Question 3. Problems and Applications # 1 in textbook chapter 20.
In each of the following cases, identify whether the problem is adverse selection or moral hazard, and explain your answer. How might the problem be dealt with?
Rick has gotten a large advance to textbook. With the money in hand, he prefers spending his time sailing rather than sitting in his office working on the book.
David is trying to get a large advance to textbook. He knows, but publishers don’t, that he did poorly on the writing portion of his entrance exam for graduate school.
Brenda is buying a life insurance policy. She knows that members of her family tend to die young.
Maria, who has a large life insurance policy, spends her vacation pursuing her favourite hobbies: skydiving, bungee jumping, and bull-fighting