Exam 16: The Economics of Information

Scenario: Pat works in a factory that produces jams, jellies, and marmalades. His job is to check whether each pack of marmalade is sealed before it is dispatched for sale. Several other workers in the factory do the same job. Therefore, it is not possible for the manager of the factory to keep track of the number of packs each worker actually inspects. -Refer to the scenario above.Which of the following problems is most likely to arise in this case?

Governments are often forced to bail out large banks to prevent entire economies from being affected adversely.This provision often encourages banks to invest in risky assets.This is an example of ________.

Samsung provides a warranty for all goods it manufactures to indicate that these goods are of high quality.This is an example of ________.

Explain principal-agent relationships.

Which of the following is likely to be observed among unemployed individuals if government offers generous unemployment benefits?

Which of the following is an example of adverse selection?

________ discourage low-risk individuals from seeking health insurance.

Which of the following is likely to arise in a market with asymmetric information?

Mr.Smith put his laptop up for sale.He was aware of the fact that the laptop malfunctioned frequently.However,none of the potential customers who came to buy the laptop were able to discover the problem.One of them actually bought it at a remunerative price.This occurred because of the presence of ________.

Rachel usually takes long coffee breaks and works less when her boss is out of town on business.However,she started taking shorter breaks when the Human Resources manager at her company announced that each employee will henceforth be paid a performance-based incentive every month.What explains her behavior before and after the announcement of the new policy?

Which of the following is a solution to the problem of moral hazard in the labor market?

How can performance-based incentives help companies facing moral hazard?

In a market with ________,one side of the market has private information that is relevant for the other side.

Scenario: Tom wants to buy a used iPhone from an online exchange Web site. He expects 50 percent of the used phones to have some defect. He is willing to pay up to $80 for a phone without any defect and $0 for a defective phone. An owner of a good-quality iPhone is likely to sell his phone if he gets a price of $70. -Refer to the scenario above.Tom is likely to get a defective phone if he is willing to pay an amount of ________.

Economists refer to the general problem of ________ as a principal-agent relationship.

A company facing the problem of moral hazard decided to lay off some workers during a recession instead of lowering wages.What is the possible reason for such a decision?

Which of the following is an example of signaling in a market with asymmetric information?

Scenario: You walk into a used car lot to buy your first car. However, you are not sure of the quality of the cars in the lot and expect one-third of them to be of poor quality. -Refer to the scenario above.Based on the given information,we can conclude that the market for used cars has ________.

Efficiency wages paid to workers ________.

The function of the agent in a principal-agent relationship is to ________.