12.5 Integrative Questions
1) Moral hazard typically occurs because
A) people are dishonest.
B) agreements sometimes create incentives that are costly to monitor so people can act in their self interest.
C) workers possess diminishing marginal productivity.
D) screening leads to informed people revealing their relevant private information.
E) workers possess adverse selection.
2) Moral hazard results from _____ information and adverse selection results from _____ information.
A) private; private
B) private; public
C) public; private
D) public; public
E) None of the above answers are correct because both are the result of the lemons problem.
3) If a salesperson is paid by the volume of sales he or she makes, then the
A) moral hazard problem is diminished.
B) lemons problem can be screened.
C) moral hazard problem is enhanced.
D) adverse selection problem is enhanced.
E) None of the above answers is correct.
4) Which of the following is an example of moral hazard?
A) I hire you to work in my garden for a fixed fee, and you work hard all day.
B) I hire you to work at an hourly rate and you work as slowly as possible.
C) You apply for the job only because I pay a fixed wage per day, no matter how much or little you do.
D) You agree to be paid by the weed to work in my garden, and then you work hard.
E) You agree to be paid by the weed to work in my garden, and then you don't work hard.
5) The lemons problem is caused by
A) health-care providers' incentive to order unnecessary tests..
B) used car buyers' inability to determine the quantity of used cars offered for sale.
C) auto insurance companies inability to adequately screen drivers.
D) the missing health care market.
E) government regulations than make some information private.
6) In the used car market, adverse selection creates the lemon problem when
A) sellers cannot judge buyers' creditworthiness.
B) buyers believe that sellers will offer only high-priced "good" used cars for sale..
C) buyers believe that sellers will sell only lemons.
D) sellers offer warranties on all used cars.
E) None of the above answers are correct because it is moral hazard that creates the lemon problem.
7) In the used car market, ________ is(are) a way of signaling.
A) high-deductibles
B) warranties
C) low interest rates
D) high prices for high-quality used cars
E) screening, using low prices for low quality used cars and high prices for high quality used cars,
8) ________ occurs when an informed person takes an action to send information to an uninformed person and ________ occurs when an uninformed person creates an incentive for an informed person to reveal private information.
A) Moral hazard; adverse selection
B) Adverse selection; moral hazard
C) Signaling; screening
D) Screening; signaling
E) Pooling; separating
9) Private information
A) can create adverse selection but plays no role in creating moral hazard.
B) explains why drivers screen auto insurance companies.
C) means that unless it is overcome, the equilibrium in the market will be a separating equilibrium.
D) plays a role in the markets for health-care insurance and auto insurance.
E) cannot explain why the U.S. expenditures on health care per person exceed those in other major nations.
10) Even if your college degree is irrelevant to an employer's needs, your high GPA might still get you the job because
A) the firm is not a profit maximizer.
B) your GPA screens some of your private information.
C) your GPA sends a signal about your quality as a worker.
D) the firm will most likely make an adverse selection.
E) the high GPA eliminates the possibility of moral hazard.
11) Which of the following can create inefficiency and deadweight loss?
A) Moral hazard can create inefficiency and deadweight loss but adverse selection cannot.
B) Adverse selection can create inefficiency and deadweight loss but moral hazard cannot.
C) Both moral hazard and adverse selection can create inefficiency and deadweight loss .
D) Neither moral hazard nor adverse selection can create inefficiency and deadweight loss .
E) None of the above answers are correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers.
