Deck 11: Game Theory and Asymmetric Information

Question 1

What is "adverse selection"?

Answer 1

A situation in which the risk associated with the existence of asymmetric information causes one party not to enter into a contractual relationship with another party.

Question 2

Moral hazard is the

A)outcome of a Prisoner's Dilemma.
B)result of market signaling.
C)risk associated with a Dutch auction.
D)risk that one party to a contract may alter its post-contract behavior to the detriment of another party.

Answer 2

D

Question 3

The Prisoner's Dilemma is an example of

A)market signaling.
B)a zero-sum game.
C)a non-zero sum,non-cooperative game with a dominant strategy.
D)adverse selection.

Answer 3

C

Question 4

What is "market signaling"?

Question 5

The following matrix shows the payoffs for an advertising game between Coke and Pepsi.The firms can choose to advertise or to not advertise.Numbers in the matrix represent profits; the first number in each cell is the payoff to Coke.(Numbers in millions.)
a.Explain why this would be described as a Prisoner's Dilemma game.
b.Explain the probable outcome of this game.

Question 6

What is a "payoff matrix"?

Question 7

In a zero-sum game

A)the gains of one player are less than the gains of the other player.
B)the gains of one player are greater than the gains of the other player.
C)the gains of one player directly reflect the losses of another player.
D)the gains and losses of players are all expressed in zeros.

Question 8

What is "game theory"?

Question 9

John takes out a student loan at a bank but spends his money in Las Vegas to play at the casino.This situation is an example of

A)moral hazard.
B)moral suasion.
C)adverse selection.
D)fraud.

Question 10

What is "moral hazard"?

Question 11

If banks face a problem in loan markets when bad credit risks are the ones most likely to seek bank loans,it is described as

A)moral hazard.
B)moral suasion.
C)adverse selection.
D)fraud.

Question 12

What is "asymmetric information"?

Question 13

Market signaling

A)is a way of conveying information to other parties in a transaction where asymmetric information exists.
B)represents a dominant strategy in a multi-player game.
C)results in an optimum solution to a beach kiosk scenario.
D)None of the above

Question 14

Asymmetric information represents a market situation in which

A)all parties to a transaction possess less than full information.
B)one party in a transaction has more information than the other party.
C)some information possessed by the parties in a transaction may be false.
D)a zero-sum game exists.

Question 15

In game theory analysis,what is a "dominant strategy"?