Author Question: Firms that continue to produce when sales are temporarily low in an effort to avoid costly ... (Read 12 times)

Capo · **on:** Jun 30, 2018

Firms that continue to produce when sales are temporarily low in an effort to avoid costly fluctuations in production are engaging in ________.

A) second degree price discrimination
B) stock out avoidance
C) work in progress
D) production smoothing

Question 2

How do commercial banks solve asymmetric information problems?

What will be an ideal response?

otokexnaru · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

D

Answer to Question 2

By collecting information to reduce the information asymmetry: screening loan applicants and monitoring borrowers once the loan is approved. Loan assets are retained, rather than sold to third parties, so information accumulates over time and, possibly, over several loans to a single borrower. The bank's investment in screening and monitoring allows it to profit from low-risk lending and to provide credit at a lower cost than the borrower can get from a new lender, so the relationship is long-term and mutually beneficial.