Question 1

Employers may pay higher than equilibrium wages to avoid moral hazard in the employment relationship by raising the cost of shirking.

Accepted Answer

A) True 
 B)False

Question 2

Jan's car is in need of repair, so Jan decides to sell it to avoid the repair bill. Unaware of the problem, Pieter buys the car. This is an example of

Accepted Answer

A)   hidden actions.
B)   adverse selection.
C)   efficiency wages.
D)   moral hazard.E) B) and C)
F) None of the above

Question 3

The principal-agent problem arises because of

Accepted Answer

A)   the firm's motive for profit maximisation.
B)   the salary differential between management and labourers.
C)   the structure of the market in which the firm operates.
D)   conflicting interests between a principal and an agent.E) A) and B)
F) None of the above

Question 4

Provide three examples of screening.

Accepted Answer

Banks will want to screen customers who ...

Question 5

An apparel company employs Jabulile as a designer. In this employment relationship, the apparel company is the

Accepted Answer

A)   agent.
B)   principal.
C)   screener.
D)   signaller.E) None of the above
F) All of the above

Question 6

Which of the following is a response to people's inconsistent behaviour over time?

Accepted Answer

A)   All of these answers.
B)   Forced contributions to a retirement plan.
C)   Year-end bonuses.
D)   Efficiency wages.E) A) and C)
F) B) and C)

Question 7

Markus is a travelling salesman for an insurance company. In this employment relationship, Markus is the

Accepted Answer

A)   agent.
B)   principal.
C)   screener.
D)   signaller.E) A) and D)
F) None of the above

Question 8

Identify and explain the two basic types of problems that arise when there is asymmetric information.

Accepted Answer

The two basic types of problems are (1) ...

Question 9

Which of the following best demonstrates the problem of moral hazard?

Accepted Answer

A)   Cynthia doesn't buy health insurance because it is too expensive and she is healthy.
B)   A life insurance company forces Tebogo to have a medical examination prior to selling her insurance.
C)   Lerato drives more recklessly after she buys car insurance.
D)   Fatima chooses to attend a well-respected university.E) None of the above
F) A) and D)

Question 10

Severe adverse selection problems may result in

Accepted Answer

A)   too few good used cars being offered for sale.
B)   wages that are too low relative to equilibrium levels.
C)   too many good drivers buying too much car insurance.
D)   people with average health buying too much health insurance.E) All of the above
F) A) and D)

Question 11

According to one survey most South Africans said they were not saving enough for retirement. This example of inconsistency over time

Accepted Answer

A)   is rational behaviour.
B)   likely occurs because saving requires a sacrifice in the present for a reward in the distant future.
C)   likely occurs because South Africans don't care about retirement.
D)   definitely would not happen if South Africans earned a greater return on their investments.E) All of the above
F) A) and B)

Question 12

Moral hazard occurs when

Accepted Answer

A)   an employer closely monitors an employee.
B)   two people consider a trade with each other and one person has relevant information about some aspect of the product's quality that the other person lacks.
C)   an employee lacks an incentive to promote the best interests of the employer, and the employer cannot observe the actions of the employee.
D)   an employee closely monitors the actions of her employer.E) None of the above
F) B) and C)

Question 13

Moral hazard occurs when

Accepted Answer

A)   the principal monitors an agent.
B)   two people might trade with each other, and one person has relevant information about some aspect of the product's quality that the other person lacks.
C)   an agent lacks an incentive to promote the best interests of the principal, and the principal cannot observe the actions of the agent.
D)   an agent monitors the principal.E) None of the above
F) B) and C)

Question 14

Ricky goes to work 8 hours per day, but while he is at work he spends most of his time visiting internet sites monitoring his fantasy football teams. This is an example of

Accepted Answer

A)   hidden characteristics.
B)   signalling.
C)   moral hazard and hidden action.
D)   screening.E) B) and D)
F) B) and C)

Question 15

Since people tend to care about fairness, firms may give bonuses during particularly profitable years to be fair and to avoid retaliation from the workers.

Accepted Answer

A) True 
 B)False

Question 16

Mfundo's friend dies of a sudden heart attack. Mfundo rushes to his doctor for an expensive physical examination. This response demonstrates that people

Accepted Answer

A)   give too much weight to a small number of vivid observations.
B)   easily change their minds when confronted with new information.
C)   enjoy going to the doctor.
D)   tend to plan ahead and follow through on their plans.E) A) and B)
F) None of the above

Question 17

A person's tendency to smoke a cigarette after promising to quit is an example of the behavioural economics insight that people are inconsistent over time.

Accepted Answer

A) True 
 B)False

Question 18

Frequently it is the case that: (1)  A worker knows more than his employer about how much effort he puts into his job, and (2)  the seller of a used car knows more than the buyer about the car's condition.

Accepted Answer

A)   Neither (1)  nor (2)  serves as an example of asymmetric information.
B)   Both (1)  and (2)  serve as examples of asymmetric information.
C)   Neither (1)  nor (2)  serves as an example of a hidden action.
D)   Both (1)  and (2)  serve as examples of hidden action.E) None of the above
F) B) and D)

Question 19

Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. This is an example of

Accepted Answer

A)   a moral hazard problem.
B)   adverse selection.
C)   behavioural economics.
D)   signalling.E) B) and C)
F) A) and B)

Question 20

Because people with hidden health problems are more likely to buy health insurance than are other people,

Accepted Answer

A)   the price of health insurance reflects the costs of a sicker-than-average person.
B)   the price of health insurance is too low, relative to the socially-optimal price.
C)   people in average health may be encouraged to buy too much health insurance, relative to the socially-optimal quantity.
D)   the Condorcet Paradox suggests that people who are sicker than average will ultimately buy more health insurance.E) A) and D)
F) B) and C)

Exam 12: Information and Behavioural Economics

The principal-agent problem arises because of

Correct AnswerverifiedShow Answer

Jan's car is in need of repair, so Jan decides to sell it to avoid the repair bill. Unaware of the problem, Pieter buys the car. This is an example of

Correct AnswerverifiedShow Answer

Frequently it is the case that: (1) A worker knows more than his employer about how much effort he puts into his job, and (2) the seller of a used car knows more than the buyer about the car's condition.

Correct AnswerverifiedShow Answer

Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. This is an example of

Correct AnswerverifiedShow Answer

Which of the following is a response to people's inconsistent behaviour over time?

Correct AnswerverifiedShow Answer

Ricky goes to work 8 hours per day, but while he is at work he spends most of his time visiting internet sites monitoring his fantasy football teams. This is an example of

Correct AnswerverifiedShow Answer

According to one survey most South Africans said they were not saving enough for retirement. This example of inconsistency over time

Correct AnswerverifiedShow Answer

Which of the following best demonstrates the problem of moral hazard?

Correct AnswerverifiedShow Answer

Moral hazard occurs when

Correct AnswerverifiedShow Answer

Severe adverse selection problems may result in

Correct AnswerverifiedShow Answer

Employers may pay higher than equilibrium wages to avoid moral hazard in the employment relationship by raising the cost of shirking.

Correct AnswerverifiedShow Answer

Provide three examples of screening.

Correct AnswerverifiedBanks will want to screen customers who ...View AnswerShow Answer

A person's tendency to smoke a cigarette after promising to quit is an example of the behavioural economics insight that people are inconsistent over time.

Correct AnswerverifiedShow Answer

Moral hazard occurs when

Correct AnswerverifiedShow Answer

Markus is a travelling salesman for an insurance company. In this employment relationship, Markus is the

Correct AnswerverifiedShow Answer

Because people with hidden health problems are more likely to buy health insurance than are other people,

Correct AnswerverifiedShow Answer

Mfundo's friend dies of a sudden heart attack. Mfundo rushes to his doctor for an expensive physical examination. This response demonstrates that people

Correct AnswerverifiedShow Answer

Since people tend to care about fairness, firms may give bonuses during particularly profitable years to be fair and to avoid retaliation from the workers.

Correct AnswerverifiedShow Answer

Identify and explain the two basic types of problems that arise when there is asymmetric information.

Correct AnswerverifiedThe two basic types of problems are (1) ...View AnswerShow Answer

An apparel company employs Jabulile as a designer. In this employment relationship, the apparel company is the

Correct AnswerverifiedShow Answer

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Banks will want to screen customers who ...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The two basic types of problems are (1) ...
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