Van sees a classified ad from Amy offering a used car seat for $20. On the oppos

Question

Van sees a classified ad from Amy offering a used car seat for $20. On the opposite page, he sees a big colour ad from a national retail chain offering a new car seat for $175. Van values a car seat at $205 as long as it works, regardless of whether it is new or used. For each of the scenarios listed, determine principle Illustrated by each person's reasoning. Suppose Van buys the new car seat from the national retail chain, thinking 'Someone would ask $20 for a used car seat only if it didn't work well," Why is Army unable to sell Van the car seat? check an that apply

Explanation / Answer

a) The previous one is a problem of adverse selection because makes a choice without having full information about both the car seat options available to him

b)It is a problem of moral hazard because there are advantages for van to not look after the used car seat for availing the replacement offer from amy .

The first one applies as discussed before , people have the incentive of misusing the property if they are insured against there damages .This makes them careless and causes moral hazard problem .

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