give an example of an existing economic interaction that exhibits moral hazard. describe the setting and talk about efficiency considerations.

Consider a market in which there are many potential buyers and sellers of used cars. Each potential seller has one car, which is either of high quality (a plum) or low quality (a lemon). A seller with a low-quality car is willing to sell it for $4,500, whereas a seller with a high-quality car is willing to SAL sell it for $8,500. A buyer is willing to pay $5,500 for a low- quality car and $10,500 for a high-quality car. Of course, only the seller knows whether a car is of high or low quality, as illustrated in the accompanying image: Suppose that 85% of sellers have low-quality cars. Assume buyers know that 85% of sellers have low-quality cars but are unable to determine the quality of individual cars. If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is $ (Hint: The expected value of a car is the sum of the probability of getting a low-quality car multiplied…

The winning bid for a house at a bank auction was $10.  But the house was not in good condition.  The couple had to pay $65,000 in explicit expenses and spend many months doing the repairs.  The time cost or lost wages are $10,000.  What is the market value of the house after repairs are done?   Explicit expenses = $65,000    Bid =         $10       Time Cost (Lost Wages) =     $  ?  Market Value of House =    Y (after expenses & repairs) Y = ?

Explain the law of diminishing returns using crime prevention as the good in question.