Exam 19: Asymmetric Information

-The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. Ten percent (10%)of all cars are lemons. Which of the following statements is TRUE?

The XYZ Co. sells shirts. Shirts with the company label on the tag are perceived to be of higher quality than shirts with the store's label. Yet, shirts are of identical quality regardless of label. The demand for perceived high-quality shirts is p_h = 50 - q_h. The demand for perceived low-quality shirts is p_l = 10 + p_h - q_l. The firm can produce shirts at TC = q_h + q_l. How many shirts does the firm label as low quality and how many as high quality? What prices are charged?

In a competitive market with large search costs, many firms, and asymmetric information, why is the monopoly price the only possible single-price equilibrium?

Why would a firm rather a company like J.D. Power (which provides product satisfaction reviews)review its product than doing it within the firm?

A market equilibrium with symmetric information is efficient because

Very few players are drafted into the NFL when they play at Division II or Division III schools whereas more players are drafted in the MLB from these schools. What can explain this?

Explain why some people who are applying for a job at a bank dress up, arrive early, and have their paperwork neatly completed for the job interview.

The XYZ Co. is hiring salespersons. They will be paid a very attractive hourly rate that is independent of how much they sell. Describe an adverse selection that would take place. Describe a moral hazard that would take place.

If consumers have limited information about price and search costs exist, then

Screening is the action

-The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. Ten percent (10%)of all cars are lemons. Which of the following statements is TRUE?

If there is zero search cost, then in the presence of asymmetric information, competitive firms will

Signals may prevent adverse selection if

The cost, c, of a college education that serves only as a signal of a high-quality worker is $10,000. The wage of a known high-quality worker, w_h, is $30,000. The wage for a known low-quality worker, w_l, is $10,000. For what value of the share of the work force that is of high quality, s, is a pooling equilibrium possible?

If getting accepted into college is very difficult because of high standards of intelligence and ability, but students learn absolutely nothing while in college, it is most likely that

-Joe wants to achieve the highest position possible with the XYZ Co. During the interview, he tells them he is capable of performing many difficult tasks. The company feels there is a 20% chance he is lying. Given the payoff matrix in the above figure, what job level will the company offer to Joe? Will he accept this offer?

-The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. The percent of all cars that are lemons is θ. What value of θ is necessary for all cars to be sold?

A consumer is likely to avoid adverse selection and get a high-quality lunch at

-The above figure shows the payoff to two firms in an industry deciding to make an investment in worker safety. Neither firm will make the investment because

If a person attends a public college and is not hired because the boss went to a private college, this might be an example of