Question 1

In a thin market:

Accepted Answer

In a thin market, there is less information and fewer transactions taking place. As a result, buyers may have less information about the quality of goods available for purchase, leading them to be more cautious when making a purchase. This means that some high-quality goods may be sold, but not as many as would be sold in a more liquid and well-informed market. Additionally, some low-quality goods may also be sold, but again, the lack of information and scarcity of transactions may limit the overall volume of goods sold.

Question 2

If the minimum price of plums high-quality)decreases, the market will become thinner.

Accepted Answer

If the minimum price of high-quality plums decreases, it is likely that more consumers will be able to afford them and demand may increase, potentially leading to a broader market.

Question 3

Adverse selection in employment is more likely when:

Accepted Answer

Adverse selection is more likely when people's abilities are difficult for potential employers to observe. This is because in such situations, employers may have difficulty distinguishing between high-quality and low-quality employees, and may end up hiring individuals who are less suited for the job, leading to adverse outcomes for both the employer and employee. When jobs require specific training or people's abilities are easy to measure, there is less room for adverse selection as employers can more accurately assess the qualifications of potential employees.

Question 4

There is asymmetric information in the used car market because sellers cannot distinguish between lemons low-quality)and plums high-quality)but buyers can.

Accepted Answer

In the used car market, sellers typically have more information about the condition of the car (whether it's a lemon or a plum) than buyers, creating a situation of asymmetric information where buyers cannot accurately assess the quality of the car compared to sellers.

Question 5

When buyers assume that there is a 70% chance of getting a lemon, and seven lemons low quality)and three plums high quality)are supplied, there is an equilibrium.

Accepted Answer

In this scenario, the buyers assume that there is a 70% chance of getting a lemon, which means they expect that 70% of the products supplied will be of low quality. With seven lemons and three plums supplied, the expected percentage of low-quality products is indeed 70%, which means the buyers' assumption is correct. This creates an equilibrium where the buyers are willing to pay a lower price for the products to reflect the perceived likelihood of getting a low-quality item. Therefore, option A is correct.

Question 6

The lemons model predicts that

Accepted Answer

The lemons model, introduced by George Akerlof, suggests that in markets where buyers cannot accurately assess product quality (e.g., used cars), the presence of low-quality goods ("lemons") can drive out high-quality goods. This is because buyers, unable to distinguish between high and low quality, will be willing to pay only a price reflective of the average quality, which may not be enough to keep sellers of high-quality goods in the market.

Question 7

Which of the following statements about a market for used cars is INCORRECT?

Accepted Answer

In a market for used cars, an increase in price would generally increase the quantity of both high-quality and low-quality cars supplied, not decrease the quantity of low-quality cars supplied. Sellers are more motivated to sell both types of cars at higher prices.

Question 8

One result of adverse selection in the used car market is that few plums high-quality)are sold.

Accepted Answer

Adverse selection in the used car market means that buyers are more likely to purchase lower-quality cars because the sellers have more information about the condition of the car than the buyers. This can lead to fewer high-quality cars being sold because sellers know they can get a better price for them in a different market.

Question 9

Which one of the following is NOT true of a thin market?

Accepted Answer

In a thin market, there are relatively few buyers and sellers, which can lead to a lack of liquidity and price volatility. The price of the good sold may actually be lower than if the market were thicker, as there are fewer potential buyers and competition among them may be weaker. Asymmetric information and sellers in a hurry to sell may also be characteristic of thin markets. However, the presence or absence of high-quality goods is not a defining feature of thin markets.

Question 10

If a typical consumer is willing to pay $3,000 for a plum and $1,000 for a lemon, and there is a 50% chance of getting a lemon, the typical consumer is willing to pay $2,000 for a used car.

Accepted Answer

The answer of If a typical consumer is willing to...

Question 11

One result of adverse selection in the market for used cars is:

Accepted Answer

Adverse selection occurs when sellers have better information about the quality of a product than buyers. In the market for used cars, this means that sellers of lemons (low quality cars) are more likely to put their cars up for sale than sellers of plums (high quality cars) because they know their cars are low quality and want to get rid of them. This results in an overabundance of lemons being offered for sale compared to plums.

Question 12

In the used car market, the adverse selection problem refers to the fact that a buyer must choose a used car from an undesirable selection of cars.

Accepted Answer

The answer of In the used car market, the adverse...

Question 13

The adverse selection problem suggests that:

Accepted Answer

The adverse selection problem suggests that the ratio of lemons (low quality) to plums (high quality) is likely to be high. This is because potential buyers may be hesitant to pay a high price for a good, fearing that it may be of low quality. As a result, sellers of high-quality goods may be driven out of the market, leaving only low-quality goods available.

Question 14

An employer can find himself in an adverse selection problem if there are too:

Accepted Answer

When there are too many underqualified applicants for each job, an employer may find himself in an adverse selection problem. This is because the employer may have difficulty identifying and selecting the most qualified candidate for the job, as they are outnumbered by underqualified candidates. This can lead to poor hiring decisions and can negatively impact the company's productivity and bottom line.

Question 15

If eight lemons low quality)and two plums high quality)are supplied and buyers assume that there is a 40% chance of getting a lemon, there is an equilibrium.

Accepted Answer

An equilibrium occurs when the supply and demand for a good or product are at balance. In this scenario, the supply includes eight lemons and two plums, with a 40% chance of getting a lemon. However, there is no information given about demand or the preferences of the buyers. Therefore, we cannot determine if there is an equilibrium or not.

Question 16

If only a small percentage of used computers on the market are plums high -quality), then the asymmetric information concerning the quality of used computers has generated a _______ market.

Accepted Answer

A thin market refers to a market where there are very few buyers and sellers, resulting in limited trading volume and liquidity. In this case, if only a small percentage of used computers on the market are of high quality, then there are relatively few high-quality options available for buyers to choose from. This would result in a thin market where there are few high-quality options and limited trading volume.

Question 17

In a market for used cars, if the minimum supply price for plums is lower than consumersʹ willingness to pay for a lemon, only plums will be supplied at the consumersʹ willingness to pay for a lemon.

Accepted Answer

In a market for used cars, the terms "plums" and "lemons" refer to high-quality and low-quality used cars, respectively. If the minimum supply price for plums is lower than consumers' willingness to pay for a lemon, it does not mean only plums will be supplied. Both plums and lemons can be supplied depending on various factors like availability, consumer preferences, and information asymmetry about the quality of cars.

Question 18

In the used pick-up truck market,

Accepted Answer

Empirical studies have found some support for the lemons model in the used pick-up truck market, but not all sellers are necessarily honest and not all buyers are necessarily naive, so the predictions of the lemons model are only partially observed.

Question 19

Which one of the following is true of a market for used cars?

Accepted Answer

As buyers become more pessimistic about their chances of buying a high-quality car, they are willing to pay less, leading to a decrease in the overall price of used cars.

Question 20

Buyers in the market for used guitars are getting more pessimistic about the possibility of getting a good guitar. This will cause the price of used guitars to _______ and the percentage of good used guitars to _______.

Accepted Answer

The increased pessimism among buyers will likely decrease demand, leading to lower prices. Additionally, with lower prices, sellers of good guitars may withdraw from the market, increasing the proportion of lower-quality guitars, hence the percentage of good used guitars decreases.

Quiz 9: Imperfect Information, External Benefits, and External Costs