MANAGERIAL/ECON+BUS/STR CONNECT ACCESS
9th Edition
ISBN: 2810022149537
Author: Baye
Publisher: MCG
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Question
Chapter 12, Problem 8CACQ
a.
To determine
To explain: The way in which asymmetric information about a hidden action or hidden characteristic can lead to moral hazard.
b.
To determine
To explain: The tactics that managers can use to overcome the problem.
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One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants.
Offer an example of a company that uses a signal to help sell its product. What is the signal?
What information is the signal trying to convey?
Do you think the signal is effective? Why or why not?
Does this signal improve market efficiency? Why or why not?
give an example of an existing economic interaction that exhibits moral hazard. describe the setting and talk about efficiency considerations.
Discuss the consequences of asymmetric information for Market Equilibrium.
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- 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.arrow_forwardSomeone indicated that employee’s absence from work despite meeting the eight hours per day requirement affect productivity and increase cost of business. If an employee makes up the hours by coming early and leaving late, how can you call it an example of moral hazard when the manager can easily correct this behavior? Please explain to the class.arrow_forwardAn advertisement in the local paper offers a "fully loaded" car that is only six months old and has only been driven 5,000 miles at a price that is 20 percent lower than the average selling price of a brand new car with the same options. This low price is likely indicative of what type of situation? a) Adverse selection b)Moral hazard c) Winner's curse d) Perfect informationarrow_forward
- Give an example, real or imaginary, of a moral hazard problem. Again, your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficientarrow_forwardIn the context of asymmetric information, adverse selection and moral hazard, how does marketFailure occur? (Make reference to the insurance or financial market)arrow_forwardWhy does the lemon market problem occur where sellers of unqualified goods stay in the market, while sellers who have quality goods leave the market? This means there is a quality problem. In the context of asymmetric information, does it include adverse selection or moral hazard?arrow_forward
- Question 3 Which of the following statements is NOT correct? Question 3 options: Asymmetric information may lead to the disappearance of a market. Information plays an important role in the economy. There are no solutions to reduce the impact of adverse selection. It is always desirable to have more information than the person one is trading with.arrow_forwardWhat would explain why moral hazard might not occur after the large gains in health insurance coverage?arrow_forwardDescribe information imperfection and its role in market failure. Do consumers possess perfect acknowledge regarding their health status and the treatment options available to them?arrow_forward
- If people get higher pay from insurance than their premiums, will this increase or decrease the death rate of average persons? Is this an example of moral hazard or adverse selection? How will an insurance company deal with these problems?arrow_forwardWhat are some strategies for reducing adverse selection in insurance markets? What sorts of problems do these solutions cause?arrow_forwardThe used car market can become a “lemon” market, where sellers of poor quality used cars will stay in the market, while sellers of good quality used cars will exit the market. Why is this happening? Is this adverse selection or moral hazard? Give an argumentarrow_forward
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