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Unformatted text preview: c.iv.2. Warranties = Repair/replace your product c.v. Screening c.v.1. When the uninformed side requires the informed side to perform an act or take a test c.vi. Signaling c.vi.1. When the informed side doesn’t act or achieve a goal in order to send the signal to provide information to the uninformed side c.vi.1.a. James -> 4 x $50,000 = $200,000 c.vi.1.b. Jimbo -> 4 x $60,000 = $240,000 c.vi.1.b.i. Benefit of USF Degree = $220,000 c.vi.1.c. James would go because costs are less than the benefits but Jimbo would not go to USF because the costs are more than the benefits II. Moral Hazard a. Characteristics a.i. Situations that encourage bad behavior b. Problem b.i. Bad behavior, excessively risky and harmful to society b.ii. Ex: If you are driving and not wearing a seat belt or has an air bag, it encourages more reckless driving because you feel safer c. Solution c.i. Change the situation so that there is no incentive to behave badly...
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- Fall '11
- Microeconomics, Market failure, Information asymmetry, Adverse selection, I. Adverse Selection