Question 1

The owner of a restaurant is worried that Covid-19 policies might affect her business. Does she face uncertainty, risk, and/or asymmetric information?
A) Uncertainty.
B) Risk.
C) Asymmetric information.
D) a and b.
E) a, b, and c.

Accepted Answer

The owner faces uncertainty because it's unclear how or if the policies will affect her business, and risk because there are potential negative outcomes associated with the impact of Covid-19 policies. Asymmetric information doesn't directly apply to the situation described, as it involves a scenario where one party has more or better information than the other, which isn't the focus of the concern about Covid-19 policies affecting the business.

Question 2

Consumer products may break down due to no fault of the consumer. Explain how a manufacturer's warranty to replace faulty products can reduce the risk on the consumer.
A) If the product breaks down, the consumer need not bear the cost of replacement.
B) The cost to the consumer is the same whether the product breaks down or not.
C) The consumer can be sure of getting a functional product.
D) a and b.
E) a, b, and c.

Accepted Answer

A manufacturer's warranty ensures that if a product breaks down, the consumer does not have to pay for a replacement (A), the overall cost remains the same regardless of breakdowns (B), and it guarantees the consumer will eventually have a functional product (C).

Question 3

Many retailers offer customers the option to pay in instalments. In so-called "buy now pay later" schemes, explain the asymmetry of information.
A) The retailer extends credit but lacks information about the customer's ability and willingness to pay the future instalments.
B) The retailer bears the risk that the customer will not pay.
C) The customer has better information about her ability and willingness to pay.
D) The customer can decide whether to pay.

Accepted Answer

The retailer extends credit but lacks information about the customer's ability and willingness to pay the future instalments.

Question 4

Health insurance covers a person's healthcare expenses. Applicants for insurance have better information about their own health and lifestyle. Explain how insurers suffer from adverse selection.
A) People with worse health and lifestyle would be more likely to buy the insurance.
B) People with worse health and lifestyle would be less likely to buy the insurance
C) People who are more risk-averse would be more likely to buy the insurance..
D) People who are more risk-averse would be more likely to buy the insurance.
E) None of the above.

Accepted Answer

Insurers suffer from adverse selection because individuals with worse health and lifestyle, who anticipate higher healthcare costs, are more likely to purchase insurance, leading to a higher risk pool and potential losses for insurers.

Question 5

A bank is seeking to downsize by offering workers incentives to retire early. What problem of adverse selection might this scheme cause?
A) The more risk-averse workers would be more likely to retire early.
B) The more capable workers would be more likely to retire early.
C) Workers would look outside for better opportunities.
D) a and b.
E) b and c.

Accepted Answer

The answer of A bank is seeking to downsize by...

Question 6

Suppose that you are buying some antique furniture. Why should you hire an expert to appraise it?
A) The antique may not be genuine.
B) The market price of antiques fluctuates over time.
C) The price of antiques varies with demand and supply.
D) Buying antiques is risky.

Accepted Answer

Hiring an expert to appraise antique furniture is crucial because the item may not be genuine, and an expert can verify its authenticity.

Question 7

Some countries only allow people who have been vaccinated against Covid-19 to eat in restaurants. Which concept of asymmetric information does this illustrate?
A) Screening.
B) Signaling.
C) Contingent contract.
D) All of the above.

Accepted Answer

Screening is the process by which one party to a transaction attempts to gather information about the other party to reduce information asymmetry. In this case, requiring proof of vaccination is a form of screening to ensure that only vaccinated individuals, who are less likely to spread Covid-19, are allowed to dine in restaurants.

Question 8

Some lawyers accept fees on a contingency basis rather than the conventional hourly rate. Under the contingency fee, the lawyer receives a share of the client's winnings in court. Which concept of asymmetric information does this illustrate?
A) Screening.
B) Signaling.
C) Contingent contract.
D) a and b.
E) b and c.

Accepted Answer

The answer of Some lawyers accept fees on a contingency...

Question 9

To stand out from others applying for jobs in finance, Maya qualified as a Chartered Financial Analyst. Under what conditions is this a credible signal?
A) For less capable persons, the cost of qualifying as a CFA must be higher.
B) For more capable persons, the cost of qualifying as a CFA must be higher.
C) The CFA examinations must be challenging.
D) Financial institutions must value the CFA qualification.
E) None of the above.

Accepted Answer

For a signal to be credible, it must be costly for less capable individuals to obtain, ensuring that only those who are truly capable will pursue it.

Question 10

British students apply to university before they complete their national examinations. Universities typically accept students with conditions, for instance, two A grades. Which concept of asymmetric information does this illustrate?
A) Signaling.
B) Screening.
C) Contingent contract.
D) a, b and c.

Accepted Answer

Contingent contracts are agreements that are dependent on certain outcomes or conditions being met, such as achieving specific grades. In this scenario, universities offer conditional acceptances based on the future exam results of the students, which is a classic example of a contingent contract.

Question 11

The owner of a restaurant is worried that Covid-19 policies might affect her business. Does she face uncertainty, risk, and/or asymmetric information?

Accepted Answer

The answer of The owner of a restaurant is worried...

Question 12

Consumer products may break down due to no fault of the consumer. Explain how a manufacturer's warranty to replace faulty products can reduce the risk on the consumer.

Accepted Answer

The answer of Consumer products may break down due to...

Question 13

Many retailers offer customers the option to pay in instalments. In so-called "buy now pay later" schemes, explain the asymmetry of information.

Accepted Answer

The answer of Many retailers offer customers the option to...

Question 14

Health insurance covers a person's healthcare expenses. Explain how insurers suffer from adverse selection.

Accepted Answer

The answer of Health insurance covers a person's healthcare expenses....

Question 15

A bank is seeking to downsize by offering workers incentives to retire early. What problem of adverse selection might this scheme cause?

Accepted Answer

The answer of A bank is seeking to downsize by...

Question 16

Some countries only allow people who have been vaccinated against Covid-19 to eat in restaurants. Which concept of asymmetric information does this illustrate?

Accepted Answer

The answer of Some countries only allow people who have...

Question 17

Some lawyers accept fees on a contingency basis rather than the conventional hourly rate. Under the contingency fee, the lawyer receives a share of the client's winnings in court. Explain the contingency fee as a form of signaling.

Accepted Answer

The answer of Some lawyers accept fees on a contingency...

Question 18

To stand out from others applying for jobs in finance, Maya qualified as a Chartered Financial Analyst. Under what conditions is this a credible signal?

Accepted Answer

The answer of To stand out from others applying for...

Question 19

British students apply to university before they complete their national examinations. Universities typically accept students with conditions, for instance, two A grades. Which concept of asymmetric information does this illustrate?

Accepted Answer

The answer of British students apply to university before they...

Quiz 11: Asymmetric Information

The owner of a restaurant is worried that Covid-19 policies might affect her business. Does she face uncertainty, risk, and/or asymmetric information?

Consumer products may break down due to no fault of the consumer. Explain how a manufacturer's warranty to replace faulty products can reduce the risk on the consumer.

Many retailers offer customers the option to pay in instalments. In so-called "buy now pay later" schemes, explain the asymmetry of information.

Health insurance covers a person's healthcare expenses. Applicants for insurance have better information about their own health and lifestyle. Explain how insurers suffer from adverse selection.

A bank is seeking to downsize by offering workers incentives to retire early. What problem of adverse selection might this scheme cause?

Suppose that you are buying some antique furniture. Why should you hire an expert to appraise it?

Some countries only allow people who have been vaccinated against Covid-19 to eat in restaurants. Which concept of asymmetric information does this illustrate?

Some lawyers accept fees on a contingency basis rather than the conventional hourly rate. Under the contingency fee, the lawyer receives a share of the client's winnings in court. Which concept of asymmetric information does this illustrate?

To stand out from others applying for jobs in finance, Maya qualified as a Chartered Financial Analyst. Under what conditions is this a credible signal?

British students apply to university before they complete their national examinations. Universities typically accept students with conditions, for instance, two A grades. Which concept of asymmetric information does this illustrate?

The owner of a restaurant is worried that Covid-19 policies might affect her business. Does she face uncertainty, risk, and/or asymmetric information?

Consumer products may break down due to no fault of the consumer. Explain how a manufacturer's warranty to replace faulty products can reduce the risk on the consumer.

Many retailers offer customers the option to pay in instalments. In so-called "buy now pay later" schemes, explain the asymmetry of information.

Health insurance covers a person's healthcare expenses. Explain how insurers suffer from adverse selection.

A bank is seeking to downsize by offering workers incentives to retire early. What problem of adverse selection might this scheme cause?

Some countries only allow people who have been vaccinated against Covid-19 to eat in restaurants. Which concept of asymmetric information does this illustrate?

Some lawyers accept fees on a contingency basis rather than the conventional hourly rate. Under the contingency fee, the lawyer receives a share of the client's winnings in court. Explain the contingency fee as a form of signaling.

To stand out from others applying for jobs in finance, Maya qualified as a Chartered Financial Analyst. Under what conditions is this a credible signal?

British students apply to university before they complete their national examinations. Universities typically accept students with conditions, for instance, two A grades. Which concept of asymmetric information does this illustrate?