Screening and monitoring are costly activities. Why is it a bad idea to impose these costs on borrowers?
What will be an ideal response?
Imposing extra costs on borrowers exacerbates the adverse selection problem, because "good" borrowers are most likely to feel that the costs are excessive and punitive, while "bad" borrowers — whose intention to repay is questionable — are relatively unaffected. Monitoring that is inconvenient and/or intrusive penalizes good borrowers and undermines their cooperation, while bad borrowers may continue to thwart the monitoring system.
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Where Es is the elasticity of supply and Ed is the own price elasticity of demand, the fraction of the tax passed on to consumers in the form of higher prices is
A) Es/(Es-Ed). B) Ed/(Es-Ed). C) Es/(Ed-Es). D) Ed/(Ed-Es). E) Ed/Es.
Which of the following statements about the concept of opportunity cost is true?
A. The opportunity cost of a decision is the cost of all possible alternatives to the good produced. B. Many decisions do not involve an opportunity cost. C. If you have an economics final and an American history final tomorrow, the opportunity cost of studying five hours for your economics exam is the five hours you cannot study for your history exam. D. The opportunity cost of a college education at a school where you have to drive 100 miles per week is the cost and maintenance of owning an automobile to drive to and from school.