Two key consequences of asymmetric information are adverse selection and moral hazard. Define each concept, provide one example of each, and explain how the two concepts differ
What will be an ideal response?
Adverse selection is the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction. Moral hazard refers to the actions people take after they enter into a transaction that make the other party to the transaction worse off. An important difference between the two is that adverse selection refers to what happens at the time of entering into a transaction (for example, a reckless driver buys automobile insurance) while moral hazard refers to what happens after entering into the transaction (for example, the insured driver drives his car off a highway and into a tree).
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What are the policy actions taken by the Fed and the U.S. Treasury in response to the financial crisis?
What will be an ideal response?
To meet its obligations, the federal government must consider four alternatives: ________ income taxes ________ Social Security taxes ________ Social Security benefits ________ federal government discretionary spending
Fill in the blank(s) with the appropriate word(s).
A perfectly competitive firm shuts down if the price of its product is
A) greater than its minimum average variable cost. B) less than its minimum average variable cost. C) greater than its maximum variable cost. D) less than its minimum total cost.
A ______ chance of default will cause the interest rate to be ______.
A. more variable; lower B. less variable; higher C. higher; lower D. higher; higher