QUESTION 1 Which of the following is an example of moral hazard? Reckless driver

Question

QUESTION 1

Which of the following is an example of moral hazard?

Reckless drivers are the ones most likely to buy automobile insurance

Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas

Drivers who have many accidents prefer to buy cars with air bags

Employees recently covered by the company health plan start going to the doctor every time they get a cold

4 points   

QUESTION 2

Which of the following is true?

Moral hazard is primarily an issue prior to a transaction.

Adverse selection is primarily an issue after a transaction.

Moral hazard is the result of an information asymmetry.

Resolving adverse selection also resolves moral hazard.

4 points   

QUESTION 3

Principal-agent relationships

Reduce monitoring costs.

Occur because managers have good information about employees.

Are not related to asymmetric information.

Are subject to moral hazard problems.

4 points   

QUESTION 4

If you were a manager of a cost center, which of the following areas would be of most interest to you?

Capturing potential economies of scale.

Increasing the quality of your product.

Hiring more marketing staff to figure out how to increase prices.

Adding additional features to your product.

4 points   

QUESTION 5

All of the following provide a motive for vertical agreements EXCEPT:

Effective execution of price discrimination.

Elimination of free-riding among retailers.

Quality control.

Diversification.

Reckless drivers are the ones most likely to buy automobile insurance

Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas

Drivers who have many accidents prefer to buy cars with air bags

Employees recently covered by the company health plan start going to the doctor every time they get a cold

Explanation / Answer

Ans. 1. Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas

Ans 2. Adverse selection is primarily an issue after a transaction.

Ans 3. Reduce monitoring costs.

Ans 4. Capturing potential economies of scale.

Ans 5. Elimination of free-riding among retailers.

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