1)How should we deal with problems, such as Asymmetric Information, Adverse Selection, and Moral Hazards?

2)In regulating a natural monopoly, the problem with a marginal-cost-pricing policy is that:

a. the regulated firm will earn negative profits.

b. the regulated firm will earn zero profits.

c. the regulated firm will still earn positive profits.

d. none of the above

1)

Asymmetric information is a problem that occurs because there is insufficient information for a transaction. A buyer lacks all the information they need to offer a good price to the buyer, and the buyer does not have information that enables them to determine whether they are buying for the right price. This problem is practically not possible to eradicate. The best that can be done is to introduce regulations or policies that require both parties to divulge as much information as possible.

Adverse selection, on the other hand, occurs when there is one party that does not have all the information about the other when getting into an agreement or transaction with them. One party fails to disclose information that could alter the course of the agreement if revealed. A major way to curb this would be to introduce laws that punish individuals who fail to reveal potentially damage-causing information.

A moral hazard happens when one party of a transaction maximizes the risk in an agreement with the intention of getting the maximum benefit out of it. They can also willfully provide misleading information to exploit the terms of a transaction. This problem can also be dealt with the same way adverse selection is dealt with; by introducing punishment for people who provide misleading information.]

2)

The answer is a).

With marginal cost pricing, the price is equal to the marginal cost. Thus, the marginal profit for the firm is zero. That is, for each additional unit produced, the monopolist will earn zero profit. But since there is a fixed cost, the overall profit is negative for the monopolist.