Examples illustrates adverse selection

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Reference no: EM13832668

Which of the following two examples illustrates adverse selection and which illustrates an incentive problem? Explain your answer. In each case, give one method that the restaurant might use to reduce the problem.

a. A restaurant offers an all-you-can-eat buffet sold at a fixed price. The customers for the buffet are not the restaurant’s usual clientele, but new customers who have big appetites. The restaurant discovers it is losing money on the buffet.

b. The restaurant owner hired a new manager who promised to work at least 8 hours per day. If the owner is not on site, the manager leaves work early, reducing restaurant profits.

Reference no: EM13832668

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