Asymetric Information

Question 1

Asymetric information

Answer 1

One person has much better info than another. Typically a seller has much better info than a potential buyer about the quality of goods on offer

Question 2

Problems of asymmetric information

Answer 2

1. Adverse selection - bad sellers drive out good ones
2. Moral hazard - incentive to provide good products or services is reduced

Question 3

Answer 3

Question 4

Answer 4

Question 5

Responses to a lemons market

Answer 5

Signalling to show good car sellers the cars are good. A warrantee is a good signal because a good car will break down less often than a bad one hence it is cheaper to provide warrantee for a good car

Screening - includes checking mileometer or looking at a full service record

Question 6

Pooling Equilibrium
Separating Equilibrium

Answer 6

Pooling - goods of different quality are all sold together
Separating - goods of different types sold separately at different prices

Question 7

Pooling Equilibrium
Separating Equilibrium

Answer 7

Pooling - goods of different quality are all sold together
Separating - goods of different types sold separately at different prices

Question 8

4 potential combinations of feasible equilibria

Answer 8

Only pooling
Only separating
Both
Neither

Question 9

Answer 9