Question

1. Until they are on the job an employer might not know the quality of a salesperson they hire, and while on the job an employer may not be able to observe how much effort they put in. Suppose that paying commission to salespeople, rather than a salary, both attracts more talented salespeople and encourages any given salesperson to work harder. Then,

Group of answer choices

Paying commission reduces a moral hazard problem, but increases an adverse selection problem

Paying commission reduces both a moral hazard problem and an adverse selection problem.

Paying commission has no effect on any moral hazard or adverse selection problem

Paying commission reduces an adverse selection problem but increases a moral hazard problem

2. The difference between determining the efficient level of provision of a public good and a private good is:

Group of answer choices

In both cases we find the marginal social benefit by adding individual demand curves vertically, but with private goods the market does not take this into account

With a public good the marginal social benefit is the vertical sum of individual demand curves, with a private good is it the vertical sum

For public goods we must take into account both marginal social costs and marginal social benefits, while for private goods only costs matter

In both cases we find the marginal social benefit by adding individual demands horizontally, the difference is that the efficient level of public goods will not be provided because of the free rider problem

3. Suppose that it becomes possible to test for the chance of getting any kind of cancer through a very accurate test, and that due to privacy regulations individuals can know their own results but insurance companies cannot ask for them. The effect on the health insurance market would be:

To reduce the appeal of employer provided health insurance to individuals who find they have a high risk

To create a greater adverse selection problem, that may cause the market to unravel if it is severe enough

To create a greater moral hazard problem, that may cause the market to break down if it is severe enough

To increase the appeal of employer provided health insurance to individuals who find they have a low risk

Answer 1

1.

Paying commission reduces both a moral hazard problem and an adverse selection problem

Reason: Paying commission will help attract good quality salesperson as well as increase the effort they put in. This helps reduce problem of both adverse selection as well as moral hazard

2.

For public goods we must take into account both marginal social costs and marginal social benefits, while for private goods only costs matter

Reason: Public goods involve externalities and thus must take into account social costs and social benefits. Private goods take into account only private costs and benefits

3.

To create a greater adverse selection problem, that may cause the market to unravel if it is severe enough

Reason: This is because the patients will start buying health insurance, thereby increasing problem of adverse selection