If a salesperson is paid by the volume of sales he or she makes, then the moral hazard problem is diminished

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Moral Hazard problem – When a party engages in risky behavior because they are unlikely to suffer loss. It may also be described as the act of ‘not being careful’ or ‘performing duties responsibly’.

The lemons problem – This occurs when there is information asymmetry between two parties engaged in a contract whether a seller and a buyer.

Adverse selection – This occurs when a seller has information that the buyer does not have regarding product quality and risks involved as a result of a transaction.

If you know that every month you will receive the same salary despite the number of sales you make, it may not pressure you much to work hard and improve sales. On the other hand, if payment is based on a piece-rate system – based on an individual’s output, then you may tend to go beyond normal to get more sales.

A payment that is based on sales volume reduces moral hazard problem that would have occurred were the salesperson paid a fixed amount.


The effects of an excise tax are:

  • lower quantity traded, lower consumer surplus, and lower producer surplus

Non-rivalry and nonexcludability are the main characteristics of:

  • Public goods

A positive externality or spillover occurs when:

  • the benefits associated with a product exceed those accruing to people who consume it.

Which of the following statements is not true?

  • I Some public goods are paid for by private philanthropy.
  • II Private provision of public goods is usually unprofitable.
  • III The free-rider problem results from non-rivalry and nonexcludability
  • IV Public goods are only provided by government.
  • IV Public goods are only provided by the government.

Suppose that Susie creates a work of art and displays it in a public place. Economists would expect:

  • Those enjoying the are to “free ride” since they cannot be made to bear any cost.

Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it. This characteristic is called:

  • Nonexcludability

Which is an example of a negative externality?

  • I An increase in the value of land you own when a nearby development is completed
  • II The costs paid by a company to build an automated factory
  • III Decreased property values in a neighborhood where a disreputable nightclub is operating
  • IV The higher price you pay when you buy a heavily advertised product
  • III Decreased property values in a neighborhood where a disreputable nightclub is operating

Which of the following is true about externalities

  • Positive externalities result in markets producing too little and can be corrected using subsidies

Which of the following represents moral hazard?

  • A home-owner skipping the annual smoke detectors check while holding comprehensive fire insurance

The tragedy of the commons is type of market failure commonly associated with:

  • Goods that are non-excludable but losses rivalry

Which one of the following goods/services is excludable , but non-rival:

  • A movie

On financial markets characterized by asymmetric information, banks will only be able to loan money to individuals with poor credit at the prevailing interest rates. This problem is called:

  • Adverse selection

On many markets , manufacturers of high quality products offer warranties to consumers. This is an example of and it used to alleviate the problem of _________.

  • Signaling;Adverse Selection

Moral Hazard issues when

  • One party engages in risk-taking behavior ,without having to pay for the consequences, if things go badly.

Commission -basses wages, franchising ,performance -based bonuses , and other such mechanisms are

  • Examples of incentive , and are used to correct moral hazard problems.

Insurance markets other have to deal with and correct

  • Both adverse selection and moral hazard

A small business applies for and receives a back loan , based on very sound business plan . Once the business receives the loan , it’s manager decides however that can better use the money to speculate on the stock market .This results in large losses yang force the business owners to declare bankruptcy and the bank loses money as well. This is an awesome example of:

  • Moral Hazard

A common problem associated with public goods is:

  • the free rider problem

Among the following examples, the one that best illustrates a public good is:

  • the bike paths around a city or town

A cost that arises from the production or consumption that falls on someone other than the producer or consumer is called

  • negative externality

One way to overcome the tragedy of the commons is to

  • assign property rights so that someone owns the resource

According to the Coase Theorem, externality problems:

  • Can be solved without the need for government intervention, under certain conditions.

if Sally drives less carefully after buying auto insurance, she illustrates

  • moral hazard

An example of someone bearing the burden of a negative externality would be

Taylor living downwind from a smelly feedlot where pigs are raised

Pollution is an example of a ________ externality.

  • negative

If all education in the United States were provided by private, tuition-charging schools,

  • too little education would be consumed

In the health insurance market, moral hazard occurs when

  • insured people adopt an unhealthy lifestyle

Adverse selection can occur when

  • one party has information not available to the other party.

A common resource is

  • rival and non excludable

If a salesperson is paid by the volume of sales he or she makes, then the

  • moral hazard problem is diminished

Which of the following actions would most likely have an external benefit?

  • attending college

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