Question

A principal-agent problem can arise when

an insurance agent sells a policy to a buyer who uses it as an incentive to behave badly.
a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agent's actions.
an agent hires a principal to do something on their behalf, and the agent can observe the principal's actions.
a principal uses an agent to accomplish a task the principal wants credit for completing.

Which of the following is NOT a solution to adverse selection when buyers have private information?
Sellers can use information that is related to buyers' likely costs.
The government can increase information, offer subsidies, enforce mandates, or provide insurance.
Sellers can offer different contracts so that buyers separate themselves.
The penalty for being a high-cost customer is reduced.

When quality is not observable by buyers, it is difficult for buyers to purchase
because of their overconfidence.
high-quality products.
because they have an advantage over sellers.
at a low price.

If sellers charge only one price in a market where buyers have private information, then sellers
will flourish as much as possible.
end up with a mix of customers skewed toward expensive customers.
end up with a mix of customers skewed toward less expensive customers.
can avoid adverse selection.

Which of the following is NOT a solution to a moral hazard problem?
Government rules and social norms can help align incentives.
Give the principal stronger incentives.
Make hidden actions observable by monitoring.
Pick the right kind of agents.

Answer 1

Answer 1.

a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agent's actions.

Reason- principal hires agent to take action on thier behalf, since principal cannot perfectly observe the behaviour of agent, agent takes the action in self interest.

Answer 2.

The penalty for being a high-cost customer is reduced.

Reason-If the buyer has private information that the seller doesn't have, buyer have additional advantage in the market. To solve the problem, government can provide incentives and subsidies, swllers can use information that they have.

Answer 3.high-quality products.

Reason- When buyer doesn't have complete information, they find it difficult to buy high quality products.

Answer 4. end up with a mix of customers skewed toward expensive customers

Reason- If sellers charge only one price in markets where buyers have addional information is that sellers will end up with more expensive customers.

Answer 5. Give the principal stronger incentives.

Reason- moral hazard in case of principal agent will harm principal more as they don't know what the agent is doing.