Exam 17: Markets With Asymmetric Information

A warranty is most valuable as a signaling device when:

Suppose new electronic devices make it easier to monitor the effort levels of workers. If some shirking is still possible in the efficiency wage model, what happens to the level of employment?

Suppose new electronic devices make it easier to monitor the effort levels of workers. What happens to the NSC curve in the efficiency wage model?

Scenario 17.1 Consider the information below: For Group A the cost of attaining an educational level y is C_A(y) = $6,000y and for Group B the cost of attaining that level is C_B(y) = $10,000y. Employees will be offered $50,000 if they have where y* is an education threshold determined by the employer. They will be offered $130,000 if they have -Refer to Scenario 17.1. If the threshold educational level y^* is set at 7,

The problem of asymmetric information in multi-plant firms involves:

As part of the most recent collective bargaining agreement with state employees, a state government must offer dental insurance at "reasonable, nonprofit rates." The state plans to self-insure in place of using a private insurance company. Statistical evidence suggests that the average household currently spends $300 per year for corrective dental work and $80 for routine checkups. Administrative costs are expected to average $20 per family. The collective bargaining agreement dictates that the plan's coverages and rates be fixed for a period of three years. The auditor considers the choice of the plan to be extremely important. Consequently, the auditor has asked you to evaluate the three proposals listed below in terms of their propensity to result in adverse selection and/or moral hazard. Proposal 1 would charge a $400 premium with no deductible. Coverage is extended to preexisting conditions, but to cover the nondeductible clause, routine checkups are not covered. Proposal 2 charges a $200 premium with a $200 deductible. The plan does not cover preexisting conditions, but does cover routine office visits. Proposal 3 charges a $150 premium with a $150 deductible. This plan doesn't cover preexisting conditions or routine checkups. The collective bargaining agreement dictates that participation in the plan must be at the employee's option.

Scenario 17.3 Consider the following information: The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run. -Refer to Scenario 17.3. If the fire protection program were in place, the company could insure the warehouse for a premium equal to:

When asymmetric information problems drive high quality products from a market, we refer to this situation as:

The principal-agent problem of ownership vs. control of the corporation tends to get worse when:

Scenario 17.5 Consider the following information: Income to the firm from workers who sell door-to-door Bad Luck Good Luck Low Effort (e = 0) $5,000 $7,000 High Effort (e = 1) $7,000 $13,000 Cost of effort: c = $2500e Probabilities: Bad luck = .75; Good luck = .25 -Refer to Scenario 17.5. The owners can't know whether the workers are exerting high or low effort if income is:

Suppose a start-up company can operate from a traditional office space or from a virtual office in which there is no physical office location and the employees collaborate over internet connections from their individual homes. Shirking is more difficult to monitor under the virtual office plan. How would the efficiency wage and level of employment for the virtual office compare to the traditional office plan?

Scenario 17.3 Consider the following information: The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run. -Refer to Scenario 17.3. Moral hazard would be eliminated in this situation if:

Augustus bought his BMW convertible as a new car in 1998 and knows that it is in excellent condition. He now wants to sell it and knows that there are many other similar cars on the used car market that are lemons. As a result:

Firms that have several plants that produce the same or related products are said to be:

Explain the nature and consequences of asymmetric information for each of the following cases. What options are available in each instance to reduce the problem? a. medical insurance b. issuance of credit cards c. professional athletes d. market for used appliances

Matthew drives a truck for Overtheroad Haulers. Matthew's marginal benefit for driving per day is: where m is the number of miles driven. The marginal social cost per mile is Calculate the efficient number of miles driven for Matthew in a day. Since Overtheroad Haulers has full insurance on Matthew's truck, Matthew's personal marginal cost is: How many miles per day will Matthew drive? Would it be efficient for society if Overtheroad Haulers places a limit on the number of miles Matthew drives? If so, what limit should they set?

The market for used cars in a particular region includes both high-quality and low-quality cars. High-quality cars are sold primarily to quality-sensitive customers, while low-quality cars are sold to price-sensitive buyers. The submarkets for high-quality and low-quality cars can be described by the supply and demand curves: Q_D^H = 160,000 - 12.5P^H Q_S^H = - 48,000 + 13.5P^H Q_D^L = 110,000 - 12.5P^L Q_S^L = 20,000 + 10P^L, where Q_D^H, Q_S^H refer to the quantities demanded and supplied of high-quality cars, Q_D^L, Q_S^L refer to the quantities demanded and supplied of low-quality cars, P^H and P^L refer to the prices of high-quality and low-quality cars. All quantities are measured in cars per month, prices are measured in dollars. a. Assuming that buyers and sellers are both able to distinguish low-quality and high-quality cars, determine the price and quantity that will prevail in each submarket. b. Examine the case where sellers are able to accurately determine used-car quality but buyers are not. You may assume that buyers assume that all cars are of average quality so that an average demand curve is appropriate. Determine the price and quantity in each submarket. c. Using diagrams, analyze the additional developments in the market until final long-run equilibrium is reached. You must describe the eventual outcome, but no calculations are required for this part of the problem.

In insurance markets, moral hazard creates economic inefficiency because:

Suppose new electronic devices make it easier to monitor the effort levels of workers. If some shirking is still possible in the efficiency wage model, what happens to the efficiency wage?

Julia is a 28-year-old nonsmoking, non-drinking female of normal weight. Because of adverse selection in health insurance,