information between buyers and sellers can lead to a situation where only low-quality goods dominate in a given market. This is known as;
adverse selection
The domination of the used-car market by lemons is an example of a market in which the goods left in the market are the undesirable goods. This problem is called __________.
adverse selection
Which of these refers to the situation in which one party to an economic transaction takes advantage of knowing more than the other party to the transaction?
adverse selection
Government intervention can prevent a free market collapse due to _____ , as they can use the law to set mandates. The government _____ have to deal with asymmetrical information.
adverse selection, does
A potential buyer of a week-old car might believe that a person who returns a car after only one week could have discovered it was a lemon and may be trying to get rid of it. Alternatively, the seller could have simply changed his or her mind about the car. The fundamental problem described here is what we refer to in economics as __________.
asymmetric information
Which of the following are not examples of moral hazard? (Check all that apply.)
b. You go skydiving and sign a waiver stating you can't sue the skydiving company if you get hurt. This is the correct answer. C. Your employer pays you wages that are higher than the market rate.
The health insurance market is an example where ______ have private information. An extreme result of this dynamic is referred to as the _______ , where the market completely collapses.
buyers, death spiral
If productivity among workers within a nation started to fall, and as a result unemployment started to rise, increasing unemployment compensation would
decrease the incentive to work
Asymmetric information means that __________.
either the buyer has information that the seller does not have or the seller has information that the buyer does not have.
An insurance company knows less about the risks of policyholders than do the policyholders themselves. For this reason, insurance companies __________.
end up insuring the most undesirable group of customers
Suppose that consumers have pessimistic expectations about buying a used car and they believe the actual chance of getting a lemon is high. Under this scenario, the price of used cars will __________.
fall
The United States health care reforms listed in the PPACA will lead to __________.
greater government involvement in the health care system
Tom wants to list his electric guitar on eBay for $300. It looks great on the outside but has some corrosion on the inside. In order to get the full price for his guitar, he doesn't mention the corrosion. This is an example of ______
hidden characteristics
The following are types of asymmetric information with the exception of:
hidden transactions
A firm that pays an efficiency wage is paying a wage that is __________ the current market wage.
higher than
Efficiency wages are used to ____________.
increase motivation and productivity, thus minimizing moral hazard.
Signaling acts as a type of ______ to help move markets plagued by adverse selection toward efficient operation. Signals are initiated by an individual _____ private information
insurance, with
Recent research by Abigail Wozniak ("Discrimination and the Effects of Drug Testing on Black Employment, NBER Working Paper No. 20095) indicates that when employers test job applicants for drugs, employment of black people increases 7 - 30% and wages increase by 1.4 - 13.0%. Why might drug testing increase employment? Drug testing might increase employment because
it acts as a signal to employers.
In the presence of asymmetric information, ____________.
it is possible for a market to completely shut down even if there are benefits to trade.
As the chance of getting a low-quality good increases, buyers are willing to pay __________ for a used car and the quantity of high-quality cars will tend to __________.
less, fall
Buyers and sellers often employ various mechanisms to help reduce the problem of asymmetric information. These mechanisms are known as __________.
market signals
A situation in which one side of an economic relationship takes undesirable or costly actions that the other side of the relationship cannot observe is called __________.
moral hazard
Joe was offered a job at a company after submitting his academic record on the basis that he has an exceptional record. However, Joe has knowledge that his academic records are false. This is NOT a case of ______
moral hazard
Which of these refers to the problem in which one person with no deductible on her health insurance policy tends to engage in a less healthy lifestyle than another person with a high insurance deductible?
moral hazard
People who are insured have _______ of an incentive to engage in risky behavior. In effect, insurance _____ risky behavior
more, subsidizes
Adverse selection occurs when ____________.
one agent in a transaction knows about a hidden characteristic and trades (or not) on the basis of that information.
Moral hazard occurs when ____________.
one party in a market transaction takes a hidden action that is relevant for, but not observed by, the other party.
All of the following are market solutions to moral hazard in the insurance market, except
reducing-copayments
Which of the following is not a market solution for moral hazard?
signaling
If the market for used stereos contains only lemons, then the market for used stereos __________.
suffers from an adverse selection problem
Low quality cars drive out the good quality cars from the automobile market because ________.
suppliers and demanders have different information about cars' quality.
Which of the following is an example of private information?
the way a person drives a rental car
Efficiency wages are ____________.
wages above the lowest pay that workers would accept.
An example of a market solution to adverse selection is:
warranties and other devices that increase information
In economics, signaling is an action taken by an individual ____________.
who has private information to convince others about his information.
In the principal-agent relationship, the agent is the one ____________.
with the hidden action