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.

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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In circumstances of imperfect information should one expect the market to be efficient? Explain briefly.
Which describes a situation with information symmetry? None of the above. The seller knows more about the true value and price of a product than the buyer The buyer and seller both know the true value and price or a product, but the buyer lacks sufficient funds to buy it All of the above. The sellers lack sufficient funds to produce a product, even when buyers are willing and able to purchase it
Which is not an example of asymmetric information? Group of answer choices A customer not knowing which insurance plan is best A client making a purchase of a used private airplane of unknown condition A mail carrier making her deliveries An insurer not having the full information about a client’s drug use A tree service recommending needless pruning on fruit trees is an example of: Group of answer choices adverse selection. mutually beneficial trades. moral hazard. a trade fallacy.
Why might it be difficult for a buyer and seller to agree on a price when imperfect information exists?
Why do sellers generally prefer a Vickrey auction to a regular sealed bid if sellers don’t receive the highest bid in the Vickrey auction? Sellers only have to sell their item if the bid is the highest-price bid. The second-highest bid in a Vickrey auction is generally higher than the highest bid in a regular sealed-bid auction. The second-highest bid is about the same in both auctions. Sellers prefer the final price is not revealed to all bidders. Sellers would never prefer Vickrey auctions.
Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in market failure? a. Only good quality cars are sold, hence the market under-provides used cars. b. Both poor and good quality cars are sold, hence the market over-provides used cars. c. Only poor quality cars are sold, hence the market under-provides used cars. d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.
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…
Please find the attached question.
Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal.
Bill Gates, even though no longer a CEO of Microsoft, still cares about the profits of his company. Assume it costs Microsoft $1 per copy of a new WindowsXX, and the inverse demand for this revolutionary product takes the form P(Q) = 60 – 5Q. A. Assume the plan to chip people worked out perfectly and Bill Gates knows exactly the willingness to pay of all consumers. What would be the profit of Microsoft then? B. Assume instead that Microsoft is allowed to do block-pricing with 2 blocks. What happens to its profit? C. Finally, assume Microsoft was able to separate it's consumers into business owners with inverse demand P (Q) = 40 – Q - and others with inverse demand P (Q) = 20 – 4Q. What would be Microsoft's profit?
which of the strategies is effective in reducing moral hazard? gatekeeping cost sharing prospective payment all of the above
Half of the used cars for sale in a market are good and the other half are lemons. Owners of good cars are willing to sell them for $1,200, while owners of lemons are willing to sell them for $50. There are many potential buyers who are willing to pay $1,500 for a good car and $300 for a lemon. Buyers cannot tell good cars from lemons, but the original owners know whether a car is a lemon or not. There will be an equilibrium in which all used cars sell for $1,150. There will be an equilibrium in which lemons sell for $50 and good used cars sell for $1,200. There will be an equilibrium in which all used cars sell for $800. The only equilibrium is one in which only lemons are sold. There will be an equilibrium in which lemons sell for $300 and good used cars sell for $1,500.