Question
Please explain how to solve this question about adverse selection and moral hazard: George runs a coffee shop in downtown Laredo.He mainly sells his coffee
Please explain how to solve this question about adverse selection and moral hazard:
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 may cups as they want for $40 per week.He hopes that his will speed up his operations because he will not have to run his customers credit cards for every transaction.He will continue to sell cups for $4 to customers who want to buy a single cup.Explain how both moral hazard and adverse selection might undermine the profitability of this scheme.
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