S1W8

Define:

1. 1. Moral Hazard

2. 2. Adverse Selection

Answer explanation

They are all about imbalanced access to information.

Adverse selection is when one party possesses a hidden characteristic which is not know to the

other party. This looks like more ill people picking up life insurance, which may not be ideal for

the insurance company.

A moral hazard is when one better-informed party is able to take advantage of a less-informed

party through a hidden action. This looks like not being as productive once hired because you

can get away with it

Why does it make sense to self-insure against minor losses?

Answer explanation

It is cheaper to self-insure minor losses because you do not have to pay the cost of the insurance firm that needs to cover for the risk they are taking on. It is easier and cheaper to do so with minor damages because the amount you put down each month is small.

• Work

• Busk

Following the changes made in the multiverse, Peter Parker is just a regular guy and is seeking

employment. He’s searching for a high wage from a wage distribution that is uniform on the

interval (4, 7). The cost of each search is 0.03. What is the smallest wage you should accept?

• A. 5.21

• B. 7.24

• C. 6.58

• D. Not enough information provided

• A) 23.563; 25.743

• B) 24.107; 25.495

• C) 24.624; 24.831

• D) 23.952; 24.673

Peter Parker, a.k.a. Spider-Man, has two options for a quick bite during a busy day. He can choose between Joe's Pizza, a well-known spot in New York City, or a new pizzeria called “Web Slice” that he hasn’t heard of before. Even though he thinks Joe’s Pizza is just average, he’s leaning toward it. What role might asymmetric information play in his decision? Would online reviews change his choice? What if both places were near Aunt May’s apartment?

Answer explanation

This question dives into asymmetric information and signaling through Spider-Man’s decision-making. Peter might choose Joe's Pizza because, as a familiar name, it signals quality and reliability. With a trusted brand, there’s less risk that the food will be bad, and it’s easier to trust what he’ll get. However, if Peter could read online reviews, he’d have more information about “Web Slice,” which could make trying it feel less risky. Also, if both pizzerias were near Aunt May’s apartment, Peter might feel safer testing out the new one since he’d have a chance to become a repeat customer. This captures how familiarity and reputation impact choices when there’s limited information.

J. Jonah Jameson, always skeptical of Spider-Man, offers “black box” insurance for superheroes. This policy requires heroes to install a tracker on their suit, monitoring speed, number of web swings, damage taken, and even time of day. How might this policy affect Spider-Man’s behavior? How might it differ for more cautious heroes versus risk-takers? Discuss using moral hazard, adverse selection, and signaling.

Answer explanation

This question explores moral hazard (how monitoring influences behavior), adverse selection (who’s more likely to opt for tracking), and signaling (demonstrating responsibility). For heroes like Spider-Man, who already use caution, having a black box likely won’t change much, but it allows him to signal his responsibility and careful approach. For riskier heroes, the black box might deter reckless behavior since the tracking could reveal if they’re taking risks, thus reducing moral hazard. Additionally, safer heroes might be more likely to choose this insurance to benefit from the lower rates, while risk-takers might avoid it, which reveals adverse selection.

Tony Stark and Dr. Bruce Banner are trying to identify which rocket types can be switched out

for others for the Endgame by calculating MRS. Help them out by finding the partial derivatives

a) ∂f/∂x and b) ∂f/∂y of

f (x, y) = x⁴ + x³y² − 2y³

Answer explanation