Exam 14: Imperfect Information: Adverse Selection and Moral Hazard

-Refer to Figure 14.1.If the insurance company assumes there will be a 50-50 split between high-cost and low-cost customers,the price of insurance will be ________ and there will be ________ consumers.

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

Recall the application about income and consumer search.What can you conclude from a recent study that explores the relationship between consumer search and income?

Recall car insurance and risky driving.What does the theory of moral hazard suggest when it comes to car insurance among insured and uninsured drivers?

Suppose that buyers in the used refrigerator market are willing to pay $500 for a high-quality refrigerators and $200 for a low-quality refrigerators.If buyers believe that 50% of all used refrigerators are low-quality,what is the maximum price they would be willing to pay for a used refrigerator?

Asymmetric information occurs:

Table 14.2 -Refer to table 14.2.The buyers assumed chance of getting a lemon will ________ and hence the willingness to pay for the used boat will ________.

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

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.

What is asymmetric information?

Suppose that buyers are willing to pay $1000 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?

-Refer to Figure 14.1.If the insurance company in this market becomes pessimistic and assumes that all buyers will be high-cost consumers,the equilibrium will be at:

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

Ward is thinking about buying fire insurance for his store.Explain how asymmetric information occurs when the policy is issued.Explain how moral hazard might occur after the policy is issued.

The result of adverse selection is that:

A firm's health insurance premiums that are based on an experience rating are affected by the amount of medical claims by the firm's employees.

Suppose air bags make people feel safer and hence they drive more recklessly.This is an example of:

Which of the following is a way of responding to the lemons problem?

Reservation prices and search efforts are the same across consumers.

In the market for used boats there are high-quality boats and poor-quality boats.Potential buyers cannot determine prior to purchase whether the boat is high quality or low quality.Which of the following statements best describes what is likely to happen in this market?