George runs a coffee shop in downtown Laredo. He mainly sells his coffee to workers in the surrounding office.

He sells cups of coffee for $4 per cup.

He works out that his average customer buys 10 cups of coffee per week. He decides to offer his customers the chance to buy a weekly unlimited coffee card that allows them to get as many cups as they want for $40 per week. He hopes that he will speed up his operations because he will not have to run his customer's credit cards for every transaction.

He will continue to sell cups for $4 to customers who want to buy a single cup. Explain howbothmoral hazard and adverse selection might undermine the profitability of this scheme.