1.3.4 - Information Gaps

Question 1

What is the concept of symmetric information in a perfect market?

Answer 1

In a perfect market, buyers and sellers have potential access to the same information.

Question 2

What occurs when buyers and sellers do not have access to the information they need to maximize their welfare?

Answer 2

Information failure or an information gap.

Question 3

What is asymmetric information?

Answer 3

A situation where either the buyer or the seller has more information than the other.

Question 4

How can the buyer or seller with more information exploit the situation?

Answer 4

They can exploit that information gap to their benefit.

Question 5

What happens to the demand curve when buyers suffer from information failure?

Answer 5

The actual demand curve is to the right of the one with perfect information.

Question 6

What is the consequence of buyers overestimating the benefits of a product?

Answer 6

They are prepared to pay a higher price for a given level of output.

Question 7

What is the result of too much being bought due to information failure?

Answer 7

There is a misallocation of resources.

Question 8

What happens when buyers underestimate the benefits of buying a good?

Answer 8

The actual demand curve will be to the left of the demand curve with perfect information.

Question 9

What occurs if suppliers underestimate the benefits of selling a product?

Answer 9

The supply curve will be to the left of the supply curve where they possess perfect information.

Question 10

What happens if suppliers overestimate the benefits of selling a product?

Answer 10

The supply curve will be to the right of the supply curve with perfect information.

Question 11

Fill in the blank: Information gaps occur when either the buyer or the seller has _______.

Answer 11

more information than the other.

Question 12

Who first outlined the problem of asymmetric information?

Answer 12

George Akerlof

Akerlof won the Nobel Prize for his work on this topic.

Question 13

In what year did George Akerlof publish his paper on asymmetric information?

Answer 13

1970

Question 14

What example did Akerlof use to discuss asymmetric information?

Answer 14

Second-hand cars

Question 15

What is a ‘lemon’ in the context of second-hand cars?

Answer 15

A very poor quality car with significant defects

Question 16

Why do buyers of second-hand cars only offer average prices?

Answer 16

They do not know the quality of the car

Question 17

What happens to owners of better than average quality cars in a market with asymmetric information?

Answer 17

They tend not to sell them because they can’t get a high enough price

Question 18

What is the final outcome of the market for second-hand cars according to Akerlof?

Answer 18

The disappearance of the market

Question 19

What role do consumer protection laws play in the second-hand car market?

Answer 19

They ensure that car dealers must sell cars that are at least roadworthy

Question 20

What factors can help consumers gauge the quality of a second-hand car?

Answer 20

• The state of the dealer’s premises
• The number of cars they are selling
• Age and mileage of the car
• Car price guides or online resources

Question 21

What is an example of the principal-agent problem in education?

Answer 21

The child is the principal and parents/guardians are the agents

Question 22

Why does a child suffer from asymmetric information in education?

Answer 22

They do not see the long-term benefits of education

Question 23

What can happen if a child is not encouraged to participate fully in education?

Answer 23

There will be a misallocation of resources

Question 24

What is the financial incentive for parents in developing countries regarding education?

Answer 24

Not to send children to school due to costs

Question 25

What do governments do to address the misallocation of resources in pensions?

Answer 25

They force workers to save for retirement

Question 26

What is a potential consequence of young workers ignoring pension savings?

Answer 26

Too little money could be allocated to pensions

Question 27

How do governments encourage pension savings in the UK?

Answer 27

* Tax breaks for occupational pension schemes * National retirement scheme with contributions

Question 28

What is a common issue with drug use and asymmetric information?

Answer 28

Individuals are unaware of the long-term costs of drug use

Question 29

What is an example of a moral hazard in financial services?

Answer 29

Bank employees selling high-risk mortgages to low-income households

Question 30

What did the financial crisis of 2008 reveal about financial institutions?

Answer 30

They abused their relationships with customers

Question 31

What is moral hazard?

Answer 31

When an agent makes decisions in their own interest knowing there are potential adverse risks

Question 32

What was the consequence for taxpayers during the financial crisis?

Answer 32

They bore the costs of losses from risky transactions

Question 33

Fill in the blank: Asymmetric information can lead to a _______ of resources.

Answer 33

misallocation

Question 34

True or False: The price of a day old second-hand car is usually above the price of a new car.

Answer 34

False

Question 35

What do manufacturers of legal drugs tend to emphasize to consumers?

Answer 35

The positive aspects of drug use

Question 36

What is the main purpose of advertising?

Answer 36

To change attitudes on the part of the buyer. ## Footnote Advertising aims to influence consumer behavior and perceptions.

Question 37

What type of advertising increases information for buyers?

Answer 37

Small ads in newspapers and notifications for sale on sites such as eBay. ## Footnote These types of ads inform buyers about available products.

Question 38

What is persuasive advertising designed to do?

Answer 38

To increase information failure on the part of the buyer. ## Footnote It aims to benefit the seller by changing buyer attitudes.

Question 39

Give an example of how a soap powder advertisement might persuade buyers.

Answer 39

It might claim that a particular brand is better at cleaning clothes than another. ## Footnote This tactic leverages perceived product effectiveness.

Question 40

How might a car advertisement link ownership to social status?

Answer 40

By suggesting that owning the car increases status for its owner. ## Footnote This plays on societal perceptions of wealth and prestige.

Question 41

What link might a tobacco advertisement try to establish?

Answer 41

Linking smoking a particular brand with being 'cool'. ## Footnote This approach targets social identity and peer influence.

Question 42

What can overconsumption of products lead to?

Answer 42

Market failure. ## Footnote Overconsumption can create imbalances in supply and demand.

Question 43

Fill in the blank: Most advertising is _______ advertising.

Answer 43

persuasive

Question 44

True or False: All advertising increases information for buyers.

Answer 44

False ## Footnote Most advertising aims to persuade rather than inform.