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Managerial Economics_Module 8 Assignment

Managerial Economics_Module 8 Assignment

Q 1. Explain how information asymmetry creates the problem of adverse selection. 2. Distinguish between risk-neutral and risk-averse behavior in decision-making. 3. Recommend methods for companies wanting to increase their information about potential high-risk customers. 4. Describe how effective signaling allows information to be shared for better outcomes for both parties. 5. Explain the problem of moral hazard.

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Incomplete markets, adverse selection can be led by asymmetric information. This is a kind of failure in the market. Asymmetry of information in economics and theory of contract deals with the decisions study in transactions in which better or more information is held by one party in comparison to other. A power imbalance is created in transactions by this asymmetry that can lead to transactions being crooked, a type of failure in the market in the worst situation. A situation is explained by the adverse selection in which asymmetric information affects the participation in the market (Spaulding, 2019).