Antonlo sees a classified ad from Caroline offering a used lawn mower for $30. On the opposite page, he sees a big color ad from a national home Improvement chain offering a new lawn mower for $250. Antonio values a lawn mower at $300 as long as it works, regardless of whether it is new or
used
For each of the scenarios listed, determine the principle illustrated by each person's reasoning.
Moral
Hazard
Adverse
Selection
Scenario
Suppose Caroline, the seller of the lawn mower, knows the mower is in good condition-she is selling it only because she
has decided to replace her lawn with a new deck. She thinks about asking $45 and offering a guarantee: She will replace
the lawn mower with a new $250 lawn mower if it turns out not to work. Then she thinks, "That's not a good ideal
Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new lawn mower for
$45-meanwhile, I'll be out $2051"
Suppose Antonio buys the new lawn mower from the national home improvement chain, thinking, "Someone would ask
$30 for a used lawn mower only if it didn't work well."
Why Is Caroline unable to sell Antonio the lawn mower? Check all that apply.
Adverse selection can cause buyers to avoid purchasing high-quality goods because of the uncertainty about their quality
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.