Business Loan
A colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low-risk loan.
a. Give an adverse selection explanation for this, and offer advice to your friend on how to solve the problem.
b. Give a moral hazard explanation for this, and offer advice to your friend on how to solve the problem.
Frequent Flyers
Frequent flyer programs are targeted more toward business travelers (who do not pay for their own tickets) than leisure travelers (who do). Explain their effect on each type of traveler. Why is there a difference?
Airline Departures
Planes frequently push back from the gate on time, but then wait 2 feet away from the gate until it is time to queue up for take-off. This increases fuel consumption and increases the time that passengers must sit in a cramped plane awaiting take-off. Why does this occur? What can be done to fix it?
Public School Principals
Each year, public schools are rewarded with bigger budgets for achieving a rating of "excellent" or "recommended" and are punished for rating "needs improvement." These ratings are based on meeting thresholds on a broad set of measures such as attendance rates, graduation rates, standardized test scores, SAT scores, etc. Discuss the incentives for principals under this scheme and how you might improve them.