problem set 50

Provide answers of approximately 1 or more pages each for each of the problems below. Be sure to draw significantly from learning material from chapters 19 (for A) and and 20 (for B).

A) Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you are trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry from the perspective of both sides, the adverse selection problems from the perspective of both sides, and why and how soft selling can be a successful signal.

B) Describe a moral hazard problem your company or community is facing that comes with enough information to answer the following questions: What is the source of the asymmetric information? Who is the less informed party? What transactions are not being consummated as a result of the information? How could you use use signaling or screening to make transactions go more smoothly? Provide advice you think best suited to improve the overall situation

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