Identify Whether Each of the Following Situations Is a Case

question 32

Essay

Identify whether each of the following situations is a case of adverse selection or moral hazard. Explain.
a.Jasper knows, but the car rental company does not know when he is trying to rent a car during a blizzard in Winnipeg, that Jasper grew up in a tropical climate and has no idea how to drive in cold weather and snowy conditions.
b.Joan has received a loan from the bank to finance the purchase of more inventory for her quilt shop, but she intends to use the money (without telling the bank) to go on a safari in Africa.
c.Some companies sell annuities, which are policies that make periodic payments as long as the purchaser lives. Jane is trying to buy an annuity. Jane knows, but the annuity issuers do not know, that people in Jane's family routinely live to age 100.

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Definitions:

Circular-Flow Diagram

A visual model that shows how money moves through an economy between households, businesses, and the government.

Factors Of Production

The inputs used in the production of goods or services in the attempt to make an economic profit, including land, labor, capital, and entrepreneurship.

Economy

The system by which goods and services are produced, distributed, and consumed within a particular geographical region.

Production Possibilities Frontier

A curve depicting all possible combinations of two goods that can be produced with available resources and technology.