10. How asymmetric information prevents gains from trade Susan sees a classified ad from Raphael offering a used DVD player for $20. On the opposite page, she sees a big color ad from a national electronics chain offering a new DVD player for $175. Susan values a DVD player at $205 as long as it works, regardless of whether it is new or used. For each of the scenarios listed, determine the principle illustrated by each person's reasoning. Moral Adverse Scenario Hazard Selection Suppose Raphael, the seller of the DVD player, knows the player works well-he is selling it only because he got a better model as a gift. He thinks about asking $40 and offering a guarantee: He will replace the DVD player with a new $175 DVD player if it turns out not to work. Then he thinks, "That's not a good idea! Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new DVD player for $40-meanwhile, I'll be out $135!" Suppose Susan buys the new DVD player from the national electronics chain, thinking "Someone would ask $20 for a used DVD player only if it didn't work well." Why is Raphael unable to sell Susan the DVD player? Check all that apply. O Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure that buyers won't try to take advantage of the guarantees by filing false claims. O Adverse selection can cause buyers to avoid purchasing high-quality goods because of uncertainty about their quality.
10. How asymmetric information prevents gains from trade Susan sees a classified ad from Raphael offering a used DVD player for $20. On the opposite page, she sees a big color ad from a national electronics chain offering a new DVD player for $175. Susan values a DVD player at $205 as long as it works, regardless of whether it is new or used. For each of the scenarios listed, determine the principle illustrated by each person's reasoning. Moral Adverse Scenario Hazard Selection Suppose Raphael, the seller of the DVD player, knows the player works well-he is selling it only because he got a better model as a gift. He thinks about asking $40 and offering a guarantee: He will replace the DVD player with a new $175 DVD player if it turns out not to work. Then he thinks, "That's not a good idea! Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new DVD player for $40-meanwhile, I'll be out $135!" Suppose Susan buys the new DVD player from the national electronics chain, thinking "Someone would ask $20 for a used DVD player only if it didn't work well." Why is Raphael unable to sell Susan the DVD player? Check all that apply. O Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure that buyers won't try to take advantage of the guarantees by filing false claims. O Adverse selection can cause buyers to avoid purchasing high-quality goods because of uncertainty about their quality.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.4P
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Susan sees a classified ad from Raphael offering a used DVD player for $20. On the opposite page, she sees a big color ad from a national electronics chain offering a new DVD player for $175. Susan values a DVD player at $205 as long as it works, regardless of whether it is new or used.
Transcribed Image Text:10. How asymmetric information prevents gains from trade
Susan sees a classified ad from Raphael offering a used DVD player for $20. On the opposite page, she sees a big color ad from a national electronics
chain offering a new DVD player for $175. Susan values a DVD player at $205 as long as it works, regardless of whether it is new or used.
For each of the scenarios listed, determine the principle illustrated by each person's reasoning.
Moral
Adverse
Scenario
Hazard
Selection
Suppose Raphael, the seller of the DVD player, knows the player works well-he is selling it only because he got a better
model as a gift. He thinks about asking $40 and offering a guarantee: He will replace the DVD player with a new $175
DVD player if it turns out not to work. Then he thinks, "That's not a good idea! Someone can just buy it, handle it
carelessly, and, if it breaks, can pretend it didn't work and get a new DVD player for $40-meanwhile, I'll be out $135!"
Suppose Susan buys the new DVD player from the national electronics chain, thinking "Someone would ask $20 for a
used DVD player only if it didn't work well."
Why is Raphael unable to sell Susan the DVD player? Check all that apply.
O Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure that buyers won't try to take advantage of
the guarantees by filing false claims.
O Adverse selection can cause buyers to avoid purchasing high-quality goods because of uncertainty about their quality.
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