CHAPTER 22 - Chapter22 1 Moralhazard occurswhen a the...

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Chapter 22 Frontiers in Microeconomics 1. Moral hazard  occurs when a. the principal monitors an agent. b. two people might trade  with each other and  one person  has relevant  information  about  some  aspect of the product’s quality that the other person  lacks. c. an agent lacks an incentive to promote  the best interests of the principal, and  the principal  cannot observe the actions of the agent. d. an agent monitors the principal. ANSWER: c an agent lacks an incentive to promote  the best interests of the principal, and  the principal  cannot observe the actions of the agent. SECTION:  OBJECTIVE:  2. Carlos, who knew  nothing  about  construction, paid  Joe to remodel a room in his house. Two years  later, the wall of the new  room crumbled  because Joe used  poor-quality materials. This is an  example of a. adverse selection. b. screening. c. moral hazard. d. signaling. ANSWER: c moral hazard. SECTION:  OBJECTIVE:  3. Monitoring an agent means a. reducing asymmetric information  the agent possesses. b. obtaining information  about  the agent’s actions. c. increasing the costs of moral hazard. d. reducing the costs of adverse selection. ANSWER: b obtaining information  about  the agent’s actions. SECTION:  OBJECTIVE:  4. The fact that someone with a high risk of medical problems is more likely to buy a lot of health  insurance is an example of a. adverse selection. b. monitoring. c. moral hazard.  d. irrational behavior. ANSWER: a adverse selection. SECTION:  OBJECTIVE:  5. Adverse selection occurs when a. people are not as careful after they buy insurance. b. owners take better care of their homes than  do renters. c. good  cars are underpriced  in the used-car market. d. there is separation  of ownership  and  control. ANSWER: c good  cars are underpriced  in the used-car market. SECTION:  OBJECTIVE:  129
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130   Chapter 22/Frontiers in Microeconomics 6. What would  be the equilibrium  price of used  cars if 4/5  of them  were faulty and  worth  $1000  while 1/5  of them  were good  quality and  worth  $2000? a.
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CHAPTER 22 - Chapter22 1 Moralhazard occurswhen a the...

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