Week 7 Unassigned Problem Solutions
Chapter 2020-1 Extended WarrantiesYour product fails about 2% of the time, on average. Some customers purchase the extended warranty youoffer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both moral hazard and adverse selection issues.
20-2 Business LoanA colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low risk loan.a.Give an adverse selection explanation for this, and offer advice to your friend on how to solve the problem.b.Give a moral hazard explanation for this, and offer advice to your friend on how to solve the problem.