Question : 16.2  Hidden Actions: Markets with Moral Hazards 1) ________ refers to : 1377570

16.2  Hidden Actions: Markets with Moral Hazards

1) ________ refers to actions that one party in a transaction takes based on his private information which affects the payoff to the other party.

A) Negative externalities

B) Moral hazard

C) Positive externalities

D) Bargaining

2) The basic idea behind moral hazard is that ________.

A) some economic transactions impose an additional cost on the society

B) some economic transactions give rise to additional benefit to the society

C) people tend to take more risks if they do not have to bear the costs of their behavior

D) people do not reveal their true preference for goods which are non-excludable in consumption

3) Which of the following is likely to arise in a market with asymmetric information?

A) Moral hazard

B) A pecuniary externality

C) A positive externality

D) A prisoners’ dilemma

4) Joseph starts driving with much less care after buying car insurance. His behavior is an example of ________.

A) moral hazard

B) a domino effect

C) adverse selection

D) herd behavior

5) Martha used to pay for her expenses with her own hard-earned money. She always tried to spend as little as she could. However, she started spending more when she received a scholarship. This behavior is an example of ________.

A) moral hazard

B) a pecuniary externality

C) the free-rider problem

D) the paradox of thrift

6) Sometimes banks tend to invest in risky stocks since the deposits of their customers are insured by the Federal Deposit Insurance Committee. This behavior is an example of ________.

A) adverse selection

B) moral hazard

C) the paradox of thrift

D) the free-rider problem

7) Mark works as a business development officer for a leading electronics company. His main task is to meet potential clients in their respective offices and try to enter into a business deal with them. Irrespective of the number of clients approached and deals made, Mark earns a fixed salary every month. Since his boss does not cross-check how many clients he meets in a day, Mark often does not meet all the clients that he is supposed to. His behavior is an example of ________.

A) adverse selection

B) moral hazard

C) a positive externality

D) a pecuniary externality

8) Linda noticed that ever since her brother bought theft insurance for his car, he keeps forgetting to lock his car. Her brother’s behavior is an example of ________.

A) adverse selection

B) moral hazard

C) a positive externality

D) a pecuniary externality

9) More people started building houses in earthquake-prone regions when the government of Polonia launched an insurance program for houses in this region. This is an example of ________.

A) adverse selection

B) a positive externality

C) moral hazard

D) herd behavior

10) State provision of free healthcare may encourage individuals to engage in unhealthy behavior, such as excessive smoking or consumption of alcohol. This is an example of ________.

A) moral hazard

B) a positive externality

C) adverse selection

D) anchoring