People Make Decisions at the Margin

question 155

Multiple Choice

People make decisions at the margin. Thus, when deciding whether to purchase a second car, they would compare

• A) the total benefits expected from two cars with the costs of the two cars.
• B) the additional benefits expected from a second car with the total cost of the two cars.
• C) the dollar cost of the two cars with the potential income that the two cars will generate.
• D) the additional benefits of the second car with the additional costs of the second car.

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Definitions:

Moral-Hazard Problem

A situation where one party engages in risky behavior knowing that it is protected against the consequences, often because another party bears the cost of those actions.

Moral-Hazard Problem

The moral-hazard problem arises in situations where one party's willingness to take risks is increased because the negative consequences of those risks will be borne by another party.

Principal-Agent Problem

A dilemma in economics where one party (agent) is supposed to act in the best interest of another (principal) but may have a tendency to act in their own interest.

Asymmetric Information

A situation in which one party in a transaction has more or superior information compared to the other.