Question 1

Suppose that buyers assume that there is a 30% chance of getting a plum, and 8 of 10 cars in the used car market are lemons. Is this an equilibrium?

Accepted Answer

The answer of Suppose that buyers assume that there is...

Question 2

You have just graduated from college and are buying a brand new car. There are two on the lot: a green one and a blue one. Both have the same features for the same price. Is there a potential asymmetric information problem?

Accepted Answer

The answer of You have just graduated from college and...

Question 3

One result of adverse selection in the used car market is that few plums (high-quality) are sold.

Accepted Answer

Adverse selection means that buyers are more likely to end up with low-quality cars at a high price because sellers with high-quality cars are less likely to offer their cars in the market due to fear of being unfairly compensated for their product. This results in few high-quality cars being sold, which are known as "plums".

Question 4

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s).
-Recall the Application. Baseball teams know more about the health of free agent pitchers than the pitchers themselves.

Accepted Answer

In the context of the free-agent market for professional baseball pitchers, it is typically the pitchers and their agents who possess more detailed and specific information about the pitcher's health, performance capabilities, and potential limitations than the teams looking to sign new talent. This scenario is an example of information asymmetry, where one party (in this case, the pitchers and their agents) has more or better information than the other (the baseball teams).

Question 5

If a seller of a high-quality good cannot prove the quality of that good

Accepted Answer

The quality of a good is a key factor in determining its value to buyers. If a seller cannot prove the quality of their good, buyers may not be willing to pay the higher price typically associated with high-quality goods. As a result, the seller may have to lower the price to attract buyers, which could lead to the good being undervalued and potentially not profitable for the seller.

Question 6

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s).
-Recall the Application. Free-agent baseball pitchers who switch teams spend a relatively long time on the disabled list compared to those who do not switch teams.

Accepted Answer

The application states that free-agent baseball pitchers who switch teams spend a relatively long time on the disabled list compared to those who do not switch teams.

Question 7

CARFAX is a company that compiles and sells histories of used cars. CARFAX reduces the

Accepted Answer

CARFAX reduces the information asymmetry in the used car market by providing buyers with the vehicle's history including accidents, odometer readings, and previous owners. This information helps buyers make an informed decision and reduces the risk of purchasing a faulty or potentially dangerous vehicle. It does not have a direct impact on the other options listed.

Question 8

Problems associated with thin markets provide incentives for

Accepted Answer

Thin markets are characterized by trade limitations, low transaction volumes and reduced liquidity, which can lead to the following problems: high price volatility, market manipulation, difficulty in finding a counterparty, and uncertainty about the quality and price of items. To overcome these challenges, buyers and sellers in thin markets need to acquire information about one another to establish trust, reduce information asymmetry and facilitate trade. This means that buyers need to seek information about the quality of items, and sellers need to prove that their items are of high quality. Therefore, both A and B are correct. Choosing option C is not suitable because it suggests that parties may agree upon a higher price than would hold under equilibrium conditions, which is not necessarily the case in thin markets.

Question 9

Suppose you own a plum (high-quality) used car that you are thinking about selling. Further, suppose you know that buyers assume that there is a 30% chance of getting a plum, and that 8 of 10 cars currently in the used car market are lemons (low-quality). Would you likely sell your car?

Accepted Answer

The answer of Suppose you own a plum (high-quality) used...

Question 10

In the used car market, the adverse selection problem refers to the fact that a buyer must choose a used car from an undesirable selection of cars.

Accepted Answer

The adverse selection problem in the used car market arises because sellers have more information about the quality of the car than buyers, leading to a market where buyers are likely to end up with lower-quality cars.

Question 11

Quality information for goods that are sold online

Accepted Answer

Ratings given by other buyers can provide insights into the quality of goods sold online. Although it is possible for false ratings to be submitted, aggregating a large number of ratings can still provide valuable information.

Question 12

The problems of thin markets can be addressed by

Accepted Answer

The answer of The problems of thin markets can be...

Question 13

Reading Consumer Reports before buying a used car

Accepted Answer

Reading Consumer Reports before buying a used car can provide valuable information about the car's reliability, safety, and overall quality. This can help buyers avoid purchasing a car that may have hidden problems or be more likely to break down. This can save buyers significant amounts of money in repairs and potentially prevent safety issues.

Question 14

There are profit opportunities in a thin market because the gap between what a buyer is willing to pay for a true plum and the amount a plum owner is willing to accept is large.

Accepted Answer

In a thin market, where there are few buyers and sellers, there may be a large gap between the prices they are willing to pay or accept for a particular asset, such as a plum. This can create profit opportunities for traders who are able to buy low and sell high, taking advantage of the imbalance in supply and demand.

Question 15

In a market for used cars, if the minimum supply price for plums is lower than consumers' willingness to pay for a lemon, only plums will be supplied at the consumers' willingness to pay for a lemon.

Accepted Answer

In a market for used cars, the terms "plums" and "lemons" refer to high-quality and low-quality used cars, respectively. If the minimum supply price for plums is lower than consumers' willingness to pay for a lemon, it does not mean only plums will be supplied. Both plums and lemons can be supplied depending on various factors like availability, consumer preferences, and information asymmetry about the quality of cars.

Question 16

It has been said that if buyers of used goods are pessimistic it becomes a self-fulfilling prophecy. In other words, buyer pessimism causes the market to have more low-quality goods. Explain why this is TRUE.

Accepted Answer

The answer of It has been said that if buyers...

Question 17

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s).
-Recall the Application. Why is there adverse selection in the baseball pitcher free agent market?

Accepted Answer

The answer of Recall the Application about the free-agent market...

Question 18

Why do used goods of different qualities often sell for the same price, while used goods of different sizes sell for different prices?

Accepted Answer

The answer of Why do used goods of different qualities...

Question 19

If the minimum price of plums (high-quality) decreases, the market will become thinner.

Accepted Answer

If the minimum price of plums (high-quality) decreases, it is likely that more people will be willing to buy them, leading to an increase in demand and potentially a wider market.

Question 20

CARFAX is a company that compiles and sells histories of used cars. Used car dealers offer to give their customers a copy of the CARFAX history of the cars in their inventory to

Accepted Answer

CARFAX provides buyers with additional information about the history of a used car, which can help them make an informed decision before purchasing. This can benefit the used car dealer by increasing the trust and confidence of buyers in the quality of their inventory.

Quiz 9: Imperfect Information, External Benefits, and External Costs