For each of the following situations, do the following: first describe whether it is a situation of moral hazard or of adverse selection. Then explain what inefficiency can arise from this situation and explain how the proposed solution reduces the inefficiency.
a. When you buy a second-hand car, you do not know whether it is a lemon (low quality) or a plum (high quality), but the seller knows. A solution is for sellers to offer a warranty with the car that pays for repair costs.
b. Some people are prone to see doctors unnecessarily for minor complaints like headaches, and health maintenance organizations do not know how urgently you need a doctor. A solution is for insurees to have to make a co-payment of a certain dollar amount (for example, $10) each time they visit a health care provider. All insurees are risk-averse.
c. When airlines sell tickets, they do not know whether a buyer is a business traveler (who is willing to pay a lot for a seat) or a leisure traveler (who has a low willingness to pay). A solution for a profit-maximizing airline is to offer an expensive ticket that is very flexible (it allows date and route changes) and a cheap ticket that is very inflexible (it has to be booked in advance and cannot be changed).
d. A company does not know whether workers on an assembly line work hard or whether they slack off. A solution is to pay the workers "piece rates," that is, pay them according to how much they have produced each day. All workers are risk averse, but the company is not risk-neutral.
e. When making a decision about hiring you, prospective employers do not know whether you are a productive or unproductive worker. A solution is for productive workers to provide potential employers with references from previous employers.