Question 1

What is "adverse selection"?

Accepted Answer

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.

Accepted Answer

Moral hazard is the risk that one party to a contract may alter its post-contract behavior to the detriment of another party. This occurs when the party protected against risk changes its behavior in a way that increases the likelihood of the risk occurring, knowing that the consequences of the risk will be borne by the other party. This can occur in various contexts, such as insurance or financial contracts.

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.

Accepted Answer

The Prisoner's Dilemma is a non-zero sum, non-cooperative game with a dominant strategy. This means that each player's best outcome depends on both their own actions and the actions of the other player, and that there is a clear best choice for each player regardless of what the other player does. It is not a zero-sum game, as the outcomes of the players are not directly opposite (i.e., one player's gain does not necessarily mean the other player's loss). It is also not an example of market signaling or adverse selection.

Question 4

What is "market signaling"?

Accepted Answer

The answer of 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.)
 $\begin{array}{c}
\begin{array}{|l|}
\hline \text { Coke (rows) / Pepsi}\
 \text { (columns)}\
\hline \text { Advertise}\
\hline \text { Don't Advertise}\
\hline  
\end{array}
\begin{array}{l|}
\hline\
 \text { Advertise}\
\hline(10,10)\
\hline(-50,500)\
\hline
\end{array}
\begin{array}{l|}
\hline \
\text {Don't Advertise}\
\hline (500,-50)\
\hline (100,100)\
\hline  
\end{array}

\end{array}$
 a.Explain why this would be described as a Prisoner's Dilemma game.
b.Explain the probable outcome of this game.

Accepted Answer

The answer of The following matrix shows the payoffs for...

Question 6

What is a "payoff matrix"?

Accepted Answer

The answer of 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.

Accepted Answer

In a zero-sum game, the gains of one player directly reflect the losses of the other player. This means that any gain made by one player is exactly offset by a loss incurred by the other player, resulting in a net change of zero.

Question 8

What is "game theory"?

Accepted Answer

The answer of 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.

Accepted Answer

Moral hazard refers to the risk that a borrower may engage in risky or irresponsible behavior once they obtain a loan, knowing that the lender will bear the consequences. In this case, John took out a student loan but spent the money irresponsibly at a casino, demonstrating moral hazard. Moral suasion refers to persuasion or encouragement to behave in a certain way, which is not relevant in this scenario. Adverse selection refers to the risk that a borrower with a higher likelihood of default is more likely to apply for a loan, which is also not relevant in this scenario. Fraud refers to intentional deception or misrepresentation, which may not be the case here as there is no information to suggest that John deliberately misled the bank.

Question 10

What is "moral hazard"?

Accepted Answer

The answer of 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.

Accepted Answer

Adverse selection refers to a situation where the lender is unable to distinguish between good and bad credit risks, resulting in the bad credit risks being the ones most likely to seek loans. This can lead to higher default rates and losses for the lender. Moral hazard refers to the risk of the borrower taking on more risk than they would if they did not have insurance, while moral suasion refers to attempts to influence behavior through persuasion rather than coercion. Fraud refers to intentional deception for personal gain.

Question 12

What is "asymmetric information"?

Accepted Answer

The answer of 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

Accepted Answer

Market signaling is the process of conveying information between parties in a transaction where one party has more information than the other (asymmetric information). It allows the party with less information to make better decisions, and can lead to more efficient outcomes in the market. Choices B and C are not accurate descriptions of market signaling.

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.

Accepted Answer

Asymmetric information occurs when one party in a transaction has more information than the other party. This can create an imbalance of power and potentially lead to a market failure. The other answer choices do not accurately define asymmetric information.

Question 15

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

Accepted Answer

The answer of In game theory analysis,what is a "dominant...

Quiz 11: Game Theory and Asymmetric Information

What is "adverse selection"?

Moral hazard is the

The Prisoner's Dilemma is an example of

What is "market signaling"?

What is a "payoff matrix"?

In a zero-sum game

What is "game theory"?

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

What is "moral hazard"?

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

What is "asymmetric information"?

Market signaling

Asymmetric information represents a market situation in which

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