Suppose the market-clearing interest rate on loans is 12, but ...

[oliviahorn72]

Suppose the market-clearing interest rate on loans is 12, but law-makers impose an 8 interest rate ceiling. The new law will tend to
 
  A) increase the supply of loans.
  B) decrease the supply of loans.
  C) increase the demand for loans.
  D) decrease the demand for loans.
  E) do none of the above.

Question 2

Elena works as a housekeeping staff member in a hotel. Her task is to clean the rooms that are unoccupied by guests. Because it is not possible for her boss to monitor her work regularly, she often skips cleaning some of the rooms.
 
  a) What is the term used to refer to such behavior? b) How can the management motivate workers like Elena to work harder?

[quynhmickitran]

Answer to Question 1

E

Answer to Question 2

a) The term used to refer to Elena's behavior is moral hazard. Moral hazard refers to actions that individuals take based on their own private information that is unavailable to the other party in the transaction but adversely affects their payoff. In this case, only Elena knows which rooms she has cleaned. This information is unavailable to her boss.
b) The management can motivate workers like Elena to work harder by giving efficiency wages. Efficiency wages are wages above the lowest pay that workers would accept that employers use to increase workers' motivation and productivity.