#1 The government can solve the free-rider problem through the following except
A) supporting information collection of private individuals or groups.
B) producing information to help investors distinguish good from bad firms
C) discouraging firms to reveal honest information
D) collecting information from firms and providing it to the public for free
#2 Collateral reduces the consequences of adverse selection because it
A)increases the expected losses on the loan
B) increases the lender's losses in the event of a default.
C) diverts the interest of the borrower from the outcome of the loan
D) secures the loan
Answer 1 C
Provisioning of information,is a public good as your consumption of information would not reduce my consumption of information and it is as you can access public information even if you have not paid for it. Like all public goods,in financial markets firms have an incentive to not provide their information freely hence there are chances that they free ride .Therefore,government cannot solve the above problem by discouraging firms to reveal honest information
Answer 2 D secures the loan
Provisioning of collateral reduces the problem of adverse selection as it secures the loan(Lender can sell the collateral in case of a willful default by the bad/risky borrower.In that case the borrower would have an incentive to lose his collateral and thereby would be discouraged to carry risky activities.
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