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![Signaling theory assumes that all information in the market are not similar
to all investors and managers. *
Correct
Wrong](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1fecaf38-8b6c-408b-b91a-7c6f462ec4cd%2F6e1da6d3-e306-4234-957b-bc3781751bac%2Fadiezmq_processed.jpeg&w=3840&q=75)
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- What are three economic negatives inherent in imperfect information and what would be an alternative approach rationale for each? Thanks.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
- Consider the following competitive market for insurance. There are two states of the world: good G and bad B. Consumers have wealth £500. If the bad state occurs their wealth is reduced by £200. Consumers are expected utility maximisers, with common utility func- tion u(x) = Vx. There are two types of consumers: high risk types H and low risk types L. Consumers know their own types, but firms cannot distinguish between different types of consumers. The probabilities that H and L types find themselves in the bad state are Pu = 0.5 and p = 0.4. It is estimated that 70% of the population are low risk. Firms are expected profit maximisers that offer consumers state-contingent contractsc = (cg, Cg) in exchange for their endowment e = (eg, eg). Determine the equilibrium set of contracts.John wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.Describe and use techniques that apply to decision making under uncertainty.
- QUESTION 8 Kelly and Shawn are both looking to sell their own car. Both cars are exactly the same and are in good condition. However, Kelly's car has a road worthy certificate whereas Shawn's car does not. Select the item from the list provided to make the following statements true. ✓ Kelly's car's road worthy certificate signals to buyers that the car 1. adverse selection is safe and functioning properly. This is an example of 2. trust ✓ A buyer will have to rely on such signal because of ✓ Kelly asked her brother, Thomas to help her sell her car instead. Kelly intends to sell the car for $12,000 in one months time and will give $1,000 to Thomas as commission. However, Thomas proceed to wait for 3 month so that he could sell the car for $13,000 and take in the extra cash for himself. This is an example of 3. asymmetric information 4. marginal benefit 5. principal-agent problem 6. expected value 7. risk loving 8. costly to fake principle 9. risk neutral 10, moral hazard 11, marginal…Roger's utility/u as a function of wealth/w is u = { ln w, w < 1600 w1/2, w >= 1600 Roger has $1000 and 3 options. 1. spend $400 to enter the game with probabilities of winning or losing: Win/(Lose) (500) 0 1000 3000 P(Win/(Lose)) 0.2 0.1 0.6 0.1 a. Show with workings which option roger would choose.Steve has received a stock tip from Monica. Monica has told him that XYZ Corp. will increase in value by 100%. Steve believes that Monica has a 25% chance of being correct. If Monica is incorrect, Steve expects the value of XYZ Corp. will fall by 50%. a. If Steve's utility of income is U(I)=50I. What is Steve's expected utility from buying $1,000 worth of XYZ Corp. stock? b. If Steve's utility of income is U(I)=I0.5. What is Steve's expected utility from buying $1,000 worth of XYZ Corp. stock?
- Each stock listed on the New York Stock Exchange is allocated to a specialist, who is responsible for maintaining an orderly market. This person has a specific location on the floor of the exchange known asMy answer is wrong The answer:adverse selection causes an inefficiently large number of transactions to occur. is wrong!!!How might imperfect information impact price? Group of answer choices Because buyers cannot determine the true quality of a product, they might tend to bid up the prices. Because they might not be able to present all the information about a product, sellers might temporarily lower the price to make potential buyers think the product is of excellent quality. Imperfect information might tend to cause prices to be perfectly elastic. Buyers cannot distinguish which goods have a higher quality and might be less likely to pay higher prices for that good.
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