Asymmetric information: adverse selection and moral hazard. - One Line Questions

1. Screening refers to: — A party with inferior information taking steps to uncover the hidden characteristics of the other party.
2. Moral hazard occurs when: — A party's actions are unobservable and the party has an incentive to act in a way that harms the other party.
3. Which of the following is an example of moral hazard? — A car owner driving less carefully after purchasing comprehensive insurance.
4. What is the 'principal-agent problem'? — A situation where a principal cannot observe the actions of an agent, leading to potential conflicts of interest.
5. Which economic issue arises after a transaction due to asymmetric information? — Moral hazard
6. In the context of employment contracts, if an employee has incentives to exert less effort because their effort is difficult to monitor, this is an example of: — Moral hazard
7. When a government agency provides subsidies for a product, and consumers, feeling less financial burden, tend to consume more of it, this can be a form of: — Moral hazard
8. The concept of 'hidden action' is most closely associated with which type of information asymmetry problem? — Moral hazard
9. The concept of 'hidden characteristics' is most closely associated with which type of information asymmetry problem? — Adverse selection
10. In the context of lending, if a borrower promises to use the loan for a safe investment but secretly plans a riskier one, this is an instance of: — Moral hazard
11. In the context of employee effort, if an employer cannot perfectly monitor how hard an employee is working, the employer faces a problem of: — Moral hazard
12. A situation where a person's insurance coverage leads them to engage in riskier behavior is a classic example of: — Moral hazard
13. In the principal-agent framework, the agent's desire to pursue their own interests, potentially at the principal's expense, is known as: — Opportunism
14. Deductibles in insurance contracts primarily aim to address: — Moral hazard by making the insured party bear some of the cost.
15. Which of the following is an example of signaling in the job market? — An employee obtaining a university degree.
16. Which of the following is an example of screening in the insurance market? — An insurance company offering different policies based on health status.
17. Moral hazard in the credit market refers to: — Borrowers using loan proceeds for riskier ventures than initially agreed upon.
18. What is the primary challenge posed by adverse selection in financial markets? — Lenders might not be able to assess the true riskiness of borrowers before lending.
19. In a credit market, adverse selection occurs when: — Borrowers who are likely to default are more likely to seek loans.
20. What is the core concept of asymmetric information in economics? — One party in a transaction has more or better information than the other.
21. The 'lemons problem' suggests that in markets with asymmetric information about quality: — Sellers of high-quality products may be unable to get a fair price.
22. In the labor market, moral hazard can manifest as: — Employees exerting less effort than promised because their effort is hard to observe.
23. What is the 'lemons' problem in Akerlof's model? — Low-quality goods driving out high-quality goods.
24. Co-payments in health insurance are designed to: — Mitigate moral hazard by making patients more cost-conscious.
25. Which of the following is a potential consequence of severe moral hazard in a market? — Market collapse or a significant reduction in the quality of goods/services traded.
26. Why might a perfectly competitive market fail to emerge in a market characterized by significant asymmetric information? — Adverse selection can lead to market collapse or reduced quality.
27. Which of the following is a common solution for adverse selection in markets with differentiated products? — Providing warranties and guarantees
28. In the context of insurance, adverse selection leads to: — Insurers attracting a disproportionate number of high-risk individuals.
29. The existence of 'hidden action' and 'hidden information' in economic transactions implies that: — Contracts and institutions may be necessary to align incentives.
30. Which of the following can help lenders mitigate adverse selection? — Requiring collateral or down payments.
31. Which economic problem arises before a transaction occurs due to asymmetric information? — Adverse selection
32. A situation where a seller knows a product is defective but does not disclose it to the buyer is an example of: — Adverse selection
33. If a company hires employees and then finds out they are less productive than their resumes suggested, this is primarily a problem of: — Adverse selection
34. Reputation mechanisms, such as credit ratings or customer reviews, primarily address: — Adverse selection by revealing hidden information.
35. George Akerlof's seminal paper 'The Market for Lemons' illustrates which economic concept? — Adverse selection in the used car market
36. Adverse selection is a problem that occurs when: — Individuals with higher risks are more likely to seek insurance.
37. Consider a market for used cars. If buyers cannot easily distinguish between good cars ('cherries') and bad cars ('lemons'), what is the likely outcome according to Akerlof? — The market will be dominated by 'lemons', and 'cherries' may disappear.
38. Which tool is LEAST likely to be used to combat moral hazard? — Screening mechanisms
39. Which of the following is a mechanism to mitigate adverse selection? — Screening and signaling
40. Which of the following is a mechanism to mitigate moral hazard? — Monitoring and incentives (e.g., deductibles, co-payments, performance contracts)
41. If employers offer higher salaries to employees with advanced degrees, this is an example of: — Signaling by employees
42. Which of the following can help lenders mitigate moral hazard? — Monitoring the borrower's activities and enforcing loan covenants.
43. Which tool is LEAST likely to be used to combat adverse selection? — Monitoring of post-contractual behavior
44. The use of credit scores by lenders is a form of: — Screening by lenders
45. In a principal-agent relationship, moral hazard is a concern because: — The agent may shirk responsibilities or take excessive risks because their actions are not fully monitored.
46. Signaling is a strategy employed by: — The party with more information to reveal their hidden characteristics.
47. A buyer is more likely to be cautious about the quality of a product when: — The seller has more information about the product's quality.
48. Which of the following best describes the role of warranties in mitigating adverse selection? — They signal the seller's confidence in the product's quality.
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