Microeconomics (9th Edition) (Pearson Series in Economics)
9th Edition
ISBN: 9780134184241
Author: Robert Pindyck, Daniel Rubinfeld
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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Chapter 17 Solutions
Microeconomics (9th Edition) (Pearson Series in Economics)
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- Explain the term adverse selection and moral hazard and show how these lead to market failurearrow_forwardHow does the problem of moral hazard affect the safety of sports such as football and boxing when safety regulations started requiring that players wear more padding?arrow_forwardFaced 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.arrow_forward
- 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.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_forwardA Grab driver who does not own the car is very harsh on his driving as he knows that the car is not his. Is this an example of a moral hazard problem? How does moral hazard issue arise?arrow_forward
- 7) 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. b. In light of your knowledge of asymmetric information problems, why is this a reasonable policy? Is the policy likely to create a moral hazard problem? Explain.arrow_forwardIf 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_forwardWhich of the following is an example of moral hazard in the medical industry? Choose the best answer: a. A surgeon wants the opportunity to perform for minor ailments b. Insurance companies and individuals do not openly share information c. Prices are not transparent or consistent among customers d. Those with significant health insurance coverage tend to overuse health servicesarrow_forward
- Explain the relationship between moral hazard and insurance premiumsarrow_forwardWhat would explain why moral hazard might not occur after the large gains in health insurance coverage?arrow_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
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