A colleague tells you that he can get a business loan from the bank, but the rate seems very high for what your colleague considers a low-risk loan. Use the following table to classify each explanation for the high rate as an instance of either adverse selection or moral hazard. Explanation for High Rate The bank cannot determine which borrowers are likely to pay back the loan and which are likely to default. The bank believes your friend, if given access to financing at low rates, would use the money frivolously. Adverse Selection Your advice is more likely to solve the problem of Moral Hazard You advise your friend to sign a contract that restricts certain types of risky investments that he can undertake with the funds from the loan.

A colleague tells you that he can get a business loan from the bank, but the rate seems very high for what your colleague considers a low-risk loan. Use the following table to classify each explanation for the high rate as an instance of either adverse selection or moral hazard. Explanation for High Rate The bank cannot determine which borrowers are likely to pay back the loan and which are likely to default. The bank believes your friend, if given access to financing at low rates, would use the money frivolously. Adverse Selection Your advice is more likely to solve the problem of Moral Hazard You advise your friend to sign a contract that restricts certain types of risky investments that he can undertake with the funds from the loan.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Don’t do question 9, just look at the info and chart on question 9 and apply it to question 10 in the next image.
Define the term Expenses?
IMF loan condition and challenges in Bangladesh. Please write this at least 1500 word. Must write this in 1500 word please and also provide the references
You can earn 10% a year on your savings. Your dad offers you a Holiday Gift of $1000 this year, $2000 next Holiday, $3000 Holiday 2021. If instead he offered you $6,000 Holiday 2020 (next year). Which should you pick, the single payment or the 3 payments. SHOW YOUR WORK Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
What is the AVC and MC?
Exercise: 01 Issue a promissory note: ⑴Amount ￡3,026.00 ⑵Date and place of issue 8/August/2009，Guangzhou, China ⑶Tenor At 90 days after date ⑷Maker Guangdong Imp. & Exp. Co., Guangzhou ⑸Payee Chemicals Import & Export Company London ⑴Drawer Thames Enterprises Ltd., London ⑵Drawee The National Westminster Bank Ltd., London ⑶Payee Philips Hong Kong ⑷Date and place of issue 07/01/2001，London ⑸Amount GBP79,014 Exercise: 02 Issue a check:
can you do part b, c, d and e i can hse 4 questions for it