Deck 19: Asymmetric Information

Question 1

Which of the following is an example of a hidden characteristic?

A) After purchasing life insurance, Billy joins the bomb squad.
B) Only the owner knows about her car defects.
C) Bobby let his employer know about his college degree.
D) Sally provides her driving record to the car insurance company.

Answer 1

Only the owner knows about her car defects.

Question 2

A person who starts practicing poisonous snake charming after signing a contract with a health insurance company is an example of

A) moral hazard.
B) adverse selection.
C) signaling.
D) screening.

Answer 2

moral hazard.

Question 3

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?

A) All of the cars sell for $1,900.
B) Only lemons are sold for $1,900.
C) Only lemons are sold for $1,000.
D) Only good cars will be sold for $2,000.

Answer 3

All of the cars sell for $1,900.

Question 4

A consumer is likely to avoid adverse selection and get a high-quality lunch at

A) a snack bar at a traveling carnival.
B) a vendor who parks her cart at a different location every noon.
C) a restaurant in the center of a business district.
D) a restaurant located next door to Disneyland.

Question 5

What is one of the most important benefits of the Internet?

A) The Internet has increased asymmetric information.
B) The Internet has reduced asymmetric information.
C) The Internet has increased moral hazard.
D) The Internet has increased transaction costs.

Question 6

If a bank offers mortgages that do not require the normal 20% down payment,the bank encourages

A) people who know they might not pay off the mortgage.
B) people who can't afford the down payment but can pay off the mortgage.
C) people who know that they are going to pay off the mortgage.
D) people who know they can't pay off the mortgage but who can afford the down payment.

Question 7

Adverse selection occurs when

A) a person takes more risks that are not known to the life insurance company because he has life insurance.
B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.
C) a person is a risk lover.
D) pregnant women with health insurance make more doctor visits than uninsured pregnant women.

Question 8

Opportunism may occur when

A) both parties have limited information.
B) both parties have full information.
C) one party has information the other does not.
D) All of the above.

Question 9

Adverse selection occurs when there is

A) full information.
B) unobserved behavior.
C) an unobserved characteristic.
D) a worker who shirks because his boss does not watch him.

Question 10

Adverse selection can occur when

A) all persons involved in a transaction have full information.
B) one person has information not available to others.
C) post-agreement incentives result in workers shirking.
D) nobody has any information about a particular product.

Question 11

If reckless drivers are more likely to buy automobile insurance than safe drivers are,

A) a moral hazard has occurred.
B) adverse selection has occurred.
C) the market for insurance is efficient.
D) then automobile insurance will be fairly priced.

Question 12

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?

A) Only lemons are sold for $1,900.
B) Only lemons are sold for $1,000.
C) Buyers of lemons will pay too much for their cars.
D) Buyers of good cars will pay too much for their cars.

Question 13

If you sell your DVD player on eBay,you will be better informed about the quality of the product than any potential buyer.This is called

A) adverse selection.
B) asymmetric information.
C) moral hazard.
D) opportunistic behavior.

Question 14

The lemons problem is due to

A) asymmetric information.
B) moral hazard.
C) hidden actions.
D) symmetric information.

Question 15

If adverse selection exists in a market,

A) it increases consumer surplus but reduces producer surplus.
B) it reduces consumer and producer surplus.
C) it reduces producer surplus but has no impact on consumer surplus.
D) it increases both consumer and producer surplus.

Question 16

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

A) All of the cars will be sold at $1,600.
B) No cars will be sold.
C) Only lemons will be sold at $1,600.
D) Only lemons will be sold at $1,000.

Question 17

A person who practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance is an example of

A) moral hazard.
B) adverse selection.
C) signaling.
D) screening.

Question 18

In the automobile insurance market,adverse selection occurs when

A) drivers with greater risks buy a policy with large deductibles.
B) drivers with greater risks buy a policy with no deductibles.
C) uninsured drivers drive recklessly.
D) insured drivers drive recklessly.

Question 19

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?

A) All of the cars will be sold.
B) No cars will be sold.
C) Only lemons will be sold.
D) Only good cars will be sold.

Question 20

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

A) All of the cars will be sold.
B) No cars will be sold.
C) Only lemons will be sold.
D) Ten percent of the used cars sold will be lemons.

Question 21

What could be a potential explanation for a firm selling virtually identical products under different brands?

A) Consumers are well informed about the quality of the products.
B) Consumers believe that the products' quality is similar and thus firms are able to price discriminate.
C) Consumers always favor private-label brands.
D) Consumers believe that the products' quality differs and thus firms are able to price discriminate.

Question 22

Asymmetric information will always cause

A) efficiency problems.
B) equity problems.
C) Both A and B.
D) None of the above.

Question 23

The market for used cars is shown in the above figure.Ten percent (10%)of all cars are lemons.A mechanic is offering to inspect a car for sale and certify that a car is not a lemon.If car sellers are risk neutral,what is the highest price that a car seller would pay for such a service? Who would buy this service?

Question 24

A market equilibrium with symmetric information is efficient because

A) low-quality goods are not sold.
B) consumers pay higher prices for lemons.
C) sellers only offer high-quality goods.
D) the goods go to the people who value them the most.

Question 25

If sellers of good cars and sellers of lemons both offer a warranty on their cars,consumers will then be able to tell which cars are the lemons.

Question 26

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

A) a warranty on a lemon is costly to the seller.
B) warranties are offered on all cars.
C) warranties are only offered on lemons.
D) a warranty on a good car is a false signal.

Question 27

eBay has a seller reputation system to provide

A) consumers with a signal concerning seller quality.
B) sellers a chance to signal other sellers concerning their quality.
C) a reduction in monopoly power.
D) improvements in investor relations.

Question 28

Explain how product liability laws can reduce adverse selection.

Question 29

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.The percent of all cars that are lemons is θ.What value of θ is necessary for all cars to be sold?

Question 30

Which of the following reduces the effects of asymmetric information?

A) repeat purchases
B) warranties
C) building a reputation
D) All of the above.

Question 31

Suppose that everyone is risk neutral and buyers cannot identify the lemons.The expected value of a used car is $8,000.No good cars will be sold in this market

A) unless the sellers of good cars place a value greater than $8,000 on their cars.
B) unless the sellers of lemons place a value greater than $8,000 on their cars.
C) unless sellers engage in cheap talk.
D) unless the sellers of good cars place a value lesser or equal to $8,000 on their cars.

Question 32

With asymmetric information firms might be reluctant to improve the quality of their products because

A) it costs them more to produce the better quality product.
B) they are not able to completely capture the benefits of the improvement.
C) consumers do not value the better product.
D) consumers are better informed about the product and value the new product less.

Question 33

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.What is the maximum share of lemons that will still allow for all cars being sold?

A) 12%
B) 16%
C) 20%
D) 23%

Question 34

The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.For all cars offered for sale to be sold,the percent of all cars that are lemons is θ.What happens to θ if car buyers incur a $100 transaction cost when buying a used car?

Question 35

Many people tend to buy multiple cars from the same manufacturer because

A) doing so reduces the asymmetric information problem; consumers have better knowledge of quality.
B) doing so reduces the asymmetric information problem; consumers have better knowledge of prices.
C) doing so doesn't change the asymmetric information problem but consumers have more information.
D) doing so increases the consumers brand loyalty.

Question 36

Explain what may occur when a buyer and a seller have unequal amounts of limited information.Describe two different types of problems that may arise when asymmetric information exists.

Question 37

A downtown diner daily serving the same business people will be more likely to serve a tasty lunch than a snack bar at a tourist attraction.

Question 38

The XYZ Co.is hiring salespersons.They will be paid a very attractive hourly rate that is independent of how much they sell.Describe an adverse selection that would take place.Describe a moral hazard that would take place.

Question 39

Adverse selection occurs when an agreement encourages undesirable behavior.

Question 40

What is one reason the eBay seller reputation system is important?

A) eBay transactions tend to be isolated, one-off transactions.
B) eBay transactions tend to be repeat sales between the same seller and buyers.
C) eBay transactions often involve stolen products.
D) eBay transactions require a larger percentage than, say, Amazon transactions.

Question 41

Selling the same product under different brand names allows a firm to price discriminate as long as

A) customers know the products are identical.
B) customers do not know the products are identical.
C) the products really are not the same.
D) the firm lets customers know that the products are identical.

Question 42

Some companies subject their applicants to extensive tests.Why?

A) to reduce the informational asymmetry between the firm and the applicant
B) to screen the applicant to avoid the problem of adverse selection
C) to gather more information about the applicant
D) All of the above.

Question 43

Screening is the action

A) taken by an informed person to determine the information possessed by uninformed people.
B) taken by an uninformed person to determine the information possessed by informed people.
C) taken to offset signaling.
D) that is cheaper and more effective than cheap talk.

Question 44

Signals may prevent adverse selection if

A) sending a false signal is cheap for the agent.
B) sending a false signal is costly for the agent.
C) agents as rational.
D) signals are as good as cheap talk.

Question 45

Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

Question 46

Explain why some people who are applying for a job at a bank dress up,arrive early,and have their paperwork neatly completed for the job interview.

Question 47

Why would a firm rather a company like J.D.Power (which provides product satisfaction reviews)review its product than doing it within the firm?

A) J.D. Power provides less credibility.
B) J.D. Power provides greater credibility.
C) J.D. Power is more honest than the average firm.
D) J.D. Power has a government monopoly in providing product satisfaction reviews.

Question 48

If bad drivers can usually avoid being ticketed by the police,then insurance companies will

A) use one's driving record as a signal.
B) use one's driving record as a screening device.
C) not be able to use one's driving record as a screening device.
D) request driving records directly from the police and not from the individual applicant.

Question 49

If the government provides universal health insurance,what screening process will the government need?

A) It won't need a screening test.
B) It will only give health insurance to non-smokers.
C) It won't use screening tests but it will use statistical discrimination.
D) It won't use screening tests but it will use signals.

Question 50

A physical examination is NOT a good screening device for life insurance companies if

A) life-threatening diseases are usually undetected.
B) doctors cannot be easily bribed to write a good report.
C) medical history is a good predictor of life expectancy.
D) one's current state of health is a good predictor of life expectancy.

Question 51

If a student achieves a high SAT score,this

A) sends a signal to a college that the applicant will be a good college student.
B) does not act as a screening device.
C) is a moral hazard.
D) provides a college with no information.

Question 52

Life insurance companies often give applicants a physical examination to prevent

A) the person from dying before obtaining the policy.
B) signaling.
C) adverse selection.
D) profit maximization.

Question 53

Assume health insurance is provided universally by the government.This would

A) eliminate the problems of adverse selection.
B) result in adverse selection.
C) eliminate the problems of moral hazard.
D) All of the above.

Question 54

If the market interest rate is 5% and a bank advertises loans at 12%,the bank will receive

A) no applications.
B) applications from mostly low-risk borrowers.
C) applications from mostly high-risk borrowers.
D) a moral hazard.

Question 55

What role does a company like J.D.Power (which provides product satisfaction reviews)serve?

A) It provides a screening test.
B) It provides a signal of quality.
C) It reduces moral hazard.
D) It reduces costs of giving surveys.

Question 56

The requirement that all drivers must carry auto insurance reduces

A) moral hazard.
B) the effectiveness of signaling.
C) adverse selection.
D) the chance of auto accidents.

Question 57

If a life insurance company does not require a medical exam of its policyholders,it is most likely that the company

A) charges above-average premiums.
B) charges below-average premiums.
C) charges no premiums.
D) has only very healthy policyholders.

Question 58

Assume health insurance is provided universally by the government.This would

A) force every taxpayer to bear the costs of adverse selection.
B) force every taxpayer to bear the costs of moral hazard.
C) force the government to deal with adverse selection problems.
D) force foreign governments to deal with moral hazard problems.

Question 59

Firms are able to price discriminate

A) when all customers are uninformed about quality differences.
B) when no customers are uninformed about quality differences.
C) when some customers are uninformed about quality differences.
D) when there is full information about quality available to all customers.

Question 60

How can a warranty at the seller's expense signal that a product is of high quality?

Question 61

Competitive firms are able to set price above marginal cost when

A) the markup is less than the cost of going to another store.
B) the markup is greater than the cost of going to another store.
C) all consumers have full information.
D) consumers know what other stores are charging.

Question 62

If consumers have limited information about price and search costs exist,then

A) the result must be that all firms will charge the same price.
B) the monopoly price must result.
C) the full-information, competitive price is not an equilibrium.
D) the difference in prices between firms will be greater than the search cost.

Question 63

A firm is more likely to adopt multiple brand names for the same product when the good is a nondurable.

Question 64

The XYZ Co.sells shirts.Shirts with the company label on the tag are perceived to be of higher quality than shirts with the store's label.Yet,shirts are of identical quality regardless of label.The demand for perceived high-quality shirts is p_h = 50 - q_h.The demand for perceived low-quality shirts is p_l = 10 + p_h - q_l.The firm can produce shirts at TC = q_h + q_l.How many shirts does the firm label as low quality and how many as high quality? What prices are charged?

Question 65

Describe how a firm that sells only one brand of bleach may be able to increase its profit if it re-labels some of its bleach.

Question 66

As long as there is asymmetric information among consumers and positive search cost,if price is below the monopoly price and the same across all firms,then a competitive firm

A) can always profit from raising its price.
B) can always profit from lowering its price.
C) can profit from raising its price but by no more than the search cost.
D) can profit from lowering its price but by no more than the search cost.

Question 67

In the tourist-trap model,a consumer might pay more than the marginal cost for a good sold in a competitive market because

A) the consumer is not free to search for lower prices.
B) souvenir stores are part of a nationwide cartel.
C) the cost of searching for a cheaper good is more than the markup over the marginal cost.
D) the difference in prices between stores will be smaller than the search cost.

Question 68

When consumers have asymmetric information and when search costs and the number of firms are large,a single-price equilibrium in a competitive market

A) is impossible.
B) occurs when price equals average cost.
C) occurs when price equals marginal cost plus the search cost.
D) occurs when the price is the price a monopoly would set.

Question 69

The WWQX Co.sells shirts.Shirts with the company label on the tag are perceived to be of higher quality than shirts with the store's label.Yet,shirts are of identical quality regardless of the label.The demand for perceived high-quality shirts is p_h = 80 - q_h.The demand for perceived low-quality shirts is p_l = 19 + p_h - q_l.The firm can produce shirts at TC = 2q_h + 2q_l.What is WWQX Co.total profit?

A) $2,362
B) $1,521
C) $2,518
D) $1,875

Question 70

The Internet has made it possible to compare lots of prices without incurring a lot of cost.This

A) has given firms added market power to price discriminate.
B) has significantly reduced search cost and made markets more competitive.
C) has enabled firms to charge higher prices to consumers with computers.
D) has only affected technology markets.

Question 71

Empirical studies conclude that advertising

A) raises prices in all markets.
B) can reduce the prices of many goods.
C) reduces the prices on all goods.
D) has no impact on prices.

Question 72

The number of brands of identical products will most likely increase as

A) the number of informed consumers increases.
B) the cost of producing many brands decreases.
C) the number of uninformed consumers decreases.
D) None of the above.

Question 73

If there is zero search cost,then in the presence of asymmetric information,competitive firms will

A) charge the monopoly price.
B) charge the competitive price.
C) charge zero price.
D) shut down.

Question 74

The Internet has made it possible to compare lots of prices without incurring a lot of cost.If Internet access is unequally distributed throughout the population one would expect

A) consumers with Internet access to pay a higher price.
B) consumers without Internet access to pay a lower price.
C) price discrimination against consumers without Internet access.
D) firms to charge the same price to all consumers.

Question 75

The WWQX Co.sells shirts.Shirts with the company label on the tag are perceived to be of higher quality than shirts with the store's label.Yet,shirts are of identical quality regardless of the label.The demand for perceived high-quality shirts is p_h = 80 - q_h.The demand for perceived low-quality shirts is p_l = 19 + p_h - q_l.The firm can produce shirts at TC = 2q_h + 2q_l.What prices are charged for the low-quality and for the high-quality shirts?

A) p_l = 31; p_h = 41
B) p_l = 51; p_h = 41
C) p_l = 17; p_h = 45
D) p_l = 35; p_h = 28

Question 76

For much of its history,General Motors was characterized by having versions of the same car with different nameplates,e.g.,Chevrolet vs.Cadillac.This business model has seemed less successful in recent years.What might explain this?

A) Consumers have more information concerning costs and quality.
B) Consumers have more information concerning costs but not quality.
C) Sellers have more information concerning costs but consumers have more information about quality.
D) Consumers have less information concerning costs and quality.

Question 77

In the tourist-trap model,a consumer might pay more than marginal cost for a good sold in a competitive market if the cost of possibly finding the good cheaper is more than the markup over marginal cost.

Question 78

If all consumers are uninformed about the quality of a product

A) firms can increase product by selling the same product under a different name at a different price.
B) firms will not be able to price discriminate.
C) firms will price discriminate.
D) firms will increase profits by charging different prices for the same product.

Question 79

With asymmetric information among consumers and positive search costs,a firm may

A) raise its price above the monopoly price.
B) price at the monopoly level.
C) price at the full information competitive level.
D) None of the above.

Question 80

The WWQX Co.sells shirts.Shirts with the company label on the tag are perceived to be of higher quality than shirts with the store's label.Yet,shirts are of identical quality regardless of the label.The demand for perceived high-quality shirts is p_h = 80 - q_h.The demand for perceived low-quality shirts is p_l = 19 + p_h - q_l.The firm can produce shirts at TC = 2q_h + 2q_l.How many shirts does the firm label as low quality and how many as high quality? What prices are charged?

A) q_l = 29; q_h = 39
B) q_l = 39; q_h = 79
C) q_l = 19; q_h = 25
D) q_l = 20; q_h = 18