Question

Which of the following best illustrates moral hazard? a. A person holds stocks from only a...

  1. Which of the following best illustrates moral hazard?

a.

A person holds stocks from only a few corporations.

b.

A person holds stock only in very risky corporations.

c.

After a person obtains life insurance, she takes up skydiving.

d.

A person obtains insurance knowing he is in poor health.

2. A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

a.

$1,000/(1 + r) + $1,000/(1 + r)2

b.

$1,000 + $1,000/(1 + r)

c.

$1,000(1 + r) + $1,000(1 + r)2

d.

$2,000/(1 + r)2.

3. A person who is not employed and claims to be trying hard to find a job but really is not trying hard to find a job is

a.

correctly counted as out of the labor force.

b.

correctly counted as unemployed.

c.

counted as unemployed but should be counted as out of the labor force.

d.

counted as out of the labor force but should be counted as unemployed.

4.

  1. Suppose the demand for hard-wood flooring increases, while the demand for wall-to-wall carpeting decreases. Based on this change in consumer tastes, the demand for hard-wood-flooring factory workers in North Carolina increases, while the demand for carpet factory workers in Georgia decreases. This is an example of

a.

structural unemployment created by efficiency wages.

b.

structural unemployment created by sectoral shifts.

c.

frictional unemployment created by sectoral shifts.

d.

frictional unemployment created by efficiency wages.

Show me how to solve the problem.
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Homework Answers

Answer #1

Q1 .

The correct option is c i.e After a person obtains life insurance, she takes up skydiving

Moral hazard is when a person engages in risky activities after buying insurance knowing the adverse outcome of this activity will be borne by another party.

Q2

1000 today and 1000 after 1 year

The present value of a future payment is given by the formula

P = F/(1+r)^t

So present value P = 1000 + 1000/(1+r)

So option b is correct

Q3

Correct answer is option c, i.e.counted as unemployed but should be counted as out of the labor force.

A person who is not looking for a job is not considered in the labor force

Q4

Correct answer is option c, i.e. frictional unemployment created by sectoral shifts

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