1 page total.

a. In the aftermath of the 2008 financial crisis, it was often said that some banks were “too big to fail”, by which it was understood that if such banks got into financial trouble because of bad lending practices the government would bail them out rather than let them go bankrupt. If this leads banks to make more unwise loans, we say the banking market is subject to what problem?

b. The automaker Lexus has a program in which a used Lexus automobile which passes a 100+ point inspection is designated by the local dealer to be a Lexus Certified Pre-owned Vehicle. What problem associated with asymmetric information is this program designed to address, and under what conditions would it be successful in overcoming this problem?

c. Describe the principal-agent problem and the inherent tradeoff implicit in all incentive systems.