Microeconomics, Student Value Edition (2nd Edition)
2nd Edition
ISBN: 9780134461786
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Question
Chapter 16, Problem 1Q
To determine
Meaning and types of asymmetric information.
Expert Solution & Answer
Explanation of Solution
Every transaction has a buyer and a seller who interact with each other to derive utility. When a situation arises where one party in the transaction has more information regarding any good or service in particular, such a situation is referred to as a situation of asymmetric information.
There are essentially two types of asymmetric information. First is called “Hidden Characteristics” refers to some particular characteristic of a good/service that only one party is aware about. Second is called “Hidden actions” in which either the buyer or the seller conducts certain action that is relevant with regards to the transaction but is not known to the other party.
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Chapter 16 Solutions
Microeconomics, Student Value Edition (2nd Edition)
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Similar questions
- Discuss the consequences of asymmetric information for Market Equilibrium.arrow_forwardA medical test that an insurance company could use to distinguish between high- and low-risk types would create an equilibrium in which both high- and low-risk types could have full insurance. Sketch a brief proof using a diagram. Why is this equilibrium not an equilibrium under the normal information asymmetry assumptions? Show which of the three equilibrium criteria does not hold.arrow_forwardWhat impact do asymmetric and imperfect information have on prices and quantities? Group of answer choices An unstable equilibrium. A decline in prices or quantities of products sold. One party (buyer/seller) will always be unhappy. One party will be made better off, and the other party will be made worse off.arrow_forward
- Which is not an example of asymmetric information? Group of answer choices A customer not knowing which insurance plan is best A client making a purchase of a used private airplane of unknown condition A mail carrier making her deliveries An insurer not having the full information about a client’s drug use A tree service recommending needless pruning on fruit trees is an example of: Group of answer choices adverse selection. mutually beneficial trades. moral hazard. a trade fallacy.arrow_forwardSuppose that the graph below illustrates the demand for healthcare services given a coinsurance plan of 25%, what would be the expected change if the participant changed jobs and received a plan with 100% coinsurance?arrow_forwardThe lecture mentions that diminishing marginal utility applies to the consumption of money as well as the consumption of certain food. Can you give another example where diminishing marginal utility applies? Can you think of any example where diminishing marginal utility does not apply? From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much you hate uncertainty), the cost of insurance (i.e. if it is within your willingness to pay), as well as wealth. Can you think of anything else that affects demand for insurance? One of the predictions of prospect theory is that we tend to be overly concerned with relatively small risk. Can you think of any example (besides those given in the lecture) that either speaks to this or is an exception?arrow_forward
- Why might it be difficult for a buyer and seller to agree on a price when imperfect information exists?arrow_forwardDefine the difference between moral hazard and adverse selection using an example. .arrow_forwardIn circumstances of imperfect information should one expect the market to be efficient? Explain briefly.arrow_forward
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