Question 1

Of the following,the best example of private information is when

Accepted Answer

Private information refers to information that is not known or available to others. In this case, the seller of the used car knows about the defects of the car, but the potential buyer does not. This is a perfect example of private information. Option A is not private information as one person simply knows a price that the other does not. Option C is not an example of private information since the seller does not know about the defects. Option D is not an example of private information as a trained mechanic would be able to find out about the defects. Option E is not an example of private information as both parties have access to the same information.

Question 2

In the used car market,adverse selection is a problem primarily when

Accepted Answer

Adverse selection in the used car market refers to a situation where buyers cannot determine the quality of a used car. This happens because the seller has more information about the car's quality than the buyer. As a result, the buyer may end up paying a higher price for a lower quality car. This problem of adverse selection can be reduced if buyers can accurately determine the quality of the car before buying it.

Question 3

In the used car market with no warranties,the market for lemons (poor quality used cars)is ________ and the market for good cars is ________.

Accepted Answer

The market for lemons becomes inefficient due to oversupply as sellers of high-quality cars withdraw from the market, unable to get a fair price due to asymmetric information. Buyers, unable to distinguish between good and bad cars, are only willing to pay an average price, leading to an undersupply of good cars, making that market also inefficient.

Question 4

The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as

Accepted Answer

Adverse selection occurs when one party in a transaction possesses more information than the other, resulting in an imbalance of power and potentially unfair outcomes. This can lead to the better-informed party taking advantage of the less informed one by negotiating a deal that benefits themselves at the other party's expense.

Question 5

Adverse selection is created by

Accepted Answer

Adverse selection is created by private information, where one party has more information than the other party and uses it to their advantage, leading to an imbalance of power and potential negative outcomes for the other party.

Question 6

The used car market without warranties suffers from

Accepted Answer

The used car market without warranties suffers from adverse selection, where buyers cannot distinguish between high-quality and low-quality cars, and moral hazard, where sellers have an incentive to hide defects in the car. These problems are inherent in asymmetric information, where one party knows more about the product than the other, and can lead to market failure. Perfect competition, a separating equilibrium, oligopoly, and excessive signaling do not accurately describe the issues in the used car market.

Question 7

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Accepted Answer

Offering a warranty is a credible signal of good quality because it can be costly for the seller if the car is not of good quality. The warranty means the seller is confident enough in the car's condition to offer protection against future repairs, which would be an unnecessary cost if the car were likely to have issues. This aligns with signaling theory, where credible signals must entail a cost to the signaler that would not be rational if the signal were false.

Question 8

One of the ways the market for used cars copes with the problems associated with private information is through the offering of

Accepted Answer

Warranties offered by dealerships or third-party companies can help alleviate the concerns of buyers regarding the reliability of a used vehicle. This provides buyers with additional information and confidence in their purchase, which helps address the problem of private information. Leases, low interest rates, and high prices for high-quality used cars do not directly address the problem of private information, and low prices may actually exacerbate it as buyers may question the quality of the vehicle being sold at such a low price.

Question 9

Adverse selection can occur when

Accepted Answer

Adverse selection occurs when one party has information that the other party does not have, leading to an imbalance in the quality of the goods or services exchanged.

Question 10

Your grade point average acts as ________ to potential employers.

Accepted Answer

A grade point average serves as a signal to potential employers of a candidate's academic performance and may indicate their work ethic or level of dedication.

Question 11

Private information is a situation in which

Accepted Answer

Private information refers to a situation where one party to an exchange has information that is not available to the other party. This information asymmetry can lead to market inefficiencies and can affect the behavior of both parties involved in the exchange.

Question 12

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

Accepted Answer

Without effective signals such as warranties, there is no way for the owners of peaches to convince buyers that their cars are worth $10,000. As a result, they will have to settle for a lower price or risk not being able to sell their cars at all.

Question 13

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000,and lemons are worth $6,000.Three fourths of all used cars are peaches,and one fourth are lemons.In a market with no signals,for instance,a market without warranties,the average value of cars actually sold will be

Accepted Answer

The answer of Suppose that there are only two types...

Question 14

Without warranties,used car buyers can assume that all used cars are "lemons" because of

Accepted Answer

Adverse selection refers to the tendency of buyers with higher risk to participate in a transaction more than buyers with lower risk. Without warranties, the buyer cannot differentiate between a high-risk and a low-risk used car, leading them to assume that all used cars are lemons.

Question 15

Signals are believable when the cost of sending a ________ is known to be ________.

Accepted Answer

Signals are more believable when the cost of sending a false signal is high, making it less likely for someone to send a false signal due to the associated high costs.

Question 16

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

Accepted Answer

Warranties provide a signal of quality for used cars, which reduces the problem of private information for buyers. This results in a price difference between good and bad used cars, as buyers are willing to pay more for a car with a warranty, assuming it is of better quality. Therefore, the price of good and bad used cars differs in the presence of warranties.

Question 17

Adverse selection is the tendency for people who accept contracts to be those who

Accepted Answer

Adverse selection refers to the situation where those who have private information that puts them at an advantage in the transaction are more likely to accept contracts. This means that they are planning to use their private information to the disadvantage of the less well-informed party. Therefore, choice D is the correct answer.

Question 18

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Accepted Answer

By offering a warranty, the seller is putting their money on the line if the car ends up being a lemon. This means that the seller is less likely to sell a low-quality car, as they would have to pay out on the warranty if it ends up being a lemon. Therefore, buyers believe that a warranty is a signal of quality, as the seller wouldn't offer one if they thought the car was likely to need repairs or replacements.

Question 19

In the used car market without warranties,adverse selection results in

Accepted Answer

Adverse selection refers to the market condition where buyers have less information about the quality of the used cars than the sellers. In such a market, sellers of high-quality cars tend to pull out, leaving only sellers offering low-quality cars (lemons) in the market. This results in a situation where only lemons are available for sale, as the sellers of good quality cars prefer not to sell due to the lower prices that buyers may be willing to offer for fear of getting a lemon. Therefore, option B is the best choice.

Question 20

Suppose there are only two kind of cars in the market for used cars: lemons and good cars.A lemon is worth $1,000 both to its current owner and to anyone who buys it.A good car is worth $8,000 to its current and potential owners.Buyers can't tell whether a car is a lemon until after they have bought the car,and there is no warranty.What is the equilibrium price of a used car?

Accepted Answer

Since buyers cannot tell whether a car is a lemon or a good car, they will be willing to pay the average value of both types, which is (1000+8000)/2 = $4,500. However, no seller of a good car will be willing to sell for less than $8,000 because that is the value to them, so the only cars that will trade are lemons at $1,000. Therefore, the equilibrium price is $1,000, which is also the value of a lemon to its current owner.

Quiz 12: Markets With Private Information

Of the following,the best example of private information is when

In the used car market,adverse selection is a problem primarily when

In the used car market with no warranties,the market for lemons (poor quality used cars) is and the market for good cars is .

The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as

Adverse selection is created by

The used car market without warranties suffers from

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

One of the ways the market for used cars copes with the problems associated with private information is through the offering of

Adverse selection can occur when

Your grade point average acts as ________ to potential employers.

Private information is a situation in which

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

Without warranties,used car buyers can assume that all used cars are "lemons" because of

Signals are believable when the cost of sending a is known to be .

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .

Adverse selection is the tendency for people who accept contracts to be those who

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

In the used car market without warranties,adverse selection results in

Quiz 12: Markets With Private Information

Of the following,the best example of private information is when

In the used car market,adverse selection is a problem primarily when

In the used car market with no warranties,the market for lemons (poor quality used cars) is ________ and the market for good cars is ________.

The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as

Adverse selection is created by

The used car market without warranties suffers from

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

One of the ways the market for used cars copes with the problems associated with private information is through the offering of

Adverse selection can occur when

Your grade point average acts as ________ to potential employers.

Private information is a situation in which

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

Without warranties,used car buyers can assume that all used cars are "lemons" because of

Signals are believable when the cost of sending a ________ is known to be ________.

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

Adverse selection is the tendency for people who accept contracts to be those who

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

In the used car market without warranties,adverse selection results in

In the used car market with no warranties,the market for lemons (poor quality used cars) is and the market for good cars is .

Signals are believable when the cost of sending a is known to be .

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .