CH 10

When adverse selection occurs there are

fewer transactions than would have been occurred if both sides had the same information.

A club charges a flat fee for an open bar (all-you-can-drink). Which statement describes the moral hazard problem in this situation?

The marginal cost of another drink becomes zero, encouraging additional consumption.

Which of the following are ways that the government can help to solve information asymmetry problems?

Mandating participation in a program Require the more-informed party to reveal information Providing the missing information to the less-informed party

What method is often used when both parties want to eliminate information asymmetry?

Signaling

A common example of _______ occurs in insurance markets because of the information asymmetry between insurance companies and their customers.

adverse selection

The requirement by most states that all drivers buy at least a minimum level of insurance to cover liability to third parties is a government regulatory attempt to solve the

adverse selection problem.

When buyers and sellers have different information about the quality of a good, buyers may undervalue goods since they cannot correctly assess their quality. The resulting low prices may mean that only poor-quality goods will be available. This situation is called: This is a problem because:

adverse selection; some beneficial transactions will not take place.

To determine if an information problem should be 'solved', we should consider the trade-off between the

benefit and the opportunity cost of more information.

A good reputation

can be viewed as a special form of signaling. is a helpful way for buyers to avoid information asymmetry.

When people are fully informed about the choices that they and other relevant economic factors, we say they have

complete information

<blank> create problems because of the wants and constraints of those involved.

information asymmetry

When you buy a used car, there is likely to be

information asymmetry

Laws on disclosure don't always work well because they can create

information overload

In the early 2000s, laws requiring banks and mortgage brokers to disclose the terms of home loans failed to prevent many Americans from entering into irresponsible mortgage agreements. This could have been the result of

information overload.

A driver who expects to have frequent accidents would

not choose a high-deductible plan.

To determine if an information problem should be 'solved', we should consider the

opportunity cost of acquiring more information.

According to the ______ problem, a person called a principal entrusts someone else, called the agent, with a task.

principal-agent

After two parties have entered into an agreement, information asymmetries can cause the

principal-agent problem.

Taking action to make someone reveal private information about someone else is called

screening

When people take action to reveal their own private information, they are

signaling

The _____ theory of education argues that a college degree credibly _____ to potential employers that you are intelligent, hardworking, and able to complete assignments.

signaling; signals

Information problems are not always worth solving because

the cost of acquiring information can be prohibitive.

Even in a best-case scenario, adverse selection reduces the efficiency of markets because

transactions that would make both sides better off don't take place, so surplus is lost.