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Economics 1st Edition by Dean Karlan,Jonathan Morduch
Edition 1ISBN: 978-0073511498Economics 1st Edition by Dean Karlan,Jonathan Morduch
Edition 1ISBN: 978-0073511498 Exercise 6
BackPedal is a bike-rental shop that rents bicycles, helmets, and other gear by the day.
a. BackPedal offers an optional helmet rental for $10/day with the rental of a bicycle. To his surprise, the store manager has noticed that cycling accidents are higher among customers who rent helmets than those who do not. Explain this phenomenon using economic concepts. Assume that customers who do not rent helmets also do not own helmets.
b. BackPedal is considering offering helmets for free with a bike rental. Explain how this new policy will affect the issues you identified in part a.
a. BackPedal offers an optional helmet rental for $10/day with the rental of a bicycle. To his surprise, the store manager has noticed that cycling accidents are higher among customers who rent helmets than those who do not. Explain this phenomenon using economic concepts. Assume that customers who do not rent helmets also do not own helmets.
b. BackPedal is considering offering helmets for free with a bike rental. Explain how this new policy will affect the issues you identified in part a.
Explanation
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a. Moral hazard problem:
Moral hazard r...
Economics 1st Edition by Dean Karlan,Jonathan Morduch
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