How information asymmetry can impact economic efficiency. In your answer cover the following: a) What is principal-agent problem? Support your answer with relevant examples. b) What is efficiency wage? Support your answer with appropriate graph
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How information asymmetry can impact economic efficiency. In your answer cover the following:
a) What is principal-agent problem? Support your answer with relevant examples.
b) What is efficiency wage? Support your answer with appropriate graph.
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- Describe the principal-agent problem between firm owners and managers. Make sure you identify the principal and the agent and discuss the information asymmetries and different goals of the two players.Give an example, real or imaginary, of an adverse selection problem. Your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficientIn the famous court case Stambovsky v. Ackley a prospective homebuyer attempts to back out of a purchase after learning that the home was widely believed to be haunted since the current owner had it included in a tour of haunted homes. Prior to the prospective buyer backing out, what imperfect information situation applied to this situation? Explain.
- Suppose American sugar producers convince the federal government to issue a directive to put a tariff on foreign sugar. This would be an example of the principal-agent problem. logrolling. rent-seeking. moral hazard.Question 9 Which of the following is true in the principal agent model?1. The agent has more information and may shirk by behaving in a way contrary to the principal's interest. 2. The principal has less information and may shirk by behaving in a way contrary to the agent's interest. 3.The principal has more information and may shirk by behaving in a way contrary to the agent's interest. 4.The agent has less information and may shirk by behaving in a way contrary to the principal's interest.Company X sells a high-quality product. Its problem is that consumers cannot differentiate company X’s product from competing, very low-quality products. What is this particular type of information asymmetry problem called? What is one way that company X can solve this problem (without relying on government policy)?
- Give an example, real or imaginary, of a moral hazard problem. Again, your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficientAsymmetric information makes it hard for investors to sell securities. Banks, meaning both investment and commercial, specialize in reducing asymmetric information. What methods do they have for reducing information asymmetries? Be sure to specify if the methods are designed to reduce the problems of adverse selection or moral hazard.Which is CORRECT about information asymmetry and adverse selection 1. Information asymmetry refers to the situation when buyers have more information on the product than the sellers. 2. Information asymmetry is the result of adverse selection. 3. In a used car market, if sellers with good cars are unwilling to sell at a large discount, then only bad cars will get sold. This suboptimal outcome is so-called “adverse selection”. 4. Due to information asymmetry, market investors interpret firm’s SEO announcement positively because they believe insiders consider the firm undervalued.
- BK Books is an online book retailer that also has 10,000 “bricks and mortar”outlets worldwide. You are a risk-neutral manager within the CorporateFinance Division and are in dire need of a new financial analyst. You only interview students from the top MBA programs in your area. Thanks to your screening mechanisms and contacts, the students you interview ultimately differ only with respect to the wage that they are willing to accept. About 10 percent of acceptable candidates are willing to accept a salary of $140,000, while 90 percent demand a salary of $190,000. There are two phases to the interview process that every interviewee must go through. Phase 1 is the initial one-hour on-campus interview. All candidates interviewed in Phase 1 are also invited to Phase 2 of the interview, which consists of a five-hour office visit. In all, you spend six hours interviewing each candidate and value this time at $2,500. In addition, it costs a total of $8,000 in travel expenses to interview each…In this simple insurance model, a company has a monopoly over a small market. There are 100K potential customers with a low risk profile, 60K potential customers with a medium risk profile, and 10K potential customers with a high risk profile. A person’s risk profile is important as it determines how much insurance is worth to the customer and how much money the customer will cost on average to the insurance company. The following table summarizes the estimates put together by the company: Low risk profile Medium risk profile High risk profile Number of potential customers 100,000 60,000 10,000 Expected expense per customer $2K $7K $15K Maximal price the customer isready to pay for insurance $3K $8K $16K Remark: Explaining where these numbers come from would require a subtler model that describes the risk covered by the insurance policy. While there is no need to do this for the purpose of this exercise, notice though how the maximal price…Have you come across instances of agency problems in your professional or personal life? Please explain briefly ( in 3-4 sentences) who the principal and agent are and what lead to the principal-agent problem. You can also use a recent (preferably after 2015) example from the business world to illustrate the above if you do not have an example from your professional or personal life. Avoid examples of Enron, Goldman Sachs, Bernie Madoff scandal, Boeing, and Worldcom. You can enter your answer as a comment (text, audio, etc.) at the end of the video.