(a)
The reason why workers apply for disability benefits from a company.
(a)
Explanation of Solution
Here, the issue of the imperfect information is given. The workers have more information about themselves, whereas the company paying for their disability does not have more information about the workers applying for the job. This means that the worker can forge a disability certificate with the help of a doctor and the company would provide them with benefits. Thus, the imperfect information causes the problem here.
Imperfect information: Imperfect information is a situation where one party of the market has more information about the product or service than the other, which helps the informed one to make benefits over other.
(b)
The market condition for used computers.
(b)
Explanation of Solution
The used goods and
(c)
The market condition for customized telephone systems.
(c)
Explanation of Solution
There will be many providers of the telephone system in the market and many competing bids will be there in the market. Thus, it will be difficult to evaluate amongst them and select the item without being placed in the offices. Thus, the issue of the imperfect information arises. This leads to the issue of identifying which company’s system is good and selecting it.
(d)
The market condition for automobile collision insurance.
(d)
Explanation of Solution
The insurance coverage for the automobiles is essential and each and everyone should take the insurance, in order to take their vehicle to the road. Thus, it is mandatory to have insurance. However, the bad drivers will go for a higher insurance coverage as they would cause more frequent collisions. This leads the insurance cost to become higher for the good drivers who care for their vehicle. Thus, this adverse selection also leads to the issue of moral hazard as the insurance diverts the risk of collision from the bad driver to the insurance company; thus, makes the bad drivers to become worse.
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Chapter 17 Solutions
Principles Of Microeconomics
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