How does adverse selection contribute to market failure?

June 30, 2024 No Comments

A: Adverse selection is perhaps the most academically cited example of market failure in a laissez-faire economy. The problem arises when exchanging agents have different information or conflicting incentives about product quality. According to adverse selection theory, voluntary market transactions sometimes attract the sub-optimal type

How does aggregate demand affect price level?

June 30, 2024 No Comments

A: Prices coordinate supply and demand, and they are also determined by it; there is no clean, direct and one-dimensional link between aggregate demand and general price levels. Under ceteris paribus conditions, however, a rightward shift in aggregate demand corresponds with an increase in the

How do leverage ratios help to regulate how much banks lend or invest?

June 30, 2024 No Comments

A: Banks are among the most leveraged institutions in the United States; the combination of fractional-reserve banking and Federal Deposit Insurance Corporation, or FDIC, protection has produced a banking environment with limited lending risks. To compensate for this, three separate regulatory bodies, the FDIC, the

How do changes in interest rates affect the spending habits in the economy?

June 30, 2024 No Comments

A: Changes in interest rates can have different effects on consumer spending habits depending on a number of factors, including current rate levels, expected future rate changes, consumer confidence and the overall health of the economy. It’s possible for interest rate changes, either up or

How do modern companies assess business risk?

June 30, 2024 No Comments

A: Before a business can assess or mitigate business risk, it must first identify probable or likely risks to its bottom line. There is no surefire method for identification or assessment, but firms rely on reasonable approximations based on past experience. Risk processes naturally evolve

How do companies use price discrimination?

June 30, 2024 No Comments

A: Price discrimination is a strategy that companies use to charge different prices for the same goods or services to different customers. The three main types of price discrimination are first degree, second degree and third degree. Companies use these types of price discrimination to

How do modern corporations deal with agency problems?

June 30, 2024 No Comments

A: Agency problems—also known as principal-agent problems or asymmetric information-driven conflicts of interest—are inherent in static corporate structures. This conflict arises when separate parties in a business relationship, such as a corporation’s managers and shareholders, or principals and agents, have disparate interests. Principals hire agents

How do economies of scale work with globalization?

June 30, 2024 No Comments

A: Globalization – the integration of factors of production and inclusion of consumer groups from different markets around the world – facilitates unprecedented achievements of economies of scale for producers. Access to increased numbers of laborers, investors, markets, resources, technologies and business models through globalization

How do NGOs get funding?

June 30, 2024 No Comments

A: A non-governmental organization (NGO) is a non-profit, citizen-based group that functions independently of government. NGOs are organized on local, national and international levels to serve specific social or political purposes. As non-profit organizations, NGOs rely on a variety of sources for funding projects, operations,

How do Economies of Scope and Economies of Scale Differ?

June 30, 2024 No Comments

A: Economy of scope and economy of scale are two different concepts used to help cut a company’s costs. Economies of scope focuses on the average total cost of production of a variety of goods, whereas economies of scale focuses on the cost advantage that arises when there is

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