Exam 16: Asymmetric Information

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, where A is the number of safety actions taken. The marginal benefit of those actions is given by MB_B = 200 - 6A. The optimal number of precautions for this outfitter to take is ____.

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. Paying a fixed fee for writing a book ____ an example of moral hazard because ____.

The market for used sea kayaks has both a high-quality and low-quality variety. High-quality kayaks are valued at $3,000 and low-quality ones at $800. Supply of used high-quality kayaks is Q_H = 0.5P_H - 1,000, and the supply of used low-quality kayaks is Q_L = P_L - 500. Potential buyers cannot distinguish between a high-quality and a low-quality used kayak. Buyers believe that only 3 of every 10 used kayaks are of high quality. In this market, ____ high-quality used kayaks will be sold.

Carfax offers a report on used cars for $39.99. It details the ownership type and history, vehicle mileage, accident reports, and other information. Carfax is an example of how markets try to:

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. Fast pickers will choose to apply at _____.

Vivaan, a musician, frequently plays at large parties and nightclubs. Vivaan has musical equipment worth $8,000, and he takes precautions to prevent theft. The marginal benefit of these precautions is given by MB = 60 - 3A, where A is the number of precautions Vivaan takes to reduce theft. The marginal cost of preventing theft (i.e., the time, energy, and effort expended) is given by MC = 2A. What is Vivaan's optimal level 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, Paula will visit the physician ____ times.

(Figure: Principal-Agent Game II) If the principal chooses a flat salary, the agent will _____ and earn a payoff of _____.

Which of the following practices mitigates moral hazard? I. A health insurance company's policy requires a $500 deductible and a 20% coinsurance rate. II. Progressive Insurance offers drivers a discount for using a black box that records miles driven and the number of sudden stops. III. Homeowner insurance does not cover claims arising from backyard swimming pools.

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?

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?

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?

The signaling model of education assumes that attending college will:

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

Which of the following statements is (are) TRUE? I. Moral hazard can either increase or decrease the likelihood of an insurance claim. II. Moral hazard is the result of asymmetric information. III. Insurance coverage sets up moral hazard because people don't respond to the incentives offered by the coverage.

The market for used sea kayaks has both a high-quality and low-quality variety. High-quality kayaks are valued at $3,000 and low-quality ones at $800. Supply of used high-quality kayaks is Q_H = 0.5P_H - 1,000, and the supply of used low-quality kayaks is Q_L = P_L - 500. Potential buyers cannot distinguish between a high-quality and a low-quality used kayak. Buyers believe that only 3 of 10 used kayaks are high-quality. What are buyers willing to pay and how many used sea kayaks will be sold?

(Figure: Theft Prevention) An individual with no automobile insurance will choose to take _____ units of action to prevent theft.

(Figure: Principal-Agent Game III) What is the likely outcome of this game?

For a signal to be meaningful, the cost of obtaining it must be:

Answer the following questions. a. Dedicated college students want to learn as much as possible about their field of study. How might a principal-agent problem arise between professors and students? b. As a health-care patient, you want your physician to be concerned only about your well-being. What principal-agent problems may arise between physicians and patients?