1. ECO 550 Week 8 Quiz
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week-8-quiz/
Question 1
1. People’s abilities to bear risk increases with:
their abilities to understand the market.
their abilities to diversify their asset holdings.
their abilities to invest in risky assets over a large time period.
their abilities to judge the probability of outcomes.
Question 2
1. Which of the following actions can prevent migration of individuals from one health
insurance policy to another?
Lowering the opportunity costs of switching from one policy to another.
Fixing a uniform premium rate for all individuals under one type of policy.
Conducting an interview of the people before placing them under different policies.
Setting up a norm requiring all individuals to purchase the same coverage.
Question 3
1. In a principal/agent relationship, _____ can help to reduce the damage caused by a winner’s
curse, provided both the parties are well-informed.
signals
warranties
disclosure
renegotiation

2. Question 4
1. Which of following provisions in an insurance policy may be economically efficient if policy
holders can control small claims but not large ones?
Vigilance provision
Non-price exceptions
Co-payment provisions
Liquidated damages
Question 5
1. Which of the following is an example of a moral hazard?
A student committing suicide after failing in an examination.
A housekeeper leaving a house unlocked after insuring it against burglary.
An exporter delivering faulty products after receiving a certain fraction of the total payment.
A person deriving utility from a commodity without paying for it.
Question 6
1. Which of the following is a possible result of adverse selection?
Only lemons remain in the market for used cars.
A store manager shirks his responsibility because his supervisor is not present at all times.
A car mechanic does not bother to properly fix the customers' cars when his work cannot be
monitored.
Many people selling their houses at very low prices expecting prices to decline further.
Question 7
1. Which of the following practices of insurers deter moral hazard?
Setting a uniform premium structure.
Requiring people to purchase the same coverage.

3. Arranging for reinsurance to cut the risk of unexpectedly large claims.
Conducting security checks without notice and terminating the policy whenever required.
Question 8
1. Which of the following is an example of a non-price provision in an automobile insurance
contract that can reduce moral hazard?
A provision specifying that coverage is limited to 75 percent of the total damages caused by an
accident.
A provision that disallows medical claims by drunk drivers involved in accidents.
A provision that restricts accident compensation to claims over $1,000.
A provision requiring that the insured car carry certain safety devices like air bags.
Question 9
1. DTC contracts which prohibit buyers from inspecting diamonds in advance help to minimize:
the problem of moral hazard.
the cost of gathering duplicative information.
the problem of adverse selection.
the winner’s curse.
Question 10
1. Which of the following is an example of incomplete information?
A seller losing out on profits because the market price rises above the pre-contracted price.
An insurer refuses to bear the complete cost of a treatment.
An insured car driver driving carelessly on the highway.
A new household appliance starts malfunctioning after two weeks.
Question 11
1. An insured person’s incentive to behave in ways that raise the probability of a claim is known
as:

4. a moral hazard.
the lemons problem.
the problem of adverse selection.
the problem of advantageous selection.
Question 12
1. The effects of asymmetric information in the car market can be weakened by:
providing a warranty for the product.
purchasing business interruption insurance.
inserting a “buyer beware” clause in the agreement.
buying a “put” option.
Question 13
1. Which of the following risks will always be insured in a business?
Bad debts recorded in the company accounts
Vital inputs required for daily production
High-end technology based products
Inventory stocked up in the storehouses.
Question 14
1. ______ provisions in an insurance policy stipulate that it will pay only a certain percentage of
losses claimed by the insured.
Vigilance
Co-payment
Non-price exception
Deductible
Question 15

5. 1. If a purchase contract allows a buyer to accept less than a specified maximum "take" each
month, buying a _____ would allow the seller to resell the excess at a _____ price.
put option; profitable
put option; predictable
call option; predictable
call option; profitable
Question 16
2. Independent workers using specialized capital save the costs of contracting but risk:
generalization.
opportunism.
inefficiency.
over-utilization.
Question 17
2. A person acting as a supervisor as well as a residual claimant:
attempts to make value-maximizing investment decisions.
aims to maximize a firm’s sales.
facilitates maximum investment in capital goods.
reduces risk of opportunism.
Question 18
2. Which of the following is an example of an institutional investor?
A large pension fund
A person who buys stocks for his portfolio
A company that invests millions in a new product
A dealer who buys a painting expecting huge returns

6. Question 19
2. If the owners of different types of resources, which are combined to produce an output, agree
on organizational relationships that define their responsibilities toward one another they have
formed a _____.
group
company
distribution network
team
Question 20
2. Assets whose returns have a high positive correlation are considered:
highly risky compared with those whose returns have lower or negative correlations..
completely risk free.
less risky compared to those which have a low positive correlation.
partially risky.
Question 21
2. Directors can make opportunistic choices to advance their personal interest when:
they plan to sell off the corporation stocks at inflated prices.
they hold majority of the stocks in the corporation.
they are aware that the cost of forming a new board of directors is high.
their personal returns from the well being of the corporation is high.
Question 22
2. A sole proprietorship is characterized by:
separation of ownership and management.
mutual agency.

7. existence of multiple contracts.
unlimited liability.
Question 23
2. In a _____ the outsider buys the shares with debt collateralized by its other assets, and
sometimes also by the target’s assets.
merger
cash tender
proxy fight
leveraged buyout
Question 24
2. Creditors supply loans to sole proprietors at a high rate of interest because of:
their low profit expectancy from this business.
frequent experience of loan default.
their inability to call in their loans or sell them to others.
their general risk-averse nature.
Question 25
2. A _____ requires workers to comply with orders from a boss, who need not consult them
when making decisions, and to be paid for their cooperation.
residual claimant
hierarchy
shareholder
cooperative
Question 26
2. A _____ generally has less understanding of the firm than a manager and has little knowledge
that is likely to improve the quality of the manager’s choices.

8. specialized residual claimant
diversified residual claimant
diversified hierarchy
specialized hierarchy
Question 27
2. When a large shareholder or a group solicits vote for a slate of directors that it has proposed
as an alternative to candidates endorsed by the current board, a(n) _____ takes place.
acquisition
proxy fight
merger
leveraged buyout
Question 28
2. Which of the following is an advantage of having centralized ownership and responsibility for
capital goods?
It allows firms to avoid the depreciation cost of capital equipment.
It increases the capital per worker ratio.
It spreads the investment risk associated with acquisition of capital goods.
It resolves the problem of continuity.
Question 29
2. Which of the following could a corporation use to raise its initial operating capital?
Government loans with low interest rates
Mortgages from banks
Public offering of stock
Loans from the informal market at a high rate of interest

9. Question 30
2. A person who performs supervisory activities will also be a _____ if she/he is financially
responsible for investment and other contracted decisions.
residual claimant
director
shareholder
financial advisor