Chapter 17: Asymetric Information

An individual is willing to pay something for information because
1. information is costly.
2. it is always better to know than not to know.
3. this allows him or her to increase utility.
4. information is a public good.
An individual will not choose to acquire all available information because
1. that would maximize utility given his or her budget constraint.
2. that would violate the assumption of risk aversion.
3. there are increasing returns to additional information.
4. there are decreasing marginal costs to acquiring information.
Adverse selection arises because
1. insurance buyers have more information than insurance sellers.
2. insurance sellers have more information than insurance buyers.
3. individuals can select which insurance company to patronize.
4. insurance companies can exercise too much control over who they insure.
Adverse selection in competitive insurance markets harms
1. high risk individuals.
2. low risk individuals.
3. owners of insurance companies.
4. Everyone.
One way the “lemons problem” in the used-car industry can be mitigated is by
1. raising the price of used cars.
2. hiring auto experts to sell used cars.
3. requiring sellers to guarantee trouble-free cars.
4. allowing owners to trade in their own cars when they purchase a used car.
An example of adverse selection is
1. purchasing a new car sight unseen based on the recommendation of a neighbor.
2. high health insurance premiums resulting from the poor health of people who buy policies.
3. suppliers who charge more for better quality clothing than for lower quality clothing.
4. being talked into buying a low-quality item because the price is lower.
If markets are perfect, a rational actor may reasonably conclude from the high price of a good that the good
1. is produced by a monopoly.
2. is of better quality.
3. has a greater demand for it.
4. is not known about by other consumers.
In volatile markets, “speculators” would be expected to provide some stability because
1. they will be required to do so by the government.
2. they will use current price moves to predict future moves.
3. they will buy when price is below equilibrium and sell when it is above equilibrium.
4. they will buy when price is above equilibrium and sell when it is below equilibrium.
A market participant who obeys the principles of rational expectations will base his or her expectations of market price on
1. all possible information about supply and demand curves.
2. all possible information about the history of price movements.
3. rational behavior by other market participants.
4. rational behavior by government regulators.
The “lemons model” predicts quality deterioration in the used car market because
1. used cars require increasing maintenance.
2. suppliers and demanders have different information about cars’ quality.
3. used cars are generally of a lower quality than new cars.
4. people will usually buy new cars if they are available.

Chapter 17: Asymetric Information

Multiple Choice Questions