University of Texas, El Paso - ECON 3310

CHAPTER 20

1)The difference between moral hazard and adverse selection is

1. 1. moral hazard has to do with unobservable characteristics of individuals
   2. moral hazard has to do with unobservable actions of individuals
   3. adverse selection is when individuals change their behaviors because of a contract
   4. adverse selection is when you choose the wrong answer on a test

2. An example of moral hazard is
   1. workers shirking when the boss is not looking
   2. health care insured dieting and exercising
   3. drivers of safer cars turning their phones off before driving
   4. borrowers investing their loan proceeds exactly as the bank requires

3. An example of moral hazard is
   1. workers working diligently even though the boss is not looking
   2. health care insured forgoing their diet and exercise
   3. drivers of safer cars turning their phones off before driving
   4. borrowers investing their loan proceeds exactly as the bank requires

4. An example of moral hazard is
   1. workers working diligently even though the boss is not looking
   2. health care insured dieting and exercising
   3. drivers of safer cars texting on their phones while driving
   4. borrowers investing their loan proceeds exactly as the bank requires

5. An example of moral hazard is
   1. workers working diligently even though the boss is not looking
   2. health care insured dieting and exercising
   3. drivers of safer cars turning their phones off before driving
   4. borrowers investing their loan proceeds differently than the bank requires

6. US law was recently changed so that some airplane manufacturers are immune from liability from accidents involving their decades old aircraft. As a result
   1. accident rates fell due to less adverse selection
   2. accident rates fell due to less moral hazard
   3. accident rates rose due to less adverse selection
   4. accident rates rose due to less moral hazard

7. An example of moral hazard is
   1. people drive less carefully in icy conditions with antilock brakes as without
   2. people drive as safely with more airbags as without
   3. football players avoid 'spearing' with their heads even with safer helmets

1. 4. people read the medicine warnings as carefully when self-medicating versus with a doctor's prescription

8. An example of moral hazard is
   1. people drive as carefully in icy conditions with antilock brakes as without
   2. people drive less safely with more airbags as without
   3. football players avoid 'spearing' with their heads even with safer helmets
   4. people read the medicine warnings as carefully when self-medicating versus with a doctor's prescription

9. An example of moral hazard is
   1. people drive as carefully in icy conditions with antilock brakes as without
   2. people drive as safely with more airbags as without
   3. football players 'spear' with their heads when tackling more often with safer helmets
   4. people read the medicine warnings as carefully when self-medicating versus with a doctor's prescription

10. An example of moral hazard is
    1. people drive as carefully in icy conditions with antilock brakes as without
    2. people drive as safely with more airbags as without
    3. football players avoid 'spearing' with their heads even with safer helmets
    4. people fail to read the medicine warnings more often when self-medicating versus with a doctor's prescription

11. An example of moral hazard is
    1. A taxi driver paid per mile taking a longer route than necessary
    2. a piece-rate garment worker shirking more than a per jour worker
    3. an hourly salesman working harder than a commission salesman
    4. an author on contract going to as many book signings as one with a percentage royalty rate

12. An example of moral hazard is
    1. A taxi driver paid per mile taking the shortest route
    2. a piece-rate garment worker shirking less than a per jour worker
    3. an hourly salesman working harder than a commission salesman
    4. an author on contract going to as many book signings as one with a percentage royalty rate

13. An example of moral hazard is
    1. A taxi driver paid per mile taking the shortest route
    2. a piece-rate garment worker shirking more than a per jour worker
    3. an hourly salesman working less hard than a commission salesman
    4. an author on contract going to as many book signings as one with a percentage royalty

rate

14. An example of moral hazard is
    1. A taxi driver paid per mile taking the shortest route
    2. a piece-rate garment worker shirking more than a per jour worker
    3. an hourly salesman working harder than a commission salesman
    4. an author on contract going to fewer book signings as one with a percentage royalty rate

15. You offer an extended warranty for your product that is purchased by a few customers. If the product typically fails 2% of the time,
    1. you should price the warranty at less than 2% of the product price
    2. you should price the warranty at exactly 2% of the product price
    3. you should price the warranty at more than 2% of the product price
    4. Cannot tell from this information

16. You offer an extended warranty for your product that is purchased by a few customers. If the product typically fails 2% of the time, the claim rate will exceed 2% of warranty purchasers because
    1. adverse selection will lead those who are more reckless to purchase the warranty
    2. moral hazard will lead those who purchase to be more reckless
    3. you systematically underestimate product failure rates
    4. a) and b)

17. Progressive Insurance’s 'Tripsense' monitors driving patterns of the people who purchase the related insurance policy. This lowers insurance costs because
    1. only less reckless drivers will accept the device
    2. only more reckless drivers will accept the device
    3. drivers will believe they can now drive more recklessly
    4. it does not affect care in driving

18. Progressive Insurance’s 'Tripsense' monitors driving patterns of the people who purchase the related insurance policy. This lowers insurance costs because
    1. only more reckless drivers will accept the device
    2. drivers will want to drive more carefully now
    3. drivers will believe they can now drive more recklessly
    4. it does not affect care in driving

19. Because employer-provided health insurance was too expensive, a major employer decided to self-insure and simply pay for medical bills itself rather than a premium to an insurance company. As a result
    1. they are more likely to institute a wellness program for employees
    2. they are less likely to institute a wellness program for employees
    3. they are indifferent with regards wellness programs

1. 4. they will regret this decision

20. A difference between moral hazard and adverse selection is that
    1. moral hazard deals with pre-contractually determined public information
    2. moral hazard deals with post-contractually determined private information
    3. adverse selection deals with pre-contractually determined private information
    4. adverse selection deals with post-contractually determined public information

21. Which is NOT an example of moral hazard
    1. people eat less at all-you-can-eat buffets
    2. loggers clear-cut a tract of land rather than when paying per tree felled
    3. Drivers of heavier, safer cares are more likely to run stop signs
    4. workers on commission work harder than those paid an hourly wage

22. Which is NOT an example of moral hazard
    1. people eat more at all-you-can-eat buffets
    2. loggers select the most profitable trees to harvest even when they are not paying per tree felled
    3. Drivers of heavier, safer cares are more likely to run stop signs
    4. workers on commission work harder than those paid an hourly wage

23. Which is NOT an example of moral hazard
    1. people eat more at all-you-can-eat buffets
    2. loggers clear-cut a tract of land rather than when paying per tree felled
    3. Drivers of heavier, safer cares are less likely to run stop signs
    4. workers on commission work harder than those paid an hourly wage

24. Which is NOT an example of moral hazard
    1. people eat more at all-you-can-eat buffets
    2. loggers clear-cut a tract of land rather than when paying per tree felled
    3. Drivers of heavier, safer cares are more likely to run stop signs
    4. workers paid an hourly wage work harder than those on commission

25. To keep employees from shirking, you can invest in greater monitoring
    1. because monitoring is inexpensive
    2. especially when monitoring is not very efficient
    3. when employees respond well to incentive contracts
    4. when incentives solve both moral hazard and adverse selection problems with employees

26. To keep employees from shirking, you can invest in greater monitoring
    1. even though monitoring is expensive
    2. especially when monitoring is efficient

1. 3. when employees respond well to incentive contracts
   4. when incentives solve both moral hazard and adverse selection problems with employees

27. To keep employees from shirking, you can invest in greater monitoring
    1. even though monitoring is expensive
    2. especially when monitoring is not very efficient
    3. when employees fail to respond to incentive contracts
    4. when incentives solve both moral hazard and adverse selection problems with employees

28. To keep employees from shirking, you can invest in greater monitoring
    1. even though monitoring is expensive
    2. especially when monitoring is not very efficient
    3. when employees respond well to incentive contracts
    4. when incentives fail to solve either moral hazard and adverse selection problems with employees

29. The following is NOT an example of a potential monitoring solution to moral hazard
    1. a pre-hire typing test for clerical employees
    2. closed circuit TVs throughout a warehouse
    3. GPS tracking devices in repair trucks
    4. listening in on call center conversations

30. The following is NOT an example of a potential monitoring solution to moral hazard
    1. blocking social network sites on company computers
    2. termination for failing to show up to work during the probationary period
    3. GPS tracking devices in repair trucks
    4. listening in on call center conversations

31. The following is NOT an example of a potential monitoring solution to moral hazard
    1. blocking social network sites on company computers
    2. closed circuit TVs throughout a warehouse
    3. requiring a kitchen remodeling contractor to be 'bonded'
    4. listening in on call center conversations

32. The following is NOT an example of a potential monitoring solution to moral hazard
    1. blocking social network sites on company computers
    2. closed circuit TVs throughout a warehouse
    3. GPS tracking devices in repair trucks
    4. requiring physicians to be 'board certified'

33. Which is NOT an example of signaling high quality in a social setting
    1. wearing a business suit on a job interview

1. 2. scrimping on the tip for the waiter after a dinner date
   3. offering an expensive engagement ring to your bride
   4. Visiting the beauty salon before a big date