Luxury Cars Inc. knows that its customers like to race, so it offers an advanced driver's education training program to improve driver's skills. Drivers who take this course pay $200 and if they race, there is no racing fee, only a $2,000 cost if the driver actually has an accident to cover Luxury Car Inc's deductible. Marty figures if he takes this course, his chances of beating Biff in his Mom's car rise to 99% and his chances of an accident fall to 0.001.

But there's still a problem. If his Mom catches him racing, he'll still be grounded for a month, which is worse than not standing up to Biff. So, he discusses his problem with his Mom. Mrs. McFly is willing to loan her son her own car if he'll take the driver's ed course, cover Luxury Car Inc.'s accident fee, and take the family out to a $100 steak dinner following a win.

Question 10 2 Points What is Marty's payoff now?

$279

$379

$479

$579

$679

Question 11 2 Points What should Marty do now?

Marty races Biff with his mom's car, takes the driver's ed course and with 99% probability enjoys a steak dinner with his family

Marty races using his Mom's car but privately skips the driver's ed

Marty races using his Dad's car

Marty doesn't race Biff and is humiliated

Question 12 2 Points In addressing the moral hazard problem (where Marty wanted to secretly use his Mom's car), the deal that Marty makes with his Mom, and taking her to dinner, is an example of (choose best answer):

Monitoring bad behavior

Restricting action sets

Providing an incentive contract to improve effort

Changing ownership in outcomes to align goals

Question 13 2 Points Suppose that Mrs. McFly really wants her son to win and so makes him an offer that if he wins by more than a car-length (with no accidents), then she will take the family out for dinner and Marty won't need to pay. This is an example of (choose best answer):

Monitoring bad behavior

Restricting action sets

Providing an incentive contract to improve effort

Bonding to align goals

Changing ownership in outcomes to align goals