Multiple Choice Questions 1 Which of the following is an

Multiple Choice Questions 1 Which of the following is an

Multiple Choice Questions

1. Which of the following is an example of moral hazard?
a. Reckless drivers are the ones most likely to buy automobile insurance.
b. Retail stores located in high-crime areas tend to buy theft insurance more often than stores
located in low-crime areas.
c. Drivers who have many accidents prefer to buy cars with air bags.
d. Employees recently covered by the company health plan start going to the doctor every time
they get a cold.

2. In a bad economy, a CEO has a 4% chance of meeting earnings estimates at regular effort,
and a 5% at extraordinary effort.
Extraordinary effort costs the CEO $10,000 in extra effort. How a large of a bonus should the
CEO be paid for meeting estimates to encourage extraordinary effort?
a. $100,000
b. $200,000
c. $250,000
d. $1,000,000

3. A salesperson can put in regular effort (resulting in a 40% chance of sale) or high effort (60%
chance of sale). If high effort costs the salesperson $20 more than regular effort, how large of a
per-sale bonus is required to encourage high effort?
a. $12
b. $20
c. $33.33
d. $100

4. Which of the following is not an example of a process designed to combat moral hazard
problems?
a. Banks include restrictive covenants in loan agreements.
b. Universities have students complete evaluations of professor performance at the end of a
class.
c. Insurance companies require applicants to provide medical history information as part of the
application process.
d. Employers regularly monitor employee performance.

5. Which of the following is an example of moral hazard?

a. High-quality products being driven out of a market by low quality products.
b. A local charity raising insufficient funds because no one contributes, expecting that their
neighbors will.
c. A bakery defaults on its loan because of a new consumer fear of carbohydrates.
d. A corporation uses a business loan secured for one investment on another, higher-risk

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