There is a moral hazard problem when... Group of answer choices A) one agent has private information which is unobservable to another B) an agent buys a commodity C) there is an unethical behavior D) the actions of one agent are unobservable to another

There is a moral hazard problem when... Group of answer choices A) one agent has private information which is unobservable to another B) an agent buys a commodity C) there is an unethical behavior D) the actions of one agent are unobservable to another

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

There is a moral hazard problem when...
Group of answer choices
A) one agent has private information
which is unobservable to another
B) an agent buys a commodity
C) there is an unethical behavior
D) the actions of one agent are
unobservable to another

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Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in adverse selection? a. The expectedprice offered by the buyer encourages the seller to sell a poor quality car. Hence only poor quality cars are sold, which harms sellers. b. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms buyers. c. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms sellers. d. The…
How do you solve this problem? (see attachment)
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The market for lemons refers to a situation where sellers are better informed than buyers about the quality of the good for sale, like used cars. While sellers know the true quality of the car, buyers can’t distinguish the good cars from the bad cars (a.k.a. lemons). Consequently, from the buyer's perspective, there is a 50-50 chance that cars are either high or low quality, and therefore they will perceive all cars as medium quality cars. Which of the following statements are true? Multiple Choice From the seller's point of view, the price that buyers are willing to pay is too low. Therefore, they will find it difficult to sell their cars at "true" value. For the sellers who are selling lemons, the offered price will be higher than what they have expected. Therefore, they will sell lemons to the buyers at a higher price. Because buyers perceive all cars as medium quality cars they will pay a price that is between the price of good cars and the price of lemons.…
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