Explain why asymmetric information can lead to moral hazard and adverse selection, and identify strategies for mitigating these potential problems. Please explain more detail with the diagram.
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Q2. Explain why asymmetric information can lead to moral hazard and adverse
selection, and identify strategies for mitigating these potential problems. Please explain more detail with the diagram.
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- Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (for example, a seven-year warranty on all parts and labor associated with mechanical problems).a. In light of your knowledge of asymmetric information problems, why is this a reasonable policy? b. Is the policy likely to create a moral hazard problem? Explain.The text points out that asymmetric information can have deleterious effects on market outcomes. a. Explain how asymmetric information about a hidden action or a hidden characteristic can lead to moral hazard or adverse selection. b. Discuss a few tactics that managers can use to overcome these problems.Why can government safety nets create both an adverseselection problem and a moral hazard problem?
- 7) Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (for example, a seven -year warranty on all parts and labor associated with mechanical problems). a. b. In light of your knowledge of asymmetric information problems, why is this a reasonable policy? Is the policy likely to create a moral hazard problem? Explain.a) Suppose an insurance company decides to insure the earnings obtained by a professional tennis player (in the event of an injury), provided she does not engage in activities like skydiving or skiing. Which asymmetric information problem is the insurance company trying to avoid? b) How do insurance companies protect themselves against losses due to adverse selection and moral hazard? c) How do insurance companies price their products to solve the problem of asymmetric information?(a)Explain what is meant by "asymmetric information." Identify and explain the twobasic types of problems that arise when there is asymmetric information.
- If the theory of moral hazard is correct, how would you expect the gains in insurance coverage to affect health behaviors such as smoking, drinking, exercise, and healthy eating habits? What would explain why moral hazard MIGHT NOT occur after the large gains in health insurance coverage?What are moral hazard and adverse selection? How are they similar, how are they different? What causes each?Describe how the following facts represent solutions to problems of asymmetric information. a. Auto insurance rates are higher for teenagers than for nonteenagers. b. Your car insurance coverage probably includes a deductible—an amount that you have to pay out of pocket before your insurance coverage kicks in. c. Many states have laws like Virginia’s that give customers the right to keep or inspect parts that are removed by an auto mechanic.
- Which of the following is the least likely example of asymmetric information? a. King Solomon and two women who claim to be the mother of a baby b. a job applicant and a prospective employer c. an auto mechanic and a transient customer d. a retailer of used books and prospective customers3. Briefly explain how asymmetric information in the used car market can result in adverse selection and what can be done to mitigate the problem.25. Which of the following is the best example of a moral hazard problem? Question 25 options: a) A borrower uses the proceeds of a business loan to gamble at a Las Vegas casino. b) A borrower decides to borrow at a fixed rather than a variable interest rate. c) A bank has difficulty in distinguishing between good and bad credit risks. d) A borrower makes all of her payments despite a downturn in her business.