Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Chapter 12, Problem 4IAPA
To determine
To provide:
An example of private information possessed by a hockey player who wants a no-trade clause. Whether a hockey player who is in a long-term contract with no trade clause can cause moral hazard and problem of adverse selection to the team.
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Students have asked these similar questions
Rule versus discretion
24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance
companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are
risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of
insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of
buyer they are insuring, what is the minimum equilibrium price of insurance?
a. $1,000
b. $1,500
c. $2,000
d. $3,000
e. $4,000
Robert decides to start working for the local ridesharing company. He has a large 12-passenger van and thinks he will be in big demand at the airport. He tells his personal car insurance company that he is driving for a ridesharing company, and he needs some additional insurance. He is denied additional coverage. Why?
There is no such thing as ridesharing insurance.
He lives in a state that doesn’t offer ridesharing insurance.
The city he lives in is too small for him to qualify for ridesharing insurance.
Many insurance companies will not insure high-occupancy vehicles under their ridesharing policies.
Chapter 12 Solutions
Foundations of Economics (8th Edition)
Ch. 12 - Prob. 1SPPACh. 12 - Prob. 2SPPACh. 12 - Prob. 3SPPACh. 12 - Prob. 4SPPACh. 12 - Prob. 5SPPACh. 12 - Prob. 6SPPACh. 12 - Prob. 7SPPACh. 12 - Prob. 8SPPACh. 12 - Prob. 9SPPACh. 12 - Prob. 10SPPA
Ch. 12 - Prob. 11SPPACh. 12 - Prob. 1IAPACh. 12 - Prob. 2IAPACh. 12 - Prob. 3IAPACh. 12 - Prob. 4IAPACh. 12 - Prob. 5IAPACh. 12 - Prob. 6IAPACh. 12 - Prob. 7IAPACh. 12 - Prob. 8IAPACh. 12 - Prob. 9IAPACh. 12 - Prob. 1MCQCh. 12 - Prob. 2MCQCh. 12 - Prob. 3MCQCh. 12 - Prob. 4MCQCh. 12 - Prob. 5MCQCh. 12 - Prob. 6MCQCh. 12 - Prob. 7MCQ
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Similar questions
- Please provide the source of the informationarrow_forward18Please make sure your answer is correct and I will give a positive review!arrow_forward20-2 A collogue tells you that he can get a business loan from the bank, but he rates seem very high for what our collogue considers a low risk loan. Give an adverse selection explanation for this, and offer advice to your friend on how to solve the problem. Give moral hazard explanation for this, and offer advice to your friend on how to solve the problem.arrow_forward
- 4. A taproom owner is trying to determine how to structure his manager's compensation. One option he considers is a flat salary of $70,000 per year. The second option is a base salary of $30,000 plus 15% of the taproom's profit. If the manager puts a lot of effort into her job, the taproom's annual profit will be $500,000 with 75% probability and $100,000 with 25% probability. If the manager exerts only modest effort, the taproom's profit will be $500,000 with 25% probability and $100,000 with 75% probability. The manager's opportunity cost of putting a lot of effort into her job is $50,000, while her opportunity cost of exerting only modest effort is $25,000. a. Draw the game tree for the interaction between the taproom owner and the manager. Assume that the taproom owner moves first. b. What is the equilibrium outcome for this game? What kind of contract should the taproom owner offer? What level of effort will the manager choose? Explain.arrow_forwardEconomics Was it ethical for Tesla to hire a PR firm to monitor its employees? Yes or No? Write a paragraph to explain your answer. discussionarrow_forward1)Describe an example of moral hazard that we may run into in the real world. Think of something that is legal and not inherently lethal, yet still demonstrates elevated risk for the participant who would likely act safer if insurance or protection was not available. Explain why someone might take this risky action. What are the benefits to the risky behavior? In your response to two of your peers, explain what an insurance company may do to reduce the likelihood that an individual would take this risk. Keep in mind, that we cannot always just deny coverage if an individual is participating in the risky behavior.arrow_forward
- What do you do when you’re faced with an opportunity to lie, cheat or steal forthe betterment of yourself/ or a promotion from a job?arrow_forwardWhat is an insurance premium?arrow_forwardJohn owns and runs a food truck, which he expects to increase his wealth to $40,000 this year. John knows that every year, there is a 20% chance that his truck will be firebombed by one of his ruthless food truck competitors. If this happens, he will face a bill of $10,000 in repairs and lost income. John can choose to get insurance to cover all repair costs and lost wealth. Use this information and the information in the table and graph to answer the questions. Total utility Wealth Total utility (utils) 730 1000 $32,000 900 $34,000 755 800 700 $36,000 785 600 792 500 $38,000 400 300 200 100 0 $5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 Wealth What is John's expected wealth? expected wealth: $ What is the price for John's insurance? price of insurance: $ What is John's expected utility without insurance? expected utility: 730 If John chooses to pay the insurance policy price, what would be his total utility? total utility: 1030 42000 10000 utils utilsarrow_forward
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