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Homework answers / question archive / University of South Asia, Lahore - Campus 2 - ACCOUNTING FINANCIAL 1)A bank can decrease the degree of moral hazard if it     a

University of South Asia, Lahore - Campus 2 - ACCOUNTING FINANCIAL 1)A bank can decrease the degree of moral hazard if it     a

Accounting

University of South Asia, Lahore - Campus 2 - ACCOUNTING FINANCIAL

1)A bank can decrease the degree of moral hazard if it

    a. Monitors the borrowers behaviors

    b. Placing covenants on the loan

    c. Both of the above

    d. None of the above

 

QUESTION 2

A commission-paid shoe salesman must decide whether to work hard or shirk. Working hard would increase the probability of a sale from 20% to 40% but would cost him $20. If the salesman is paid a $40 commission per sale and a $20 fixed salary and is under monitoring where he would get fired if he doesn’t work hard, what would he choose to do?

    a. Work hard

    b. Shirk

    c. Walk away from the job

    d. None of the above

 

QUESTION 3

A firm hiring only MBAs, regardless of the self-professed skill set is an example of

    a. Screening mechanism

 

    b. Signaling mechanism

    c. Way to waste money

    d. None of the above

 

 

QUESTION 4

A shoe salesman working on commission must decide whether to work hard or shirk. Working hard would increase the probability of a sale from 20% to 70% but

 

the effort would cost him $5. If the typical commission on a pair of shoes was $8, would he decide to work hard?

    a. Yes because it is higher than what it costs him in effort

    b. Yes because it is higher than zero

    c. No, because it costs him more in effort

    d. None of the above

 

QUESTION 5

Adverse selection in insurance implies that

    a. insurers cannot tell the risk levels that different individuals face

    b. people are not risk averse

    c. all people face the same risk

    d. potential customers facing more risk are no more interested in purchasing insurance

 

QUESTION 6

An auto-insurance company introduces an anti-theft device that records how well the customer has secured his car. If the driver locks his car with the monitored lock every day, the rates go down. The company is trying to solve a      problem

    a. Adverse selection

    b. Moral hazard

    c. Forced bankruptcy

    d. None of the above

 

 

 

 

QUESTION 7

An example of moral hazard is

    a. an author on contract going to as many book signings as one with a percentage royalty rate

    b a piece-rate garment worker shirking more than a per hour worker

.

    c. A taxi driver paid per mile taking the shortest route

    d an hourly salesman working less hard than a commission salesman

.

 

QUESTION 8

An indication that Insurance companies anticipate adverse selection is

    a. they classify clients into different risk types according to pre-existing conditions

    b. they do not require a deductible

    c. they do not require a co-payment

    d. they do not classify clients into different risk types according to their claim history

 

QUESTION 9

Economists disagree with constant government bailouts of large, struggling companies because it can give a rise to

    a. Moral hazard

    b. Adverse selection

    c. Lazy managers

    d. None of the above

 

QUESTION 10

For a screen to be successful,

    a. High risk individuals must not be able to pose as low risk individuals

    b It must not be profitable for high risk individuals to pose as low risk individuals

.

c. High risk individuals should be able to pose as low risk individuals   

  d None of the above

.

 

QUESTION 11

In the market for insurance, low risk customers are not served because

  1. They do not like buying insurance    
  2.  b They are more costly to serve

.

c. Products designed to be attractive to them are also attractive to high risk types.

    d All of the above

.

 

QUESTION 12

Lara will agree to a second date with Tom only if, on their first date, Tom is well mannered and well dressed. Lara is using a

    a. Screening mechanism

 

    b. Signaling mechanism

    c. All of the above

 

 

QUESTION 13

 

 

 

Lazy Lucy’s parents decided that they would only pay her tuition if she passes all her classes. They would stop paying her tuition if she procrastinates and fails her courses. Lucy’s parent’s decision is a solution to a      problem.

    a. Adverse selection

    b. Moral hazard

    c. Forced bankruptcy

    d. None of the above

 

QUESTION 14

Lindsey’s auto-insurance company issued her a policy that required the installation of a devise that monitors her driving habits. Lindsey is confused because she had never gotten into an accident before she bought the insurance. The insurance company is protecting itself against

    a. Adverse selection

    b. Moral hazard

    c. Bad drivers

    d. None of the above

 

QUESTION 15

Moral hazard is caused by

    a. Hidden actions

    b. Hidden information

    c. Both of the above

    d. None of the above

 

QUESTION 16

Potential buyers of older homes form their bids from imperfect estimates of a house’s value As a consequence,

    a. Higher quality houses are more likely to be up for sale

    b Both the higher and lower value houses would be offered for sale

.

c. Lower quality houses are more likely to be up for sale

    d No houses would be offered for sale

.

 

QUESTION 17

Sam, after taking a $200 loan from the bank to finance an investment that pays $1000 50% of the time and $0 50% of the time at a 100% interest, discovers another riskier investment that pays out $5,000 but only 10% of the time, while the other 90% of the time it pays zero. Would the he want to switch to the riskier investment?

    a. Yes because his return has increased

    b. No because his liability to the bank has increased

    c. No because his return has decreased

    d. None of the above

 

QUESTION 18

Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a

 

 

               secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over                    expected loss for insurance.

 

How much would Nadia be willing to pay for the insurance? ?10000*0.1?+100

  

 a. $1100

                                   b. $1000

                                   c. $1200

    d. $900

 

QUESTION 19

Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over expected loss for insurance.

 

How much would Samantha be willing to pay for the insurance?    

 a. $1100

    b. $1000

    c. $2500

    d. $2600

 

QUESTION 20

Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over expected loss for insurance.

 

Suppose the insurance company cannot tell them apart but expects them to be different values and charges them an average premium of $1850. How much profit would it make? 2500- 1850=650

    a. $1850

    b. They would make a loss of $650

    c. Zero-they would break even

    d. They would make a loss of $1100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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