Exam 36: Asymmetric Information-Part A

Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16.The community has equal numbers of each type of worker.The local community college offers a course in microeconomics.High-productivity workers think taking this course is as bad as a cut in wages of $4 and low-productivity workers think it is as bad as a wage cut of $8.

In a market where there is a pooling equilibrium, different types of agents choose the same action.

A certain city has two kinds of workers, alphas and betas.An alpha can produce $100 worth of output per day working for himself.If he works in the local factory, he produces $120 worth of output a day.A beta produces $60 worth of output per day working for himself, and he produces $80 worth of output per day if he works for the local factory.Workers either work for themselves or work in the factory.The factory owner can't tell alphas from betas.He pays a wage equal to the average product of his labor force and he has at least some alphas working for him.Workers are free to choose to work for themselves or the factory, depending on which offers more money.

Which of the following is the best example of adverse selection?

A firm hires two kinds of workers, alphas and betas.The population at large has equal number of alphas and betas.One can't tell a beta from an alpha by looking at her, but an alpha will produce $3,000 worth of output per month and a beta will produce $2,500 worth of output in a month.The firm decides to distinguish alphas from betas by having workers take an examination.A worker will be paid $3,000 if she gets at least 60 answers right and $2,500 otherwise.For each question that they get right on the exam, alphas have to spend 1/2 hour studying and betas have to spend 1 hour.For either type, an hour's studying is as bad as giving up $20 of income per month.This scheme leads to

Jan's utility function is C - H², where C is consumption and H is hours worked per day.She can work in the city for 8 hours per day, earning $100 a day.Alternatively, she can rent a small farm from Mr.Porksniffer.If she rents the farm, she can work as many hours a day as she wishes.If she works H hours per day, she can sell her crops for a total of $20H per day, but she must pay Mr.Porksniffer an annual rent of $R.Mr.Porksniffer wants to charge the highest rent $R that he can and still be able to have Jan rent from him.What is the highest rent he can charge? A penny less than

Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $5,000 per month.You can't tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity.Kandos, however, have more patience than klutzes.Listening to an hour of dull lectures is as bad as losing $250 for a klutz and $100 for a kando.There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $5,000 per month and anybody who does not is paid $1,000 per month

Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16.The community has equal numbers of each type of worker.The local community college offers a course in microeconomics.High-productivity workers think taking this course is as bad as a cut in wages of $5 and low-productivity workers think it is as bad as a wage cut of $9.

Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16.The community has equal numbers of each type of worker.The local community college offers a course in microeconomics.High-productivity workers think taking this course is as bad as a cut in wages of $5 and low-productivity workers think it is as bad as a wage cut of $9.

Ten workers work jointly on a project.All 10 workers are equally skilled.The total value of the output produced is $60 times the sum of the number of hours worked by all 10 workers.Each worker's utility is equal to his income minus the square of the number of hours he works.Each worker is selfish.The employers have no way of keeping track of any individual's work effort, so they decide to let each person work as long as he wants to and they divide the total value of the output equally among the workers.How much income will each worker get?

A life insurance company must be concerned about the possibility that the people who buy life insurance may tend to be less healthy than those who do not.This is an example of adverse selection.

The incentive compatibility constraint requires that incentives be consistent with a consumers budget constraint.

In a market where there is a separating equilibrium, different types of agents make different choices of actions.

Enigma, Ohio, has two kinds of workers, klutzes whose labor is worth $1,000 a month and kandos whose labor is worth $2,500 a month.Enigma has exactly twice as many klutzes as kandos.Klutzes look just like kandos and are accomplished liars, so if you ask, they claim to be kandos.It is too expensive to monitor anybody's work.A professor who likes to talk offers to give free lectures on personal hygiene and macroeconomics.Klutzes and kandos find these lectures excruciatingly dull.An hour's lecture is as bad as losing $50 for a kando and as bad as losing $100 for a klutz.If all other firms pay wages equal to the productivity of an average citizen of Enigma, which of these strategies would be most profitable for a new firm?

Lexus has recently begun a program in which a used Lexus automobile which passes a 100 + point inspection is designated by the local dealer to be a Lexus Certified Pre-owned Vehicle.Would local Lexus dealers find it in their best interest to participate? Explain.

Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 4,000 used cars on the market is such that the number of used cars of value less than V is V/2.Original owners must sell their used cars.Original owners know what their cars are worth, but buyers can't determine a car's quality until they buy it.An owner can either take his car to an appraiser and pay the appraiser $100 to appraise the car (accurately and credibly)or sell the car unappraised.In equilibrium, car owners will have their cars appraised if and only if the car's value is at least

There are two types of used cars, high quality and low quality.Buyers cannot distinguish the two types until after they have purchased them.Owners of high-quality cars will sell them if the price is $2,000 or higher.Owners of low-quality cars will sell them if the price is $1,000 or higher.Buyers value a high-quality used car at $3,466 and a low-quality used car at $1,200.Suppose that 30% of used cars are of high quality and 70% of used cars are of low quality.In equilibrium,

Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $5,000 per month.You can't tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity.Kandos, however, have more patience than klutzes.Listening to an hour of dull lectures is as bad as losing $250 for a klutz and $150 for a kando.There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $5,000 per month and anybody who does not is paid $1,000 per month

Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 6,000 used cars on the market is such that the number of used cars of value less than V is V/2.Original owners must sell their used cars.Original owners know what their cars are worth, but buyers can't determine a car's quality until they buy it.An owner can either take his car to an appraiser and pay the appraiser $400 to appraise the car (accurately and credibly)or sell the car unappraised.In equilibrium, car owners will have their cars appraised if and only if the car's value is at least

An insurance company must be concerned about the possibility that someone will buy fire insurance on a building and then set fire to it.This is an example of moral hazard.