Exam 16: Asymmetric Information

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

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

The Affordable Care Act (Obamacare) mandates that everyone buy health insurance or face a penalty. The rationale for this policy is to:

(Table: Car Quality Rating) 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. At an auction price of $1,000, there will be ____ cars for sale.

(Table: Car Quality Rating) 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.

Suppose workers with a college degree are paid a lifetime income of $500,000 and workers without a college degree are paid $300,000. The cost of obtaining a college degree for high-productivity workers is $100,000. For a college degree to serve as a useful productivity signal, the cost of a college degree for low-productivity workers must be:

Each of the following is an example of an institution that helps limit the lemons problem in the used car market EXCEPT:

Which of the following statements is TRUE?

Suppose there are two types of fruit pickers. Fast pickers bring in more than 10 units of fruit per day, while the slow pickers bring in fewer than 10 units per day. Johnson Farm pays pickers a flat rate of $50 per day, and Henry Farm pays pickers $5 for every unit picked. The pickers know their productivity level, but the farms don't know a picker's productivity until he or she starts working. a. At which farm will the slow pickers choose to apply? b. At which farm will the fast pickers choose to apply? c. Which farm will have adverse selection in the applications?

(Figure: Fire Prevention II) Elif and Mehmet 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? Elif and Mehmet 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?

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. With insurance coverage, Troy will visit the physician ____ times.

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.

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. In this example, the principal is ____.

(Table: Insurance Claims) Five people vary in health status. Each person knows his or her own health status and expected medical bills, which are given in the table. These people are considering buying health insurance. Assume that each person is equally likely to file a claim. a. Suppose that the insurance company does not know the health status of any one person but does know the expected claims of the group. If the insurance company sets the premium based on the average expected claims of these five people, what is the premium? b. At the premium determined in part a, who buys health insurance? What will happen to the premium over time?

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. Without insurance coverage, Troy will make ____ physician visits.

The supply of used high-quality motorcycles is Q_H = 0.2P_H - 1,000, and the supply of used low-quality motorcycles is Q_L = 0.5P_L - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, consumers are willing to pay ____ for any used motorcycle.

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. a. In this example, who is the principal and who is the agent? b. What is the moral hazard in paying an author a fixed fee for writing a book? Is there an alternative way of paying the author that would lead to greater effort?

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

Suppose there are two types of fruit pickers. Fast pickers bring in more than 10 units of fruit per day, while the slow pickers bring in fewer than 10 units per day. Johnson Farm pays pickers a flat rate of $50 per day, and Henry Farm pays pickers $5 for every unit picked. The pickers know their productivity level, but the farms don't know a picker's productivity until he or she starts working. There will be an adverse selection problem in applications at _____.

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?