John and Mary Work Eight Hours at a Bakery

question 231

Multiple Choice

John and Mary work eight hours at a bakery. John can decorate either 10 ice-cream cakes or 4 wedding cakes; Mary can decorate either 8 ice-cream cakes or 2 wedding cakes. According to this scenario

• A)Mary has the absolute advantage in decorating wedding cakes.
• B)Mary has the absolute advantage in decorating ice-cream cakes.
• C)Mary has the comparative advantage in decorating ice-cream cakes.
• D)John has the comparative advantage in decorating ice-cream cakes.

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Definitions:

Moral Hazard Problem

A situation in which one party engages in risky behavior knowing that it is protected against the consequences, usually by insurance or other safety nets.

Financially Distressed Banks

Financially distressed banks are financial institutions experiencing significant financial difficulties, potentially leading to insolvency or the need for external financial assistance.

Risky Projects

Initiatives or investments that have a significant chance of failure or result in negative outcomes but also offer potential high rewards.

Moral Hazard

Moral hazard refers to a situation where one party is more likely to take risks because they do not have to bear the full consequences of their actions, often due to asymmetrical information or a disconnect between action and responsibility.