Because of the adverse selection problem, Question 3 options: a) lenders will write debt contracts that restrict certain activities of borrowers. b) good credit risks are more likely to seek loans causing lenders to make a larger than usual amount of loans to good credit risks. c) lenders are reluctant to make loans that are not secured by collateral. d) lenders may refuse loans to individuals

Because of the adverse selection problem, Question 3 options: a) lenders will write debt contracts that restrict certain activities of borrowers. b) good credit risks are more likely to seek loans causing lenders to make a larger than usual amount of loans to good credit risks. c) lenders are reluctant to make loans that are not secured by collateral. d) lenders may refuse loans to individuals

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter15: Contracting, Governance, And Organizational Form

Section: Chapter Questions

Problem 4E

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7) Because of the adverse selection problem, A) good credit risks are more likely to seek loans, causing lenders to make a disproportionate amount of loans to good credit risks. B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town." C) lenders are reluctant to make loans that are not secured by collateral. D) all of the above.
QUESTION 6 The benefit of establishing a long-term relationship with your banker is to: A. Reduce the likely of moral hazard B. Diminish problems with asymmetric information C. Improve loan terms for the customer D. All of the above
5. Consider the set-up in the lecture slides on credit: There are two borrowers (denoted by S and R respectively) each of whom need 1 unit of credit for an investment. There is one lender (denoted by L) with one unit of credit and can only lend to one borrower. both the lender and borrowers are risk-neutral (that is, they only care about the expected profits and expected returns respectively). Further, the borrowers and lender have a reservation return of zero (that is, they will undertake to borrow or lend as long as the expected return or profit is strictly greater than zero). Finally, each borrower will repay if she is able to and nothing is repaid if the investment fails (i.e. there is limited liability). (a) Suppose that there are two states of the world (g,b) each occurring with equal probability. In state g the return to S is 1.4 and R’s return is 1 + d for some d > 0. In state b, S’s return is 1.4 and R’s return is 0. Suppose that the bank can charges a separate interest…
1. Financial institutions in the U.S. economy Suppose Clinton decides to use $1,000 currently held as savings to make a financial investment. One method of making a financial investment is the purchase of stock or bonds from a private company. 1. Suppose Warm Breeze, a cloud computing firm, is selling bonds to raise money for a new lab. This practice is called finance. Buying a bond issued by Warm Breeze would give Clinton (an IOU, or promise to pay/ a claim to partial ownership in) the firm. In the event that Warm Breeze runs into financial difficulty, (the stockholders/ Clinton and the other bondholders) will be paid first. 2. Which of the following statements are correct? Check all that apply. - The price of his shares will rise if Warm Breeze issues additional shares of stock. - The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Warm Breeze stock. - Expectations of a recession that will reduce economywide corporate profits will likely…
19) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) none of the above.
question 9 Consider the credit contract with collateral in the adverse selection problem from our class. The incentive compatibility constraint for the low risk type borrower states that obesvarad options a. The low risk type borrower is indifferent between applying for the low risk type credit contract and the high risk type credit contract. b. The low risk type borrower prefers applying for the low risk type credit contract over the non-participation c. The low risk type borrower only applies for the low risk type credit contract. d. The low risk type borrower derives higher utility than the risk type borrower. question 10 According to Diamond and Dybvig (1983), why does a bank run happen? options a. Because banks can have a liquidity problem without being insolvent. b. Because agents do not know their types at the beginning. c. (economic) interest. d. Because banks always need to borrow money to pay for the liquidity needs in period 1.
7 A principal-agent problem can arise when a) an agent hires a principal to do something on their behalf, and the agent can observe the principal's actions. b) a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agent's actions. c) a principal uses an agent to accomplish a task the principal wants credit for completing. d) an insurance agent sells a policy to a buyer who uses it as an incentive to behave badly
1. Statement I. In the Philippines, financial intermediaries are restricted in what they are allowed to do and what assets they can hold.Statement II. Money supply is the availability of financial resources for deployment in the financial system. It is making the money available for use or for trade or investment. a. Both statements are true.b. Both statements are false.c. Statement I is true; Statement II is false.d. Statement I is false; Statement II is true. 2.A commercial paper is defined as, except: a. Unsecured promissory notes that are only issued by large and credit worthy enterprises. b. Directly issued to the buyer, no secondary market. c. May have stated interest rate or sold at discounted basis. d. None of the above
sub-questions d-f please! 5. Consider the set-up in the lecture slides on credit: There are two borrowers (denoted by S and R respectively) each of whom need 1 unit of credit for an investment. There is one lender (denoted by L) with one unit of credit and can only lend to one borrower. both the lender and borrowers are risk-neutral (that is, they only care about the expected profits and expected returns respectively). Further, the borrowers and lender have a reservation return of zero (that is, they will undertake to borrow or lend as long as the expected return or profit is strictly greater than zero). Finally, each borrower will repay if she is able to and nothing is repaid if the investment fails (i.e. there is limited liability). (a) Suppose that there are two states of the world (g,b) each occurring with equal probability. In state g the return to S is 1.4 and R’s return is 1 + d for some d > 0. In state b, S’s return is 1.4 and R’s return is 0. Suppose that the bank can…
8, Q4) Hey, need help with the following multi-part macroeconomics problem. Thank you in advance! In this problem, consider a simple mutual fund. Households and businesses invest in the fund by buying shares; the fund uses this money, in turn, to invest in a range of assets, including equities and bonds. If an investor wishes to divest from the fund, she can “redeem” her shares. Redeeming involves selling the shares back to the mutual fund for a price called the “net asset value” (NAV). The NAV is equal to the difference between assets and liabilities, divided by the total number of investors in the fund (similar to the shareholders’ equity discussed in this chapter). The NAV is updated at the end of each day. Thus every investor who redeems on a given day will get the same price. What does this fund’s balance sheet look like? Suppose several large investors in the mutual fund start getting nervous about market conditions and decide to redeem, all on the same day. How will these…
5. Explain how imperfect information problems such as adverse selection and moral hazard might affect the following markets or situations (also identify the problem whether adverse selection or moral hazard or both of them) a. Workers report medical history for health insurance. b. The market for used car. c. The market for automobile collision insurance
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