Question 1

Informed parties try to overcome problems of adverse selection through _________; uninformed parties try to overcome problems of adverse selection through _______.

Accepted Answer

Informed parties can use screening (collecting information about the other party's characteristics to gain assurance) to overcome the problems of adverse selection. Uninformed parties can use signaling (e.g. offering a warranty or providing good references) to communicate information to the other party and reduce adverse selection problems. Social insurance and market unraveling are not effective methods for overcoming adverse selection problems.

Question 2

In many cases,signaling offers a partial solution to problems that arise from:

Accepted Answer

Signaling can help mitigate adverse selection problems by allowing individuals to communicate their private information to others. For example, a job candidate with a college degree may signal their level of education to potential employers by including their degree on their resume. This helps to sort individuals based on their qualifications and reduces the impact of adverse selection on the hiring process. However, signaling may not completely solve the problem of adverse selection as some individuals may still misrepresent their qualifications or abilities.

Question 3

The problem of adverse selection was first studied by economist ________ who showed how it can undermine the possibilities for trade in the market for _______.

Accepted Answer

The problem of adverse selection was first studied by economist George Akerloff who showed how it can undermine the possibilities for trade in the market for used cars.

Question 4

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is Q^s_H = 0.04(W - 1,500)and the supply of low-quality workers is Q^s_L = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are not observable to employers,what is the equilibrium wage?

Accepted Answer

In order for the labor market to be in equilibrium, the quantity demanded of labor must equal the quantity supplied of labor. Given the demand curve for high-quality workers, we know that the quantity demanded of high-quality workers is QD = 15,000/2 = 7,500 (since high-quality workers are twice as valuable as low-quality workers). We can set this equal to the total supply of high-quality workers plus the total supply of low-quality workers and solve for the equilibrium wage:

7,500 = 0.04(W - 1,500) + 0.08(W - 1,500)
7,500 = 0.12W - 1,080
8,580 = 0.12W
W = 71,500

However, we need to adjust for the fact that the equilibrium wage cannot be below the lowest reservation wage of either type of worker. The lowest reservation wage for a high-quality worker is 1,500, so the equilibrium wage must be at least 1,500. Thus, the equilibrium wage is $10,000, which is choice (C).

Question 5

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is Q^s_H = 0.04(W - 1,500)and the supply of low-quality workers is Q^s_L = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are observable to employers,what are the equilibrium wages?

Accepted Answer

When workers' abilities are observable to employers, the market will pay each type of worker according to their value. High-quality workers will be paid $15,000, and low-quality workers will be paid $7,500, reflecting their respective values to employers.

Question 6

If a person takes a costly action simply to influence others' beliefs then this person is engaged in what economists call:

Accepted Answer

Signaling is a concept in economics in which an individual takes a costly action in order to convey information to others. By taking this action, they are signaling a particular trait or characteristic about themselves in order to influence others' beliefs or behaviors. Examples of signaling can include investing in education, dressing professionally for a job interview, or purchasing a luxury item to demonstrate one's wealth. Therefore, if a person takes a costly action simply to influence others' beliefs, they can be considered to be engaged in signaling. The other options, market unraveling, adverse selection, and moral hazard, do not accurately describe this scenario.

Question 7

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is Q^s_H = 0.04(W - 1,500)and the supply of low-quality workers is Q^s_L = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are not observable to employers,what is the deadweight loss due to asymmetric information?

Accepted Answer

The deadweight loss due to asymmetric information is the difference between the efficient wage and the equilibrium wage. The efficient wage is the wage that maximizes the total surplus in the market, which is the sum of consumer surplus and producer surplus. The equilibrium wage is the wage that equates the quantity of labor supplied to the quantity of labor demanded.In this case, the efficient wage is $15,000 per month, which is the value of a high-quality worker to employers. The equilibrium wage is $12,000 per month, which is the wage that equates the quantity of labor supplied to the quantity of labor demanded. The deadweight loss due to asymmetric information is therefore $3,000 per month, or $36,000 per year.

Question 8

Mandated minimum quality standards can be a way to:

Accepted Answer

Mandated minimum quality standards can help reduce information asymmetry by ensuring that consumers have certain expectations of product quality and performance. This can help prevent sellers from misleading consumers with false claims or substandard products, improving the overall market transparency and efficiency.

Question 9

When analyzing cases of signaling,economists tend to focus their attention primarily on:

Accepted Answer

When analyzing cases of signaling, economists tend to focus their attention primarily on separating equilibria. This is because separating equilibria occur when one type of player (e.g., high-quality) sends a signal that distinguishes them from another type of player (e.g., low-quality). These types can then achieve higher payoffs by playing different strategies, allowing for a more efficient outcome. Pooling equilibria, on the other hand, occur when both types choose the same strategy, making it difficult to distinguish between them. General equilibria and asymmetric equilibria are broader concepts that do not specifically apply to signaling games.

Question 10

When informed parties prefer trading circumstances that are disadvantageous to uninformed trading partners,economists say that ________ has occurred.

Accepted Answer

Adverse selection refers to a situation in which informed parties have an advantage over uninformed parties in trading circumstances. This can lead to unfavorable outcomes for uninformed partners.

Question 11

Adverse selection occurs when an informed individual is ________ willing to trade in situations that make trading ________ to an uninformed trading partner.

Accepted Answer

Adverse selection occurs because the informed individual (who possesses private information) is more willing to trade in situations where the trade is less advantageous to the uninformed party (who lacks private information). Thus, the informed individual is more likely to take advantage of the uninformed party, leading to adverse selection.

Question 12

Private organizations,such as Consumer Reports,are able to earn a profit by serving as quality certifiers because:

Accepted Answer

Consumer Reports and similar organizations profit by providing valuable information to consumers who lack it and are willing to pay for insights to make better purchasing decisions.

Question 13

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is Q^s_H = 0.04(W - 1,500)and the supply of low-quality workers is Q^s_L = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are not observable to employers,how many workers of each type do employers hire?

Accepted Answer

Employers will hire high-quality workers up to the point where the marginal cost of hiring them (the wage) equals the marginal benefit (their value to the employer), and similarly for low-quality workers. For high-quality workers: Marginal benefit = $15,000 Marginal cost = W Therefore, W = $15,000, which implies that 340 high-quality workers are hired (Q_H = 0.04(15,000 - 1,500) = 340). For low-quality workers: Marginal benefit = $7,500 Marginal cost = W Therefore, W = $7,500, which implies that 680 low-quality workers are hired (Q_L = 0.08(7,500 - 1,500) = 680). So the correct answer is D, with Q_H = 340 and Q_L = 680.

Question 14

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is Q^s_H = 0.04(W - 1,500)and the supply of low-quality workers is Q^s_L = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are observable to employers,how many workers of each type do employers hire?

Accepted Answer

To determine the number of workers of each type that employers hire, we need to find the intersection point of the demand and supply curves.

The monthly demand for high-quality workers is QD1U1B1HS1U1B0 = 1,000 - 0.02W, and the monthly demand for low-quality workers is QD1U1B1LS1U1B0 = 1,000 - 0.04W.

Setting each demand equation equal to the respective supply equation, we get:

0.04(W - 1,500) = 1,000 - 0.02W for high-quality workers
0.08(W - 1,500) = 1,000 - 0.04W for low-quality workers

Solving for W in each equation:

W = 24,000 for high-quality workers
W = 10,000 for low-quality workers

Plugging in these values of W into the supply equations, we get:

QS1U1B1HS1U1B0 = 440
QS1U1B1LS1U1B0 = 480

Therefore, the answer is B: QS1U1B1HS1U1B0 = 540; QS1U1B1LS1U1B0 = 480.

Question 15

The requirement by some life insurance companies that applicants must undergo medical examinations is an attempt on the part of the life insurance company to mitigate the problem of adverse selection by:

Accepted Answer

Requiring medical examinations allows the life insurance company to collect information about the applicant's health status and medical history, which helps the company to assess the applicant's risk accurately. This information can help the company to avoid adverse selection, where individuals with higher risk are more likely to apply for insurance. By collecting information through medical examinations, the life insurance company can set appropriate premiums based on the individual's risk profile, which can help to prevent adverse selection.

Question 16

Adverse selection can cause attractive trading partners to be driven from a market by unattractive trading partners,whose presence alters prices at which attractive trading partners could trade.This unfortunate result is known as:

Accepted Answer

Adverse selection can lead to a situation where only the unattractive trading partners remain in the market, driving out the attractive ones due to the high prices caused by adverse selection. This process is known as market unraveling, and it can cause a collapse in the market if left unchecked.

Question 17

The individual mandate in the Affordable Care Act is a means of preventing:

Accepted Answer

The answer of The individual mandate in the Affordable Care...

Question 18

When one party to a transaction has more information about the characteristics of the good or service to be trade than does the other party,economists say that information is:

Accepted Answer

Asymmetric information refers to a situation where one party has more information than the other. Uneven information and disequilibriated information are not commonly used terms in economics. Imperfect information refers to a more general situation where information is not complete or accurate, but it does not necessarily imply an asymmetry between parties.

Question 19

People with different information choose different alternatives in ________ equilibria; they choose the same alternatives,despite having different information,in ________ equilibria.

Accepted Answer

In separating equilibria, individuals with different types of information choose different actions or signals, revealing their private information through their choices. In pooling equilibria, despite having different information, individuals choose the same actions or signals, thus "pooling" together and not revealing their private information through their choices.

Question 20

Adverse selection can drive good used cars from the market because:

Accepted Answer

Adverse selection refers to the situation where buyers are uncertain about the quality of the product that they are buying. In the case of the used car market, this means that buyers have a hard time distinguishing between good and bad cars. As a result, they become wary of buying any used car, and this reduces their willingness to pay for them. Since the demand for good used cars goes down, sellers may find it unprofitable to sell them, and this can drive them out of the market.

Quiz 21: Asymmetric Information

Informed parties try to overcome problems of adverse selection through ___; uninformed parties try to overcome problems of adverse selection through _.