Exam 14: Imperfect Information: Adverse Selection and Moral Hazard

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,we can expect the price that buyers are willing to pay to fall over time.

On an automobile insurance policy,a deductible is the dollar amount that the driver will pay toward damages before the insurance company will pay anything.Asymmetric information suggests that

One method of responding to the lemons effect is to invest in information.

The health insurance premiums for Firm A's employees are based on an experience rating.Which of the following is correct?

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?

You want to purchase a new car.You have gone to 3 dealerships that sell the type of car you want.The price of the car is different at each of the dealerships.You have estimated that if you go to another dealership,the marginal amount you may save will be $250,but the marginal cost of going to the dealership would be $350.Which of the following statements is accurate?

Consider a market in which some high-quality goods are sold,but not as many as if there was perfect information about the quality of the good.This type of market is known as a(n)

As more high-risk consumers enter the health insurance market,the average cost of health insurance service decreases.

Martha is trying to sell a high-quality television.All of the potential buyers are not willing to pay the price that Martha deserves.Explain to Martha how the problem of asymmetric information has led to this situation.

Because of asymmetric information,a seller of a lemon used car earns

If a person drives less carefully after purchasing automobile insurance,

In an asymmetric market for used cars,which of the following could be used to avoid a thin market?

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?

What can a seller do to try to distinguish his product as a high-quality product if consumers are skeptical?

How does the Internet auction site,eBay,address the asymmetric information problem?

What is a thin market?

Consumers can interpret the fact that a product offers a lifetime warranty as a sign that the product is of high quality.

Car companies offer certified pre-owned vehicles to reduce the problem of moral hazard.

There is asymmetric information in the auto insurance market because companies know more about customers' driving habits and can predict very well the chances of customers getting into an accident than the customers.

Explain the two predictions made by the lemons model.