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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Jack promises Samantha that he will pay for any expenses she has on her trip beyond $1,000. Does Jack’s promise create an adverse selection problem or a moral hazard problem? Explain your answer.

To determine

Identify whether the situation is moral hazard or adverse selction.

Explanation

There are two individuals, J and S, where J promising that J will pay S’s expenses for the trip over $1,000. In this situation, J provides an incentive for S to spend beyond $1,000, and J promise to pay the whole amo...

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