Exam 16: Asymmetric Information

Which of the following statements is (are) TRUE of selling agents in residential real estate transactions?

Use the following to answer question: Figure 16.3 -(Figure 16.3) What is the equilibrium in this principal-agent game?

Stan, a soybean farmer, acts to prevent crop failure. The marginal benefit is represented by MB = 80 - A, where A is the number of precautions. The marginal cost of these precautions (e.g., soil preparation and pesticide and fertilizer use) is MC = 20 - 0.5A. Suppose the government offers Stan crop insurance, which changes the marginal benefit of taking precautions to MB = 65 - 2A. The number of precautions Stan takes _____ from _____ without insurance to _____ with insurance.

Joan, a landscaper, has hired Devin to help maintain the lawns under her care. They will be working in different locations, and Joan cannot monitor Devin's performance. If Devin works hard, Joan earns profit of $1,000 and Devin makes $100. If Devin does not work hard and Joan still pays a fixed wage, each makes $300. If Devin works hard and Joan pays him per lawn, she will earn $700 and Devin will make $200. Finally, if Devin does not work hard but Joan pays him per lawn, she makes $500 and he makes $150. Set up the game in extensive form and solve for the expected outcome of this principal-agent game.

In the used car market, what institutions help limit the lemons problem?

Pam has a job at a jewelry kiosk in a mall. Pam doesn't like to work hard, and it costs her $100 to do so. Pam's employer cannot observe whether Pam works hard or not. If Pam works hard, there is a 75% probability that jewelry profits will equal $400 a day and a 25% probability that jewelry profits will equal $100 a day. If Pam shirks, there is a 75% probability that jewelry profits will equal $100 a day and a 25% probability that jewelry profits will equal $400 a day. Suppose Pam is paid $200 if jewelry profits are $400 a day and $50 if jewelry profits are $100 a day. Pam will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.

In the market for used air rifles, the overwhelming majority of rifles for sale do not shoot very accurately. This situation is an example of _____ and results from _____.

Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort.

Lucy, who has no mechanical knowledge of automobiles, takes her car to a mechanic because of a pinging noise in the engine. The transaction between Lucy and the mechanic is characterized by:

Vehicle leasing _____ the number of high-quality used cars and _____ adverse selection.

Myra drives a Honda Accord, the most stolen car in the United States. She can take precautions to prevent her car from being stolen. The marginal benefit and marginal cost of these actions are MB = 10 - 0.2A and MC = 2 + 0.6A, where A is the number of precautions. Myra values her car, a 1994 model, at $2,400.

Farmer Marley grows barley, and every year he risks losing his crop to drought, insects, or disease. Precautions such as proper soil preparation and the judicious use of water, fertilizer, and pesticide can reduce the risk of crop failure. The marginal benefit and marginal cost of these precautions are MB = 120 - 4A and MC = 20 + A, where A is the number of precautions.

In green communities, it is common for homeowners to install solar panels on the street side of their house, even though it is the least sunny part of the house. Why would some homeowners behave this way?

The cost of obtaining a four-year degree is $120,000 for low-ability workers and $60,000 for high-ability workers. Suppose that workers without a four-year degree are paid lifetime wages of $500,000. For education to be an effective signal of ability, what range of lifetime earnings must be paid to workers with a four-year degree?

Consumers value high-quality dirt bikes at $6,000 and low-quality dirt bikes at $2,500. The supply of used high-quality dirt bikes is Q_H = 0.5P_H - 2,000; the supply of used low-quality dirt bikes is Q_L = P_L - 1,000. Potential buyers cannot distinguish the difference between the two. If buyers believe that half the used dirt bikes are high-quality, what price are buyers willing to pay for a used dirt bike?

In a market whose sellers know whether their good is a plum or a lemon, why might lower prices NOT lead to a greater quantity transacted between buyers and sellers?

Your car needs an oil change. After working on the car, your mechanic comes out to the waiting room and tells you your car needs a tire alignment. Does this transaction exhibit asymmetric information? Explain.

Ted purchased a comprehensive insurance policy for his car. Which of the following is an example of moral hazard?

Which of the following statements is (are) TRUE?

Mona and Joseph own a home. Based on the figure provided, what will be the optimum number of actions (such as smoke detectors and sprinklers) to prevent fire in their house? Mona and Joseph decide to purchase fire insurance that reduces the marginal benefit of taking precautions by $4 at every action level. How will the new policy affect the optimal number of precautions?