Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 22, Problem 1PA
Subpart (a):
To determine
Identifying principal and agent in the problem of moral hazard.
Subpart (b):
To determine
Identifying principal and agent in the problem of moral hazard.
Subpart (c):
To determine
Identifying principal and agent in the problem of moral hazard.
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George Akerloff focused the market for used cars and discussed an issue later generally called the "lemons problem." A "lemon" is a low quality used car, with the seller but not the potential buyer aware of this. Since sellers have more information about the quality of the car:
a. adverse selection causes an inefficiently large number of transactions to occur.
b. moral hazard causes an inefficiently large number of transactions to occur.
c. moral hazard causes an inefficiently small number of transactions to occur.
d. adverse selection causes an inefficiently small number of transactions to occur.
Don't use pen or paper
Private markets may underallocate resources to a good or service that is affected by the moral hazard problem because the sellers of the product will not be able to
Multiple Choice
A. tell which specific buyers may be affected by moral hazard.
B. know the degree to which moral hazard may lead any specific buyer to engage in costly behavior.
C. both A and B.
D. neither A nor B.
Chapter 22 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Someone indicated that employee’s absence from work despite meeting the eight hours per day requirement affect productivity and increase cost of business. If an employee makes up the hours by coming early and leaving late, how can you call it an example of moral hazard when the manager can easily correct this behavior? Please explain to the class.arrow_forwardPeople drive faster when they have auto insurance. This is an example of: a. Adverse selection. b. Asymmetric information. c. Moral hazard.arrow_forwardWhich of the following is an example of moral hazard in the medical industry? Choose the best answer: a. A surgeon wants the opportunity to perform for minor ailments b. Insurance companies and individuals do not openly share information c. Prices are not transparent or consistent among customers d. Those with significant health insurance coverage tend to overuse health servicesarrow_forward
- If people get higher pay from insurance than their premiums. Will this increase or decrease the death rate of average persons? Is this an example of moral hazard or adverse seletion? How will an insurance company deal with these problems?arrow_forwardgive an example of an existing economic interaction that exhibits moral hazard. describe the setting and talk about efficiency considerations.arrow_forwardBriefly explain what it means for information to be asymmetric. a. What is Moral Hazard? b. Identify and briefly explain three methods that insurance companies could use to off-set the moral hazard associated with their industry. c. What is Adverse Selection?arrow_forward
- Match the situation with its most appropriate label. Use each answer only once. ✓ Only sick people purchase health insurance ✓ I'm not as careful with my laptop computer because it is insured ✓ Company employees make personal phone calls during work hours. ✓ A self-employed stock broker rents office space in the most expensive building in the city. A. Adverse selection B. Signaling C. Principal-agent problem D. Moral hazardarrow_forwardThe text points out that asymmetric information can have deleterious effects on market outcomes. a. Explain how asymmetric information about a hidden action or a hidden characteristic can lead to moral hazard or adverse selection. b. Discuss a few tactics that managers can use to overcome these problems.arrow_forwardThe difference between moral hazard and adverse selection is a. moral hazard has to do with unobservable characteristics of individuals b. moral hazard has to do with unobservable actions of individuals c. adverse selection is when individuals change their behaviors because of a contract d. adverse selection is when you choose the wrong answer on a testarrow_forward
- The used car market can become a “lemon” market, where sellers of poor quality used cars will stay in the market, while sellers of good quality used cars will exit the market. Why is this happening? Is this adverse selection or moral hazard? Give an argumentarrow_forwardWhich of the following statements is correct? a. Adverse selection arises when one party to a transaction hides information from the other. b. Moral hazard arises when one party to a transaction hides actions/behavior to the other. c. Moral hazard leads to insured customers exercising less care than they would if they were not insured. d. All of the above.arrow_forwardSuppose an individual saves as precaution against adverse events, like unemployment. This is an example of a-adverse selection b-self-insurance c-adverse saving d-moral hazardarrow_forward
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