Which is CORRECT about information asymmetry and adverse selection 1. Information asymmetry refers to the situation when buyers have more information on the product than the sellers. 2. Information asymmetry is the result of adverse selection. 3. In a used car market, if sellers with good cars are unwilling to sell at a large discount, then only bad cars will get sold. This suboptimal outcome is so-called “adverse selection”. 4. Due to information asymmetry, market investors interpret firm’s SEO announcement positively because they believe insiders consider the firm undervalued.

Which is CORRECT about information asymmetry and adverse selection 1. Information asymmetry refers to the situation when buyers have more information on the product than the sellers. 2. Information asymmetry is the result of adverse selection. 3. In a used car market, if sellers with good cars are unwilling to sell at a large discount, then only bad cars will get sold. This suboptimal outcome is so-called “adverse selection”. 4. Due to information asymmetry, market investors interpret firm’s SEO announcement positively because they believe insiders consider the firm undervalued.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter16: Information, Risk, And Insurance

Section: Chapter Questions

Problem 20CTQ: A website offers a place for people to buy and sell emeralds, but information about emeralds can be...

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Q6. Which is CORRECT about information asymmetry and adverse selection a. Information asymmetry refers to the situation when buyers have more information on the product than the sellers. b. Information asymmetry is the result of adverse selection. c. In a used car market, if sellers with good cars are unwilling to sell at a large discount, then only bad cars will get sold. This suboptimal outcome is so-called “adverse selection”. d. Due to information asymmetry, market investors interpret firm’s SEO announcement positively because they believe insiders consider the firm undervalued.
8. Migros and CarrefourSA use prices as strategic variables. The sale price (SP) for a certain product is 55 TL and the normal price (NP) is 60 TL the unit cost is 45 TL. These supermarkets choose between sales price and the normal price. There are two types of consumers uninformed who buy regardless of the price and they show up randomly and informed buyers who shop around for the lowest price. There are 1000 uninformed and 1200 informed buyers. a. Please construct the payoff table of this game. Compute the equilibrium of this game. b. What happens if Migros announces its price first? Construct the game tree and find the solution. Discuss the results.
Task 4 – Information asymmetries The following diagram relates to a market with an information asymmetry. The seller has more information about the good such as a used car market. DU is the demand curve for the uninformed public and DI is the demand curve if they were fully informed. Illustrate the price and quantity for the situation where the uninformed buyer drives the market. What would the price and quantity be if they were fully informed? Indicate the deadweight loss due to the information asymmetry and the transfer from buyers to sellers due to the asymmetry. How could this problem be solved? Consider a market in Australia (other than used cars) where this situation applies and explain how the government acts to partially or wholly solve the problem.
1) A key difficulty facing insurance companies is that people know more about their health than do insurance companies, and that those people who are seriously ill are the most likely to want to obtain health insurance. What is this phenomenon called? A) moral hazard B) economic irrationality C) asymmetric information D) adverse selection 2) An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above? A) moral hazard B) adverse selection C) asymmetric information D) economic irrationality 3) The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is A) inefficient market hypothesis. B) moral hazard. C) information disparity. D) asymmetric information. 4) Which of the following parties is…
The adverse selection of sellers is the O skew in markets toward buyers who pay less when sellers cannot tell a buyer's willingness to pay. skew in markets when sellers cannot observe quality that leads to lower prices. tendency for the mix of goods to be skewed toward more low-quality goods when buyers can't observe quality. tendency for buyers to choose to buy from sellers who are not trustworthy even when product quality is high. 5.
"Information asymmetry is detrimental for decision-making in the marketplace and hence is a market failure." Provide an example to illustrate this. Then suggest a policy that is used to address this problem.
24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of buyer they are insuring, what is the minimum equilibrium price of insurance? a. $1,000 b. $1,500 c. $2,000 d. $3,000 e. $4,000
Please choose two of the question threads to answer. 1) Screening and Imperfect Information Asymmetric information refers to a market where one side (either the buyer or the seller, but usually the buyer) has less information than the other side of the market. When there is asymmetric information in a market, markets are inefficient because the side with less information doesn't want to take the risk involved in buying (or selling) the good or service. One method of solving this problem is through screening. Screening is a strategy one uses when they don't have information. A screen can be any indicator that lets the screener know if the good or service is reliable and will meet the screener's wants. Offer an example of when you used screening to solve a lack of information. What kind of screen did you use? Was the screen effective? Were you happy with the result? 2) Public Goods and Technology Public goods are defined as non-excludable and non-rival in consumption. If something…
One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants. Offer an example of a company that uses a signal to help sell its product. What is the signal? What information is the signal trying to convey? Do you think the signal is effective? Why or why not? Does this signal improve market efficiency? Why or why not?
Using Freakonomics Chp. 2 Explain how such innovations as the Internet have affected the prevalence of information asymmetries. 6. Explain how information asymmetries facilitated the corporate scandals that occurred in the early 2000s. 7. Explain how the choice of terms a real estate agent uses to describe a particular property conveys additional information about the property, and hence the price a potential buyer might be able to successfully offer the seller. 8. Choose some evidence from Ch. 2 that illustrates how the combination of an information asymmetry and fear can lead to inefficient outcomes. Explain how the introduction of the element of fear makes the problem of the information asymmetry even worse. 9. Identify the evidence the authors offer to support their claim that real estate agents exploit an information asymmetry to their client’s detriment. 10. According to the voting data from the Weakest Link, which two groups of people are most likely to be discriminated…
12. To prevent adverse selection, health and life insurance companies Question 12 options: a) charge the same premiums to all policyholders. b) require potential policyholders to submit medical records or submit to an examination, and may refuse to sell policies to people with certain pre-existing health conditions. c) charge lower premiums to policyholders with a higher risk of filing claims. d) always charge the same premiums to people regardless of certain pre-existing conditions.
1)Describe an example of moral hazard that we may run into in the real world. Think of something that is legal and not inherently lethal, yet still demonstrates elevated risk for the participant who would likely act safer if insurance or protection was not available. Explain why someone might take this risky action. What are the benefits to the risky behavior? In your response to two of your peers, explain what an insurance company may do to reduce the likelihood that an individual would take this risk. Keep in mind, that we cannot always just deny coverage if an individual is participating in the risky behavior.