Suppose an Employer and Its Employees Enter into a Wage

question 90

Multiple Choice

Suppose an employer and its employees enter into a wage contract specifying a wage increase of 2 percent. But suppose that the price level rises by 3 percent over the course of the contract. In this case,

• A)the employer will experience a greater fall in purchasing power than would have occurred if the price level had held steady.
• B)both employer and employees will benefit from increased purchasing power.
• C)the employees' purchasing power will fall.
• D)both employer and employees will experience a loss of purchasing power.
• E)the employees' purchasing power will rise.

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Definitions:

Employer-provided Health Insurance

Health insurance coverage offered to employees (and often their dependents) as part of an employment benefits package.

Self-insure

The practice of setting aside funds to cover potential losses rather than purchasing insurance from a third party.

Wellness Program

A coordinated and comprehensive set of health promotion and protection strategies implemented at the workplace, aimed at improving employee health.

Moral Hazard

Post-contractual increases in risky or negative behavior. Examples are reduced incentive to exercise care once you purchase insurance and reduced incentives to work hard once you have been hired. Moral hazard is similar to adverse selection in that it is caused by information asymmetry; it differs in that it is caused by hidden actions rather than hidden types.