Exam 21: Asymmetric Information

If homes owned by real estate agents stay on the market longer and sell for higher prices than homes owned by people who hire real estate agents,this may be evidence of:

Suppose research reveals that college graduates have higher employment rates and higher wages,but a significant proportion of college graduates who get jobs do so in fields other than the field in which they earned their degree.How could this be evidence of signaling? What is the counter-argument?

The value of a worker's marginal product is $40 per hour for high-ability workers and $5 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U_H(E,W)= W - 5E,and the preferences of low-ability workers correspond to the utility function U_L(E,W)= W - 8E.By law,everyone is required to attend at least ten years of school.Three-fourths of the population has low ability,and one-fourth has high ability.What is the most efficient separating equilibrium?

The slope of the indifference curves in Figure 21.1 reveals the assumption that:

Figure 21.2 shows the benefit functions for low-ability workers and high-ability workers (A and B),along with one indifference curve for each worker type (C and D).The employer cannot observe worker type directly but has created two positions,E and F,as a screening mechanism.Which of the following is true?

Suppose in the market for labor years of education is used as a signal of ability,and that there is a separating equilibrium such that high-ability workers receive E_H years of education and low-ability workers receive E_L years.Each of the following must be true about E_L and E_H EXCEPT:

The value of a worker's marginal product is $50 per hour for high-ability workers and $15 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U_H(E,W)= W - 4E,and the preferences of low-ability workers correspond to the utility function U_L(E,W)= W - 10E.By law,everyone is required to attend at least ten years of school.Three-fifths of the population has low ability,and two-fifths has high ability.What can be said about the educational attainment of each type of worker in a separating equilibrium?

Give an example of the potential for moral hazard that exists in the following relationships: (a)a film actress and her agent; (b)a employee hired by a large firm to manage one retail location; and (c)a college student and a professor.

The value of a worker's marginal product is $40 per hour for high-ability workers and $5 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U_H(E,W)= W - 5E,and the preferences of low-ability workers correspond to the utility function U_L(E,W)= W - 8E.By law,everyone is required to attend at least ten years of school.Three-fourths of the population has low ability,and one-fourth has high ability.Would it be Pareto efficient for the government to ban schooling beyond 10 years rather than allow a separating equilibrium?

Moral hazard is ________ in employment settings because _______.

When informed parties prefer trading circumstances that are disadvantageous to uninformed trading partners,economists say that ________ has occurred.

People with different information choose different alternatives in ________ equilibria; they choose the same alternatives,despite having different information,in ________ equilibria.

Informed parties try to overcome problems of adverse selection through _________; uninformed parties try to overcome problems of adverse selection through _______.

In competitive markets,cross-subsidization is:

In Figure 21.1:

Figure 21.1 shows a set of:

Adverse selection can cause attractive trading partners to be driven from a market by unattractive trading partners,whose presence alters prices at which attractive trading partners could trade.This unfortunate result is known as:

Which of the following is NOT a potential source of incentives covered in the textbook?

Screening mechanisms are designed to ________ the problems of informational asymmetry.

Which of the following explains why a compensation contract designed to combat employee moral hazard that features strong incentives might be worse than having no incentive scheme at all?