How does private information create adverse selection and moral hazard?
What will be an ideal response?
Both moral hazard and adverse selection are the result of private information. Moral hazard occurs when, after an agreement has been reached, one of the parties to the agreement has the incentive to gain additional benefits at the expense of the other party. Adverse selection refers to people who accept certain contracts and have private information that allows them to benefit from the contract while harming the other party. Both moral hazard and adverse selection can affect negatively the way in which markets function.
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A monopolist is earning an economic profit. At the present output level, MR = $35 and MC = $30 . Which of the following should the firm do to increase profit?
a. raise output and lower price b. do not change price or output c. raise price and raise output d. raise price and lower output e. lower price and lower output
The ability of one person or nation to produce a good at a lower opportunity cost than another is called a(n):
A. market advantage. B. comparative advantage. C. absolute advantage. D. specialization advantage.