BE 301 EXAM 3 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2025/2026
adverse selection - Answers when one party in a transaction has more or better information
than the other
low-quality employees - Answers have more incentive to accept an offer of employment ( they
might not get another), which exacerbates the problem of adverse selection
risk-neutral consumer - Answers values a lottery at its expected value
risk-averse consumer - Answers values a lottery at less than its expected value
insurance moves risk from the ____ consumer to a ________ company - Answers risk averse
(lower value) ; risk neutral )(higher value)
when does adverse selection become a problem in financial markets - Answers when the
owners of a company want to sell shares to the public but know more about the actual
prospects of the company than potential investors
potential investors should - Answers anticipate that companies with poor prospects are most
likely to sell to the public to raise capital
simple solution to adverse selection - Answers to gather enough information to distinguish high-
risk from low-risk consumers
privacy and anti-discrimination laws - Answers frequently prevent insurance agencies, and other
companies, from gathering or using certain information
screening - Answers an effort by the less-informed party to induce consumers to reveal their
types
where is screening frequently used - Answers the insurance market
how can screening be useful - Answers to identify high from low quality employees
asymmetric information - Answers only the workers know if they're hard or lazy working
signaling - Answers the fforts of the more informed party (consumers) to reveal information
about themselves to the less informed party (insurance company). a successful signal is one
that bad types won't mimic
crucial element of a successful signal - Answers it must not be profitable for the bad types to
mimic the signaling behavior of the good types
moral hazard - Answers Arises when people behave recklessly because they know they will be
saved if things go wrong
moral hazard can also represent.... - Answers unconsummated wealth-creating transaction
, benefits of taking care _ costs of taking care - Answers >
how to distinguish between moral hazard and adverse selection - Answers ask whether
information or action is hidden. and when the problem arises (before or after a transaction_
if information is hidden... - Answers adverse selection
if the action is hidden - Answers moral hazard
the problem arises before a transaction - Answers adverse selection
the problem arises after a transaction - Answers moral hazard
shirking - Answers avoiding work
if firms anticipate moral hazard, they will be.... - Answers less willing to transact or put a lower
value on the transaction
banks face a moral hazard in loans - Answers borrowers who are least likely to repay loans are
the most likely to apply for them
if the bank anticipate moral hazard for a loan - Answers they will be less willing to lend or they
will demand a higher interest rate
to control when borrowers take bigger risks with others people money lenders must - Answers
find ways to align the incentive of the borrowers with the goals of the lenders
regulators try to reduce the costs of moral hazard by - Answers requiring banks to keep about
10% of their exuity in case depositors want their money back
bailing out homeowners - Answers helps irresponsible homeowners who made risky
investments that they couldn't afford and hurts the responsible borrowers
procure input choices - Answers spot exchange, contract, internal production
spot exchange - Answers the buyer and seller meet, exchange, and then go their seperate ways
contract procurement - Answers create an extended relationship and specify the terms under
which the exchange will take place over a given timeframe
internal production ( vertical integration) procurement - Answers shun outside suppliers, and
eliminates the reliance on outsiders for cruicial inputs
transaction costs - Answers costs in excess of the actual amount paid to the supplier
specialized investments - Answers those that are hard to recover in another trading relationship.
they tie the parties together and result in a "relation-specific exchange"
adverse selection - Answers when one party in a transaction has more or better information
than the other
low-quality employees - Answers have more incentive to accept an offer of employment ( they
might not get another), which exacerbates the problem of adverse selection
risk-neutral consumer - Answers values a lottery at its expected value
risk-averse consumer - Answers values a lottery at less than its expected value
insurance moves risk from the ____ consumer to a ________ company - Answers risk averse
(lower value) ; risk neutral )(higher value)
when does adverse selection become a problem in financial markets - Answers when the
owners of a company want to sell shares to the public but know more about the actual
prospects of the company than potential investors
potential investors should - Answers anticipate that companies with poor prospects are most
likely to sell to the public to raise capital
simple solution to adverse selection - Answers to gather enough information to distinguish high-
risk from low-risk consumers
privacy and anti-discrimination laws - Answers frequently prevent insurance agencies, and other
companies, from gathering or using certain information
screening - Answers an effort by the less-informed party to induce consumers to reveal their
types
where is screening frequently used - Answers the insurance market
how can screening be useful - Answers to identify high from low quality employees
asymmetric information - Answers only the workers know if they're hard or lazy working
signaling - Answers the fforts of the more informed party (consumers) to reveal information
about themselves to the less informed party (insurance company). a successful signal is one
that bad types won't mimic
crucial element of a successful signal - Answers it must not be profitable for the bad types to
mimic the signaling behavior of the good types
moral hazard - Answers Arises when people behave recklessly because they know they will be
saved if things go wrong
moral hazard can also represent.... - Answers unconsummated wealth-creating transaction
, benefits of taking care _ costs of taking care - Answers >
how to distinguish between moral hazard and adverse selection - Answers ask whether
information or action is hidden. and when the problem arises (before or after a transaction_
if information is hidden... - Answers adverse selection
if the action is hidden - Answers moral hazard
the problem arises before a transaction - Answers adverse selection
the problem arises after a transaction - Answers moral hazard
shirking - Answers avoiding work
if firms anticipate moral hazard, they will be.... - Answers less willing to transact or put a lower
value on the transaction
banks face a moral hazard in loans - Answers borrowers who are least likely to repay loans are
the most likely to apply for them
if the bank anticipate moral hazard for a loan - Answers they will be less willing to lend or they
will demand a higher interest rate
to control when borrowers take bigger risks with others people money lenders must - Answers
find ways to align the incentive of the borrowers with the goals of the lenders
regulators try to reduce the costs of moral hazard by - Answers requiring banks to keep about
10% of their exuity in case depositors want their money back
bailing out homeowners - Answers helps irresponsible homeowners who made risky
investments that they couldn't afford and hurts the responsible borrowers
procure input choices - Answers spot exchange, contract, internal production
spot exchange - Answers the buyer and seller meet, exchange, and then go their seperate ways
contract procurement - Answers create an extended relationship and specify the terms under
which the exchange will take place over a given timeframe
internal production ( vertical integration) procurement - Answers shun outside suppliers, and
eliminates the reliance on outsiders for cruicial inputs
transaction costs - Answers costs in excess of the actual amount paid to the supplier
specialized investments - Answers those that are hard to recover in another trading relationship.
they tie the parties together and result in a "relation-specific exchange"
