How does private information create adverse selection and moral hazard?
What will be an ideal response?
Both moral hazard and adverse selection are the result of private information. Moral hazard occurs when, after an agreement has been reached, one of the parties to the agreement has the incentive to gain additional benefits at the expense of the other party. Adverse selection refers to people who accept certain contracts and have private information that allows them to benefit from the contract while harming the other party. Both moral hazard and adverse selection can affect negatively the way in which markets function.
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If advertising makes demand of a product less elastic, it makes sense for a firm to
a. Decrease the price of the product b. Increase the price of the product c. Leave the price unchanged d. None of the above
The market for used cars is not considered perfectly competitive because:
A. there is complete information. B. the buyers are not price takers. C. the good is standardized. D. there are always very low transaction costs.
A firm's rate of technical substitution is represented graphically by
a. the slope of the line connecting the origin with the relevant point on the isoquant. b. the negative of the slope of the line connecting the origin with the relevant point on the isoquant. c. the slope of the isoquant at the relevant point. d. the negative of the slope of the isoquant at the relevant point.
Refer to the information provided in Table 14.5 below to answer the question that follows. Table 14.5B's Strategy ?AdvertiseDon't Advertise??A's profit $200 millionA's profit $400 million?AdvertiseB's profit $200 millionB's profit $100 millionA's Strategy????Don'tA's profit $100 millionA's profit $150 million?AdvertiseB's profit $400 millionB's profit $150 millionRefer to Table 14.5. Firm A's dominant strategy is to not advertise.
Answer the following statement true (T) or false (F)