Chat with AIExam 14: Game Theory and the Economics of Information
Define adverse selection and moral hazard and give examples of each.
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VerifiedMoral hazard exists when an insured party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event.For example,if Jack buys fire insurance and the insurance company cannot (at reasonable cost)observe where he keeps his old newspapers,he has less incentive to keep his old newspapers away from the fireplace because he will be compensated if a fire does occur.
Adverse selection is a form of market failure resulting from asymmetric information.It arises when products of different qualities are sold at a single price because one party (buyer or seller)is not sufficiently informed to determine the true quality of the product at the time of purchase.For example,if an insurance company cannot distinguish among low-risk and high-risk individuals and must charge a single premium to all,more high-risk individuals will want to buy insurance,potentially making it unprofitable to sell insurance.
Compare the benefits and the costs of advertising.
(30) VerifiedAdvertisements allow firms to achieve and maintain market power.It allows firms to convince consumers that their products are different from and better than those of their competitors.Artificial product differentiation brought about by advertisements not only increases the demand for the firm's product but also makes the demand more price inelastic.Thus firms enjoy greater market power.
Sometimes,advertisements operate as a barrier to entry.If a new firm attempts to enter a profitable industry,it may find that advertising by the established firms has created a captive audience of consumers who are reluctant to try a new brand.On the other hand,advertising can also be a means of breaking into an entrenched market,giving an entrant a way to increase sales quickly so that economies of scale can be realized.
In its most extreme form,criticism of advertising holds that it manipulates consumers and leads them to choose products they do not want or need.In this view,consumers' tastes are not formed independently,but are actually created by advertisers.
Which of the following is a benefit of advertising on the Internet?
(34) VerifiedB
Use the following table to answer the question : Table 14-3 : represents the payoff matrix of firms A and B,when they choose to produce either high output or low output.In each cell,the figure on the left indicates Firm B's payoffs and the figure on the right indicates Firm A's payoffs.
-Given the information in Table 14-3,if X = 10 and Y = 15,which firm has a dominant strategy?
-Given the information in Table 14-3,if X = 10 and Y = 15,which firm has a dominant strategy? (29) Which of the following,if true,would decrease the stability of a cartel?
(40) Use the following table to answer the question : Table 14-1 : shows the payoffs to Firm A and Firm B if they choose to produce either high output or low output.In each cell,the figure on the left indicates Firm A's payoffs and the figure on the right indicates Firm B's payoffs.
-With reference to the payoff matrix in Table 14-1,which firm has a dominant strategy?
-With reference to the payoff matrix in Table 14-1,which firm has a dominant strategy? (41) Like a market for "lemons," the labor market can also be affected by asymmetric information.Suppose a firm wants to hire more workers.The workers (or sellers of labor)know much more about their true productivity than the firm (or buyer of labor).The firm would like to hire workers and pay them according to their productivity but it is costly for them to hire workers,observe their behavior and productivity (do they work hard? are they on time?),and then fire those that do not perform well.Therefore,the firm would like to know how productive a worker will be before it hires that person.Can the firm acquire information (called a signal)about a worker's future productivity before hiring them? Can workers somehow signal their future productivity to firms?
This example is based on Michael Spence,"Job Market Signaling," Quarterly Journal of Economics,87 (August 1973),pp.205 - 221 and adapted from Ehrenberg and Smith,Modern Labor Economics,7th edition,Addison-Wesley.
Assume there are only 2 types of workers,low productivity or high productivity.Workers with 16 years or more of education will be offered a wage leading to a present value of lifetime income of $2,000,000.Those completing less than 16 years of education are offered a wage leading to a present value of lifetime income equal to $1,000,000.
Suppose that the total cost of various levels of education is given by the equations CA = 300,000(E-12)and CB = 200,000(E-12)where type A workers are "low productivity" workers and type B workers are "high productivity" workers,and E represents years of education.
(a)What is the net benefit (difference between the present value of income and total cost)a type A person derives from attaining 16 years of education? What would be the net benefit for type A from 12 years of education? What is the optimal level of education for a type A person?
(b)Is 16 years of education an effective way to distinguish low-ability workers from high-ability workers? Why?
(c)Suppose firms raised the cutoff for the higher wage job to 18 years of education.Would this be an effective signal of worker productivity? Why or why not?
(d)To be an effective signal,what must be the relationship between the cost of acquiring the signal and a worker's productivity?
(e)How might grade inflation affect the effectiveness of the signal?
(41) Group health plans,that offer policies covering all of a firm's employees,can partly address the adverse selection problem by:
(37) Use the following table to answer the question : Table 14-4 : describes the payoffs to Jack and Jill when each chooses to produce rock,scissors,or paper.The payoff matrix indicates the dollar payments from the loser to the winner.
-Refer to Table 14-4.Identify the Nash equilibrium,if any.
-Refer to Table 14-4.Identify the Nash equilibrium,if any. (35) All-you-can-eat restaurants tend to attract "undesirable" customers,i.e. ,mostly people who overeat.According to this statement,the problem encountered by such restaurants can be described as:
(30) Which of the following lowers the marginal benefit from a search related to a product?
(28) Assume that two firms are engaged in a pricing rivalry and attempt collusion.If each firm knows that the pricing game will last for a finite number of periods,and the collusion contract is not enforceable,then they will have an incentive to:
(27) An analysis of the relationship between advertising and price indicates that advertising:
(40) An effective and enforceable collusion in a duopoly will result in:
(35) Hannah is willing to pay at least $850 and at most $1,000 for a new dishwasher.She goes to the various electronic stores in her neighborhood to compare the prices and the product features that differentiate one brand from the other.Which of the following can be categorized as Hannah's search cost?
(25) The table given below shows the payoffs to Firm A and Firm B if they choose to produce either high output or low output.In each cell,the figure on the left indicates Firm A's payoffs and the figure on the right indicates Firm B's payoffs.
Refer to the payoff matrix in Table 14-1 and identify the Nash equilibrium.
Refer to the payoff matrix in Table 14-1 and identify the Nash equilibrium. (37) Under which of the following game theory circumstances is a collusive outcome most likely?
(33) Which of the following is true of a prisoner's dilemma game?
(25) Bella,a dentist,purchases a new sedan worth $25,000 after comparing the prices quoted by the different car dealers.She incurs a total transportation cost of $100 while visiting the different showrooms and loses fees worth $500 for spending four business hours away from the dental clinic.What will be the full price of the sedan?
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