Question 1

Explain the two predictions made by the lemons model.

Accepted Answer

The answer of Explain the two predictions made by the...

Question 2

A mixed market exists when goods of different qualities are sold for the same price.

Accepted Answer

The answer of A mixed market exists when goods of...

Question 3

The adverse selection problem happens when an informed buyer or seller must choose from an undesirable selection of goods.

Accepted Answer

The adverse selection problem occurs when one party has more information than the other party in a transaction, leading to an imbalance of power and potential for hidden risks. It is not about choosing from an undesirable selection of goods.

Question 4

Martha is trying to sell a high-quality television.All of the potential buyers are not willing to pay the price that Martha deserves.Explain to Martha how the problem of asymmetric information has led to this situation.

Accepted Answer

The answer of Martha is trying to sell a high-quality...

Question 5

In an asymmetric market for used cars,which of the following could be used to avoid a thin market?

Accepted Answer

Offering money-back guarantees on plum used cars can help build trust and signal quality to buyers, thus avoiding a thin market by encouraging more transactions.

Question 6

Various state governments have passed "lemon laws" to protect buyers of used cars as a result of the problem of

Accepted Answer

The problem of lemon laws arises due to the asymmetric information between the buyer and seller of a used car. The seller may possess information about the car's defects that is not disclosed to the buyer, and the buyer may end up with a "lemon" car. Lemon laws provide protection for buyers against this type of situation. Moral hazard and spillovers may also be issues in the used car market, but they are not directly addressed by lemon laws. An injunction is a court order that could be issued as a result of a legal case, but is not directly related to lemon laws.

Question 7

The result of adverse selection is that the presence of high-quality goods in the market drive low-quality goods out of the market.

Accepted Answer

The result of adverse selection is that low-quality goods tend to drive high-quality goods out of the market. This is because buyers can only observe the price of the good, so they struggle to distinguish between high and low-quality goods. This means that sellers of high-quality goods may leave the market as buyers are unwilling to pay a higher price for a good that looks the same as a cheaper, lower quality alternative.

Question 8

What is a thin market?

Accepted Answer

The answer of What is a thin market?...

Question 9

Asymmetric information occurs if John,who is buying Kim's used Toyota Corolla,has the same amount of information as Kim.

Accepted Answer

Asymmetric information occurs when one party in a transaction has more or better information than the other party. Therefore, if John had the same amount of information as Kim about the used Toyota Corolla, there would be no asymmetric information.

Question 10

Consider a market in which some high-quality goods are sold,but not as many as if there was perfect information about the quality of the good.This type of market is known as a(n)

Accepted Answer

A market in which some high-quality goods are sold, but not as many as if there was perfect information about the quality of the good, is known as a thin market. Thin markets are characterized by low trading activity and lower liquidity due to less information being available about the goods being traded. This lack of information creates a situation where buyers may not know the true quality of the goods they are purchasing, leading to a lower demand for such goods.

Question 11

Symmetric information occurs when both buyers and sellers have imperfect information.

Accepted Answer

Symmetric information occurs when both buyers and sellers have perfect information, meaning both parties have the same level of knowledge about the product or service being exchanged. When both parties have imperfect information, it is known as asymmetric information.

Question 12

Suppose that buyers are willing to pay $1,000 for a plum used computer and $300 for a lemon.If buyers expect 40% of the used computers to be plums,what is the maximum amount that buyers will be willing to pay for a used computer?

Accepted Answer

The answer of Suppose that buyers are willing to pay...

Question 13

What is adverse selection?

Accepted Answer

The answer of What is adverse selection?...

Question 14

Suppose that in a small town 40 used cars are sold each month.Of the 40 cars sold,30 are lemons and 10 are plums.If consumers expect 50% of the used cars sold to be lemons,this market is in equilibrium.

Accepted Answer

In this scenario, 75% (30 out of 40) of the cars sold are lemons, not 50% as consumers expect, indicating the market is not in equilibrium based on consumer expectations.

Question 15

Suppose that in a small town 40 used cars are sold each month.Of the 40 cars sold,30 are lemons and 10 are plums.If consumers expect 50% of the used cars sold to be lemons,we can expect the price that buyers are willing to pay to fall over time.

Accepted Answer

If consumers expect 50% of the used cars sold to be lemons, but in reality, 75% (30 out of 40) of the cars sold are lemons, it is likely that buyers will become disillusioned with the quality of used cars in the town and be unwilling to pay high prices. As a result, the price that buyers are willing to pay is likely to fall over time.

Question 16

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s).
-Recall the Application.Assume professional pitchers who are free agents and are more likely to get injured switch teams more often than those who are less likely to get injured.How is this situation explained by asymmetric information?

Accepted Answer

Asymmetric information occurs when one party has more information than the other. In this case, the original team has more information about the likelihood of the pitcher getting injured because they have interacted with the player on a daily basis for years. The new team, on the other hand, has less information because they have not interacted with the player daily. Therefore, option B is the best choice.

Question 17

Suppose that buyers are willing to pay $8,000 for a plum used car and $2,000 for a lemon.If buyers expect 70% of the used cars to be lemons,what is the maximum amount that buyers will be willing to pay for a used car?

Accepted Answer

The answer of Suppose that buyers are willing to pay...

Question 18

What is asymmetric information?

Accepted Answer

The answer of What is asymmetric information?...

Question 19

Asymmetric information occurs

Accepted Answer

Asymmetric information can occur in both new and used goods because the seller may have more information about the product than the buyer. In public good markets, there is no private information that one party has that the other does not, so there is no asymmetric information.

Question 20

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s).
-Recall the Application.In the market for used baseball pitchers,

Accepted Answer

Asymmetric information refers to a situation where one party has more or better information than the other, which can lead to adverse selection. In the case of the free-agent market for professional baseball pitchers, teams may not have complete information about a pitcher's health, performance, or potential, leading to adverse selection. Therefore, free agency does not eliminate the adverse selection problem, and choice C is the correct answer. Choice A is incorrect because free agency does not eliminate adverse selection. Choice B is not supported by the information provided in the application.

Quiz 14: Imperfect Information: Adverse Selection and Moral Hazard

Explain the two predictions made by the lemons model.

A mixed market exists when goods of different qualities are sold for the same price.

The adverse selection problem happens when an informed buyer or seller must choose from an undesirable selection of goods.

Martha is trying to sell a high-quality television.All of the potential buyers are not willing to pay the price that Martha deserves.Explain to Martha how the problem of asymmetric information has led to this situation.

In an asymmetric market for used cars,which of the following could be used to avoid a thin market?

Various state governments have passed "lemon laws" to protect buyers of used cars as a result of the problem of

The result of adverse selection is that the presence of high-quality goods in the market drive low-quality goods out of the market.

What is a thin market?

Asymmetric information occurs if John,who is buying Kim's used Toyota Corolla,has the same amount of information as Kim.

Consider a market in which some high-quality goods are sold,but not as many as if there was perfect information about the quality of the good.This type of market is known as a(n)

Symmetric information occurs when both buyers and sellers have imperfect information.

Suppose that buyers are willing to pay $1,000 for a plum used computer and $300 for a lemon.If buyers expect 40% of the used computers to be plums,what is the maximum amount that buyers will be willing to pay for a used computer?

What is adverse selection?

Suppose that in a small town 40 used cars are sold each month.Of the 40 cars sold,30 are lemons and 10 are plums.If consumers expect 50% of the used cars sold to be lemons,this market is in equilibrium.

Suppose that in a small town 40 used cars are sold each month.Of the 40 cars sold,30 are lemons and 10 are plums.If consumers expect 50% of the used cars sold to be lemons,we can expect the price that buyers are willing to pay to fall over time.

Suppose that buyers are willing to pay $8,000 for a plum used car and $2,000 for a lemon.If buyers expect 70% of the used cars to be lemons,what is the maximum amount that buyers will be willing to pay for a used car?

What is asymmetric information?

Asymmetric information occurs

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s) . -Recall the Application.In the market for used baseball pitchers,