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.

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Moral Hazard

The moral is a person's behavior towards himself /herself, society, organization, and others. Hazard is something that is happening and is not good. A person may be morally good or bad. It depends on his attitude, ethics, integrity, and values. A person may have the highest reverence for money to that for the truth. In this case, the person may lie and it is said that the person is morally bad.