Question 1

In the presence of asymmetric information, high-cost and low-cost customers are charged ​asymmetric prices.

Accepted Answer

In the presence of asymmetric information, prices may not necessarily reflect the cost differences between high-cost and low-cost customers directly, as sellers might not be able to perfectly distinguish between the two groups. Instead, pricing strategies like screening or signaling are used to mitigate information asymmetry.

Question 2

Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If full markets are re-established through signals, the new equilibrium will be more efficient than the original pooling equilibrium.

Accepted Answer

False

Question 3

Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If firms then screen consumers, the outcome may and may not be more efficient.

Accepted Answer

If firms screen consumers, they can identify those with a lower risk and offer them a lower price, leading to more efficient outcomes. However, if screening is imperfect or there are high transaction costs, screening may not improve efficiency and could potentially lead to even worse outcomes.

Question 4

Whether or not a pooling equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.

Accepted Answer

In a pooling equilibrium, all consumers purchase the same product or service regardless of their type. This equilibrium can only exist if the market has an equal number of high cost and low cost consumers. In markets where one type of consumer is more prevalent, a separating equilibrium where different products or services are offered to each type is more likely to occur. Therefore, the existence of a pooling equilibrium in a competitive market with adverse selection depends on the distribution of high cost and low cost consumers.

Question 5

In a competitive separating equilibrium, low cost consumers of insurance will not fully insure because insurance rates offered to them are not actuarily fair.

Accepted Answer

The answer of In a competitive separating equilibrium, low cost...

Question 6

Regardless of whether or not screening or signaling occurs in markets with adverse selection, the equilibrium will always be less efficient than an equilibrium in the same competitive market if there were no asymmetric information.

Accepted Answer

Adverse selection leads to a situation where higher quality goods or services become indistinguishable from lower quality goods or services, leading to an inefficient allocation of resources. Regardless of whether screening or signaling occurs, the presence of asymmetric information will always result in a less efficient equilibrium than a situation without adverse selection.

Question 7

A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).

Accepted Answer

In a pooling equilibrium, all individuals are offered the same insurance contract despite differences in risk, leading to inefficiencies not because everyone buys too little insurance, but because it does not differentiate between high-risk and low-risk individuals, potentially causing adverse selection problems.

Question 8

In a competitive market with high cost and low cost consumers (where firms are unable to tell consumer types apart), any screening costs incurred by firms will be passed on to low cost consumer but not to high cost consumers.

Accepted Answer

In a competitive market where firms are unable to tell consumer types apart, firms will try to charge a price that maximizes their profits. If there are high and low cost consumers, firms will charge a price that is somewhere in between what the two types of consumers are willing to pay. Any screening costs incurred by firms to determine consumer types will increase their costs and lead to lower profits. Therefore, in order to maintain profitability, firms will pass on these screening costs to the low cost consumers, who are less willing to pay higher prices, but not to the high cost consumers, who are more likely to pay higher prices. This uneven distribution of screening costs is one way in which low cost consumers can be disadvantaged in the market.

Question 9

Whether or not a separating equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.

Accepted Answer

The answer of Whether or not a separating equilibrium exists...

Question 10

Whenever there is adverse selection without signaling or screening, there will be a missing market.

Accepted Answer

Adverse selection refers to a situation where one party has more information than the other party in a transaction. This can lead to the market being dominated by low-quality products or services, as the higher quality ones are unwilling to sell at the same price. Without signaling or screening mechanisms in place, it is difficult for buyers to distinguish between high and low-quality products, leading to a missing market where high-quality products are not traded.

Question 11

If a pooling equilibrium exists in an insurance market, no separating equilibrium can exist.

Accepted Answer

This statement is true. In a pooling equilibrium, all types of individuals purchase the same insurance coverage and pay the same premium, regardless of their risk level. In contrast, in a separating equilibrium, different types of individuals purchase different insurance coverage and pay different premiums based on their risk level. If a pooling equilibrium exists, it means that there is no incentive for any individual to separate from the pool and purchase a different insurance coverage. Therefore, a separating equilibrium cannot exist in such a market.

Question 12

Adverse selection in insurance markets results in missing markets because people engage in riskier behavior once they are insured.

Accepted Answer

Adverse selection in insurance markets results in missing markets because high-risk individuals are more likely to purchase insurance than low-risk individuals, not because people engage in riskier behavior once they are insured. The latter is known as moral hazard.

Question 13

Whenever there is adverse selection, there will be missing market.

Accepted Answer

The answer of Whenever there is adverse selection, there will...

Question 14

If firms successfully gather information about consumers before offering them insurance, and if this leads to a separating equilibrium, efficiency is restored.

Accepted Answer

In a separating equilibrium, firms offer different insurance contracts based on the information they have about consumers, leading to adverse selection where only high-risk consumers choose certain types of insurance, potentially reducing overall market efficiency.

Question 15

Consider two types of rules that might govern an otherwise unregulated health insurance market: (1) Insurance companies can price-discriminate against the sick and old; (2) insurance companies cannot price discriminate against the sick and old.Explain why, in equilibrium, insurance may be very expensive for the sick and old regardless of which case we find ourselves in.

Accepted Answer

The answer of Consider two types of rules that might...

Question 16

In equilibrium, consumers will incur costs to signal their type (in markets with adverse selection) only if this results in a price that is lower than the pooling equilibrium price.

Accepted Answer

In adverse selection markets, consumers incur costs to signal their type in order to separate themselves from the low-quality pool. This separation can lead to a higher price in equilibrium, as consumers who are willing to incur the cost of signaling their quality will be charged a higher price than those who do not. Therefore, the correct statement is that in equilibrium, consumers will incur costs to signal their type only if this results in a price that is higher than the pooling equilibrium price.

Question 17

Firms that employ statistical discrimination in the labor market will earn higher profits in expectation than firms that do not discriminate (and have no effective screens).

Accepted Answer

Statistical discrimination involves using observable characteristics, such as gender or race, to make assumptions about individual potential productivity in a job role. Firms that use statistical discrimination can potentially hire more productive workers and avoid hiring less productive workers, leading to higher profits. However, this also perpetuates discrimination and can lead to unequal treatment of individuals.

Question 18

If all consumers are willing to buy insurance at the zero-profit pooling price, there cannot be a separating equilibrium.

Accepted Answer

The answer of If all consumers are willing to buy...

Question 19

Universal health insurance policies fall into three categories: single payer/single provider systems, single payer systems, and regulated insurance markets.The United States has elements of two of these.

Accepted Answer

The answer of Universal health insurance policies fall into three...

Question 20

In the presence of adverse selection (due to high and low cost consumers), firms will employ screens to get information about consumers so long as this leads to a more efficient competitive equilibrium.

Accepted Answer

The answer of In the presence of adverse selection (due...

Quiz 22: Asymmetric Information in Competitive Markets

In the presence of asymmetric information, high-cost and low-cost customers are charged asymmetric prices.

Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If full markets are re-established through signals, the new equilibrium will be more efficient than the original pooling equilibrium.

Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If firms then screen consumers, the outcome may and may not be more efficient.

Whether or not a pooling equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.

In a competitive separating equilibrium, low cost consumers of insurance will not fully insure because insurance rates offered to them are not actuarily fair.

Regardless of whether or not screening or signaling occurs in markets with adverse selection, the equilibrium will always be less efficient than an equilibrium in the same competitive market if there were no asymmetric information.

A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).

In a competitive market with high cost and low cost consumers (where firms are unable to tell consumer types apart), any screening costs incurred by firms will be passed on to low cost consumer but not to high cost consumers.

Whether or not a separating equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.

Whenever there is adverse selection without signaling or screening, there will be a missing market.

If a pooling equilibrium exists in an insurance market, no separating equilibrium can exist.

Adverse selection in insurance markets results in missing markets because people engage in riskier behavior once they are insured.

Whenever there is adverse selection, there will be missing market.

If firms successfully gather information about consumers before offering them insurance, and if this leads to a separating equilibrium, efficiency is restored.

In equilibrium, consumers will incur costs to signal their type (in markets with adverse selection) only if this results in a price that is lower than the pooling equilibrium price.

Firms that employ statistical discrimination in the labor market will earn higher profits in expectation than firms that do not discriminate (and have no effective screens).

If all consumers are willing to buy insurance at the zero-profit pooling price, there cannot be a separating equilibrium.

Universal health insurance policies fall into three categories: single payer/single provider systems, single payer systems, and regulated insurance markets.The United States has elements of two of these.

In the presence of adverse selection (due to high and low cost consumers), firms will employ screens to get information about consumers so long as this leads to a more efficient competitive equilibrium.

Quiz 22: Asymmetric Information in Competitive Markets

In the presence of asymmetric information, high-cost and low-cost customers are charged ​asymmetric prices.

Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If full markets are re-established through signals, the new equilibrium will be more efficient than the original pooling equilibrium.

Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If firms then screen consumers, the outcome may and may not be more efficient.

Whether or not a pooling equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.

In a competitive separating equilibrium, low cost consumers of insurance will not fully insure because insurance rates offered to them are not actuarily fair.

Regardless of whether or not screening or signaling occurs in markets with adverse selection, the equilibrium will always be less efficient than an equilibrium in the same competitive market if there were no asymmetric information.

A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).

In a competitive market with high cost and low cost consumers (where firms are unable to tell consumer types apart), any screening costs incurred by firms will be passed on to low cost consumer but not to high cost consumers.

Whether or not a separating equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.

Whenever there is adverse selection without signaling or screening, there will be a missing market.

If a pooling equilibrium exists in an insurance market, no separating equilibrium can exist.

Adverse selection in insurance markets results in missing markets because people engage in riskier behavior once they are insured.

Whenever there is adverse selection, there will be missing market.

If firms successfully gather information about consumers before offering them insurance, and if this leads to a separating equilibrium, efficiency is restored.

In equilibrium, consumers will incur costs to signal their type (in markets with adverse selection) only if this results in a price that is lower than the pooling equilibrium price.

Firms that employ statistical discrimination in the labor market will earn higher profits in expectation than firms that do not discriminate (and have no effective screens).

If all consumers are willing to buy insurance at the zero-profit pooling price, there cannot be a separating equilibrium.

Universal health insurance policies fall into three categories: single payer/single provider systems, single payer systems, and regulated insurance markets.The United States has elements of two of these.

In the presence of adverse selection (due to high and low cost consumers), firms will employ screens to get information about consumers so long as this leads to a more efficient competitive equilibrium.

In the presence of asymmetric information, high-cost and low-cost customers are charged asymmetric prices.