1. Which of the following is NOT a benefit of an incentive compatible contract?

a. Car drivers may get a lower insurance premium because of a larger deductible.

b. The Principal can spend less monitoring and share some of this savings with the Agent.

c. Some borrowers may be able to get loan only because the contract reassures the lender of repayment.

d. Fewer transactions between Principals and Agents will take place.

5. Which of the follow describes the basic problem of Adverse Selection?

a. It occurs "before the transaction," and is due to a change in behavior of the agent.

b. It occurs "after the transaction," and is due to a change in behavior of the agent.

c. It occurs "before the transaction," and is due to inherent unchanging characteristics of the agent.

d. It occurs "after the transaction," and is due to inherent unchanging characteristics of the agent.

8. George Akerloff focused the market for used cars and discussed an issue later generally called the "lemons problem." A "lemon" is a low quality used car, with the seller but not the potential buyer aware of this. Since sellers have more information about the quality of the car:

a. adverse selection causes an inefficiently large number of transactions to occur.

b. moral hazard causes an inefficiently large number of transactions to occur.

c. moral hazard causes an inefficiently small number of transactions to occur.

d. adverse selection causes an inefficiently small number of transactions to occur.

10. In order for a kickback to take place:

a. Rich people must have more political power than poor.

b. Government officials must be corrupt (but those in private business may be honest).

c. Someone must have the authority & responsibility to decide how to spend money of others.

d. Those in private business must be corrupt (but government officials may be honest).