1.) You can invest $100,000 into either project A or B. You estimate that A succ
ID: 1194201 • Letter: 1
Question
1.) You can invest $100,000 into either project A or B. You estimate that A succeeds with probability 0.7 in which case it doubles in value. If it fails, the scrap value is worth $50,000. Project B succeeds with probability 0.6, has value $150,000 if it succeeds and value of $30,000 if not.
You should invest in project A
You should invest in project B
You should not invest in either
You cannot tell from the information presented
2.)The "Lemons" problem is that :
Cars of verifiable high qulaity are withheld from the used car market
Cars of verifiable low quality are withheld from the used car market
Cars of unverifiable low quality are withheld from the used car market
Cars of unverifiable high quality are withheld from the used car market
3.)Signaling is:
Actions by the informed party to reveal her true risks
Actions by the informed party to conceal her true risks
Actions by the uninformed party to uncover the true risks
Action by the uninfomred party to conceal the true risks.
4.)An example of moral hazard is moral hazard has to do with unobserveable characteristics of individuals:
Workers shirking when the boss is not looking
Insured workers diet and exercise
Drivers of safer cars turning their phones off before driving
Borrowers investing their loan proceeds exactyl as the bank requires.
Explanation / Answer
1. accept project A
2. cars of unverifiable low quality are withheld from the used car market
3. actions by the informed party to conceal her ture risks
4. workers shrinking when the boss is not looking
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