Shen sees a classified ad from Valerie offering a used digital camera for $30. O

Question

Shen sees a classified ad from Valerie offering a used digital camera for $30. On the opposite page, he sees a big color ad from a national electronics chaln offering a new digital camera for $250. Shen values a digital camera at $270 as long as it works, regardless of whether it is new or used For each of the scenarios listed, determine the principle ilustrated by each person's reasoning. Moral Adverse Hazard Selection Scenario Suppose Valerie, the seller of the digital camera, knows the camera works well-she is only selling it because she got a better model as a gift. She thinks about asking $45 and offering a guarantee: She will replace the digital camera with a new $250 digital camera if it turns out not to work. Then she thinks, "That's not a good idea! Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new digital camera for $45-meanwhile, I'll be out $205! suppose Shen buys the new digital camera from the national electronics chain, thinking "Someone would ask 30 for a used digital camera only if it didn't work well. Why is Valerie unable to sell Shen the digital camera? Check all that apply O Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure that buyers won't try to take advantage of the guarantees by filing false claims. Adverse selection can cause buyers to avoid purchasing high-quality goods because of uncertainty about their quality.

Explanation / Answer

1) Moral hazard

Moral hazards: This implies taking the advantage of asymmetric information after transaction. As Valerie thinks that Shen can handle good misappropriately and claims for guarantee.

2) Adverse selection

Adverse selection: This implies taking the advantage of asymmetric information before transaction. For example, a person may be more eager to purchase life insurance due to health problems than, someone who is healthy.

3) Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure that buyers won't try to take advantage of the guarantees by filling false claims.

Adverse selection can cause buyers to avoid purchasing high quality goods because of uncertainity about their quality.

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