When Sam Makes an Agreement and Then Behaves After the Agreement

question 21

Multiple Choice

When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement,Sam is illustrating

• A) moral hazard.
• B) adverse selection.
• C) signaling.
• D) the cost of contracting.
• E) a pooling equilibrium.

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Definitions:

Erosion Costs

Costs that occur when a new project leads to a decline in revenues or increase in expenses of existing products or services.

Salvage Value

The calculated remaining value of an asset after it has served its anticipated lifetime.

Opportunity Costs

Missing out on possible advantages from various alternatives upon deciding on one.

Sunk Cost

A cost that has already been incurred and cannot be recovered or refunded, and thus should not influence future financial decisions.