Exam 15: Asymmetric Information

Adverse selection arises in insurance markets because

Return to the ready-to-eat cereal example from the previous question. Now assume that there is only one kind of cereal,so the manufacturer cannot distinguish between types of consumer (adults vs.children,of which suppose there are equal numbers in the market). What is the optimal menu of cereal boxes?

The principal is distinct from the agent in the principal-agent model because

Adverse selection in competitive insurance markets harms

Which is a distortion (a loss of social surplus)associated with a monopolist's inability to observe consumer types when constructing a nonlinear pricing scheme?

Return to the case of education and the job market from the previous question. Which condition would be consistent with both types' obtaining an education in equilibrium?

A market characterized by asymmetric information will have an equilibrium price if at that price

There are two types of worker,high ability and low ability. High-ability workers generate gross profit of A on the job and low-ability generate nothing. Education does not make workers more productive,but is costly to obtain (cH for high ability workers and cL for low ability ones). Let w be the wage that all firms in the economy pay by regulatory mandate. Suppose the worker obtains utility given by the wage (if the worker is employed,0 if not)minus the cost of education (if any). There is no disutility from work. Which condition is required if only the high-ability type is to obtain an education in equilibrium?