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Kay [80]
3 years ago
11

What is the moral hazard​ problem?a. The problem that managers of a financial firm will take on riskier investments because they

believe the federal government will save them from bankruptcy. b. The problem that managers of a financial firm may have more information about risky investments than the federal government does. c. The problem that managers may experience in distinguishing​ low-risk borrowers from​ high-risk borrowers before approving a mortgage.
Business
1 answer:
s344n2d4d5 [400]3 years ago
3 0

Moral Hazard occurs when a person increases its exposure to risk because someone else bears the the cost of those risk(Insurance companies)

Explanation:

Moral Hazard usually occurs when their is information asymmetry,the risk taking party has more information than the risk incurring party.

The financial crisis of 2008 is the best example of the Moral Hazard Problem.

The Moral Hazard Problem arises because the managers of the financial firm took over riskier investments because they believed that  the federal government will save them from the bankruptcy.

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A drought will reduce the supply of wheat thereby causing the supply curve to shift upwards (to the left) leading to an increase in the price of wheat. Since wheat is a basic ingredient in producing bread, an increase in the price of wheat will increase the cost of producing bread. An increase in cost of producing bread will reduce the supply of bread, shifting the supply curve to the right.

Potatoes and bread are close substitutes and therefore, have a competitive demand. An increase in the price of bread will increase the demand for potatoes because rational consumers will opt for a cheaper alternative considering their money income.

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