Exam 16: Asymmetric Information

Which of the following is (are) examples of moral hazard?

Based on John List's research on sports memorabilia shows, you should advise a buyer of antique furniture at a flea market to:

Some employers no longer consider a prospective employee's grade point average as a useful signal. Why might this be the case?

Pam works 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. If Pam works hard, there is a 90% probability that jewelry profits will equal $400 a day and a 10% probability that jewelry profits will equal $100 a day. If Pam shirks, there is a 90% probability that jewelry profits will equal $100 a day and a 10% 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.

Warranties on products _____ asymmetric information, but they do _____ the lemons problem.

For a signal to be meaningful, its cost must be:

Community rating regulations require insurance companies to charge everyone the same premium, with sometimes slight adjustment for age and gender, regardless of a person's health status. This regulation _____ adverse selection. _____ people and _____ people are _____ likely to buy insurance because the companies cannot legally offer them _____ premiums based on their risk factors.

Use the following to answer question: Table 16.1 -(Table 16.1) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2. Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at , where is the average quality rating of the cars available for sale. Complete the following table.

A stand-up paddleboard outfitter operates without insurance. The outfitter's marginal cost of safety (e.g., staff training, rescue equipment) is MC_A = 100 + 14A. The marginal benefit of those actions is given by MB_B = 200 - 6A, where A is the number of safety actions taken. The government has mandated that all SUP outfitters carry insurance, leading to a change in the outfitter's marginal benefit curve to MB_B = 140 - 6A. How does this government mandate change the efficient number of precautions taken by the outfitter?

The costs of obtaining a college degree for high-productivity and low-productivity workers are as follows: High productivity: C_H = $120,000 Low productivity: C_L = $180,000 Suppose workers with a college degree are paid a lifetime income of $400,000 and workers without a college degree are paid $230,000. Which of the following statements is (are) TRUE?

Suppose that at an auction there are four lawn mowers, two with a quality rating of 4 and two with a quality rating of 1. The scale runs from 1 to 4, with 1 being worst and 4, near-mint condition. Sellers know the quality rating of their lawn mower and value it at 100Q, where Q is the quality rating. Buyers do not know the quality rating of any specific lawn mower, but assume that buyers know the average quality rating of all the lawn mowers being offered for sale. Buyers value lawn mowers at , where is the average quality rating of lawn mowers being offered for sale at the current auction price. Which of the following statements is (are) TRUE?

Explain how moral hazard could arise in the following situations.

In the market for karate lessons, the instructors know more about the quality of their instruction than their students do. This situation may set up a:

Use the following to answer question: Figure 16.6 -(Figure 16.6) The figure shows the cost of college for high- and low-productivity workers. Based on the college wage premium:

Suppose that a company offers insurance for the cost of surgical hair replacement. After selling this insurance for a short period, the company finds that almost all of its customers are undergoing hair replacement treatment and filing a claim. What problem does the company face? Is there anything it could do to limit this problem?

Donna is an unsupervised outside salesperson for a small electronics firm. Instead of working on commission, Donna is a salaried employee. What issue may this compensation arrangement lead to? Give a possible solution.

A small town has 1,000 people, of whom 400 are sick. The annual expected medical claims of the healthy and sick are $500 and $9,000, respectively. If the insurance company cannot determine who is healthy and who is sick prior to the purchase of insurance, what annual premium will they set? Will this lead to adverse selection? Why or why not?

Use the following to answer question: Figure 16.7 -(Figure 16.7) Towne Music would like the rock band Fufu Arrows to produce a 10-song record. Towne is considering paying the band either (1) a high flat fee or (2) a low flat fee plus royalties.

The signaling model of education assumes that attending college will:

The new Camaro SS has a 6.2-liter V8 engine that puts out over 400 horsepower. At the racetrack, the Camaro runs the quarter-mile in an impressive 12.9 seconds at 117 mph. General Motors provides a three-year warranty on the Camaro. How might the factory warranty set up a moral hazard? What could General Motors do to mitigate the moral hazard?