Deck 11: Asymmetric Information

Question 1

The owner of a restaurant is worried that Covid-19 policies might affect her business. Does she face uncertainty, risk, and/or asymmetric information?

A) Uncertainty.
B) Risk.
C) Asymmetric information.
D) a and b.
E) a, b, and c.

Answer 1

D

Question 2

Consumer products may break down due to no fault of the consumer. Explain how a manufacturer's warranty to replace faulty products can reduce the risk on the consumer.

A) If the product breaks down, the consumer need not bear the cost of replacement.
B) The cost to the consumer is the same whether the product breaks down or not.
C) The consumer can be sure of getting a functional product.
D) a and b.
E) a, b, and c.

Answer 2

E

Question 3

Many retailers offer customers the option to pay in instalments. In so-called "buy now pay later" schemes, explain the asymmetry of information.

A) The retailer extends credit but lacks information about the customer's ability and willingness to pay the future instalments.
B) The retailer bears the risk that the customer will not pay.
C) The customer has better information about her ability and willingness to pay.
D) The customer can decide whether to pay.

Answer 3

A

Question 4

Health insurance covers a person's healthcare expenses. Applicants for insurance have better information about their own health and lifestyle. Explain how insurers suffer from adverse selection.

A) People with worse health and lifestyle would be more likely to buy the insurance.
B) People with worse health and lifestyle would be less likely to buy the insurance.
C) People who are more risk-averse would be more likely to buy the insurance.
D) People who are more risk-averse would be more likely to buy the insurance.
E) None of the above.

Question 5

A bank is seeking to downsize by offering workers incentives to retire early. What problem of adverse selection might this scheme cause?

A) The more risk-averse workers would be more likely to retire early.
B) The more capable workers would be more likely to retire early.
C) Workers would look outside for better opportunities.
D) a and b.
E) b and c.

Question 6

Suppose that you are buying some antique furniture. Why should you hire an expert to appraise it?

A) The antique may not be genuine.
B) The market price of antiques fluctuates over time.
C) The price of antiques varies with demand and supply.
D) Buying antiques is risky.

Question 7

Some countries only allow people who have been vaccinated against Covid-19 to eat in restaurants. Which concept of asymmetric information does this illustrate?

A) Screening.
B) Signaling.
C) Contingent contract.
D) All of the above.

Question 8

Some lawyers accept fees on a contingency basis rather than the conventional hourly rate. Under the contingency fee, the lawyer receives a share of the client's winnings in court. Which concept of asymmetric information does this illustrate?

A) Screening.
B) Signaling.
C) Contingent contract.
D) a and b.
E) b and c.

Question 9

To stand out from others applying for jobs in finance, Maya qualified as a Chartered Financial Analyst. Under what conditions is this a credible signal?

A) For less capable persons, the cost of qualifying as a CFA must be higher.
B) For more capable persons, the cost of qualifying as a CFA must be higher.
C) The CFA examinations must be challenging.
D) Financial institutions must value the CFA qualification.
E) None of the above.

Question 10

British students apply to university before they complete their national examinations. Universities typically accept students with conditions, for instance, two A grades. Which concept of asymmetric information does this illustrate?

A) Signaling.
B) Screening.
C) Contingent contract.
D) a, b and c.

Question 11

The owner of a restaurant is worried that Covid-19 policies might affect her business. Does she face uncertainty, risk, and/or asymmetric information?

Question 12

Consumer products may break down due to no fault of the consumer. Explain how a manufacturer's warranty to replace faulty products can reduce the risk on the consumer.

Question 13

Many retailers offer customers the option to pay in instalments. In so-called "buy now pay later" schemes, explain the asymmetry of information.

Question 14

Health insurance covers a person's healthcare expenses. Explain how insurers suffer from adverse selection.

Question 15

A bank is seeking to downsize by offering workers incentives to retire early. What problem of adverse selection might this scheme cause?

Question 16

Some countries only allow people who have been vaccinated against Covid-19 to eat in restaurants. Which concept of asymmetric information does this illustrate?

Question 17

Some lawyers accept fees on a contingency basis rather than the conventional hourly rate. Under the contingency fee, the lawyer receives a share of the client's winnings in court. Explain the contingency fee as a form of signaling.

Question 18

To stand out from others applying for jobs in finance, Maya qualified as a Chartered Financial Analyst. Under what conditions is this a credible signal?

Question 19

British students apply to university before they complete their national examinations. Universities typically accept students with conditions, for instance, two A grades. Which concept of asymmetric information does this illustrate?