A Borrower Who Takes Out a Loan Usually Has Better

question 7

Multiple Choice

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

• A)moral hazard.
• B)asymmetric information.
• C)noncollateralized risk.
• D)adverse selection.

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Definitions:

Long-Run Adjustment

The process by which firms adjust their production capacity and input usage to new market conditions over time, beyond short-term fluctuations.

Returns To Scale

Rate at which output increases as inputs are increased proportionately.

Increasing Marginal Product

A situation where each additional unit of input results in an increased amount of output.

Economic Rents

Extra earnings above the minimum amount necessary to keep a factor of production in its current use.