Exam 17: Markets With Asymmetric Information

In this problem,a labor market exists where employers hire and pay workers according to how much formal education workers possess.Education is a proxy for the level of productivity that employers can expect from workers.Therefore,employers follow a strategy in which they hire workers and pay salaries according to the following conditions: Degrees Above the Values of Post High School High School Level Education During Working Life,B(y) None 0 (y = 0 years) Associate's Degree $30,000 (y = 2 years) Bachelor's Degree $51,000 (y = 4 years) Master's Degree $58,000 (y = 6 years) Assume that there are only two types of worker abilities,those who are less productive (type L)and those who are highly productive (type H).The less productive workers have to study harder than highly productive workers in order to earn any degree.Consequently,the costs (including the psychic costs of study effort)of attaining various levels of education for these two types of employees are different. For less productive workers: C_L(y)= $13,000y For highly productive workers: C_H(y)= $10,000y a.Draw a diagram with years of education on the horizontal axis.Graph the benefits to education B(y)and the costs of education for each of the two types of workers.Discuss what level of education each type of worker should obtain. b.Now use the equations above to verify your answer from part (a)mathematically. c.Explain the value of formal education above the high school level in the market place to employers.

When sellers have more information about products than buyers do,we would expect

Managers' pursuit of which of the following objectives would NOT lead to a principal-agent problem in a corporation?

In a competitive labor market,shirking on the job can be a problem.In this market for labor services,the demand for labor is expressed as: W = where W is wage rate (dollars per hour)and L is number employed per unit of time.The no shirking constraint (NSC)is expressed as: NSC = where NSC is the minimum wage workers need not to shirk,and L is the number employed per unit of time.Assume that the labor force L^* = 150,000.Determine the following: a.the level of unemployment that would result when firms pay the efficiency wage b.the market clearing wage c.the efficiency wage

The principal-agent problem in corporations exists because the managers of a firm

Medical histories used by insurance firms allow them to

The completion of a degree or course of study is a good labor market signal

If individuals are paid the wage at which the supply of labor is equal to the demand for labor,

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.

Used cars sell for much less than new cars because

Wiz-Bang Games is a new video game maker for the latest game console.As a new game maker,they have not established a reputation of providing quality games.The marginal cost to Wiz-Bang for manufacturing games is: MC(Q)= 0.05Q.The market price for low-quality games is $20.The market price for high-quality games is $65.If Wiz-Bang sells their product in the low quality market,calculate their producer surplus.If Wiz-Bang sells their product in the high quality market,calculate their producer surplus.If Wiz-Bang spends $12,500 on marketing and packaging,they will be perceived as a high quality producer of video games.Should Wiz-Bang spend the $12,500 to provide a signal to video game consumers of producing high quality games?

Cecil's Home Appliances sells high quality washing machines.Cecil's marginal cost function is: Zach's Appliances sells low quality washing machines.Zach's marginal cost function is: The market demand for high quality washing machines is: The market demand for low quality washing machines is: If Consumer's can distinguish between the quality of Cecil's and Zach's machines (and Cecil and Zach behave as price takers),determine the equilibrium price of washing machines.Calculate Cecil's producer surplus.Now,suppose that consumers can not distinguish between the quality of Cecil's and Zach's washing machines.In this case,the demand for washing machines is: Q^D = 6,625 - 10P.Determine the joint market supply curve.Calculate the equilibrium price of washing machines and the quantity brought to market by Cecil and Zach.What is Cecil's producer surplus? If Cecil offers a warranty on his washing machines,his marginal cost function becomes: However,consumers will then perceive his machines to be high quality.Should Cecil offer the warranty?

In insurance markets,moral hazard creates economic inefficiency because:

Which of the following would be LEAST likely to contribute to a moral hazard problem among drivers?

Ford Motor Company was one of the first major companies to adopt a wage structure that is comparable to efficiency wages.What was the outcome of Ford's experiment with efficiency wages?

A bumper-to-bumper warranty on a used car is a signaling device that

Assume that a particular state has decided to outlaw the sharing of individuals' credit histories as an illegal invasion of privacy.As a result of this action we would expect the

The efficiency wage is

Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees.Currently,the employees receive an annual bonus.Trisha can sell all the output she produces for $150 per unit.Trisha's total cost function (including bonus payments to employees)is: TC(Q)= 75Q + 2.5Q².The marginal cost function is: MC(Q)= 75 + 5Q.The profit sharing plan would pay employees 30% of profits.However,due to greater cost saving initiatives from employees,Trisha's total cost function becomes: TC(Q)= 505Q + 2Q².The relevant marginal cost function becomes: MC(Q)= 50 + 4Q.Which plan offers Trisha the greatest profits for herself?

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