Information Gaps (1.3.4)

Question 1

What are Information Gaps?

Answer 1

Refers to a situation where one party in a business deal had more information than the other party. Its usually the seller has more info than the buyer and its also know as asymmetric info. Where there is an info gap the market isn’t running efficiently and it can lead to market failures.

Question 2

What’s an example situation where there is an Information Gap?

Answer 2

e.g. A car salesman selling a car will generally have more information about the car than the buyer so the seller could just not mention some certain damage etc.. and so the buyer will be getting partially ripped off.

Question 3

How are information gaps reduced in food packaging?

Answer 3

In food packaging they are forced to show a snapshot of their nutrition in their food packaging to show to consumer how unhealthy certain things are. This reduces the chance of information gaps and it can reduce the demand of a good or service.

Question 4

What is Symmetric Info?

Answer 4

Buyer and Seller have the same amount of knowledge about a good or service. product could be underpriced.

Question 5

What is Asymmetric Info?

Answer 5

Buyer and Seller have different amounts of knowledge about a good or a service. Means seller can get more as a buyer wont know the price. Over-Priced.

Question 6

What do Information Gaps lead to?

Answer 6

Market failure as there is a misallocation of resources because people don’t buy things that maximise their welfare.

Question 7

What is the principle-agent problem?

Answer 7

The principal-agent problem happens when one person (the agent) is hired to act on behalf of another (the principal), but their interests are different, and the agent may not act in the best interest of the principal.

Question 8

What’s an example of the principle-agent problem?

Answer 8

Car owners (principals) hire mechanics (agents) to fix their cars honestly, but a mechanic might exaggerate problems to charge extra.