Microeconomics (9th Edition) (Pearson Series in Economics)
9th Edition
ISBN: 9780134184890
Author: PINDYCK
Publisher: PEARSON
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Question
Chapter 17, Problem 5E
(a)
To determine
The practice of providing the extensive guarantees by the car manufacturers as a reasonable policy.
(b)
To determine
The chance of the moral hazard problem.
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The 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 argument
Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (for example, a seven-year warranty on all parts and labor associated with mechanical problems).a. In light of your knowledge of asymmetric information problems, why is this a reasonable policy?
b. Is the policy likely to create a moral hazard problem? Explain.
Someone 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.
Chapter 17 Solutions
Microeconomics (9th Edition) (Pearson Series in Economics)
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- Explain how moral Hazard can lead to market failure.arrow_forwardThe 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_forwardWhy can government safety nets create both an adverseselection problem and a moral hazard problem?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 moral hazard and adverse selection? How are they similar, how are they different? What causes each?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
- If people get higher pay from insurance than their pre 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_forward25. Which of the following is the best example of a moral hazard problem? Question 25 options: a) A borrower uses the proceeds of a business loan to gamble at a Las Vegas casino. b) A borrower decides to borrow at a fixed rather than a variable interest rate. c) A bank has difficulty in distinguishing between good and bad credit risks. d) A borrower makes all of her payments despite a downturn in her business.arrow_forwardAll MegaCorp employees who stay on the job for more than three years are rewarded with a 10 percent pay increase and coverage under a private health insurance plan that MegaCorp pays for. Tina just passed three years as a MegaCorp employee and reacts to having health insurance by taking up several dangerous sports because now she knows that the insurance plan will pay for any injuries that she may sustain. This change in Tina’s behavior is known as: a. Defensive medicine. b. Asymmetric information. c. The moral hazard problem. d. The personal mandate.arrow_forward
- why moral hazard might not occur after the large gains in health insurance coveragearrow_forwardExplain the relationship between moral hazard and insurance premiumsarrow_forwardMoral hazard is a costly behavior because the insured party acts riskier than they would normally, knowing that they’re covered, and insurance companies allow it because they can sell more policies in addition to receiving bailouts from the government. It is natural for moral hazard to happen, but its effects can have consequences. This was seen during the 2007–2008 financial crisis on Wall Street that later led to the Great Recession. Because interest rates were at an all-time low, credit was incredibly cheap, and borrowing money was easier than ever. Borrowers rushed to buy homes, including those who could not previously afford it. Money lenders approved loans and sold them to banks, which were marketed and sold as low-risk investments. The loans were then sold to investors who were looking to make an easy profit. The U.S. Federal Reserve then increased interest rates as the economy was recovering, but as a result, the housing market crashed because people were unable to make…arrow_forward
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