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2. Imperfect information refers to the situation where buyers and/or sellers do not have all of the necessary information to make an informed decision about the price or quality of a product. Asymmetric information is the condition where one party, either the buyer or the seller, has more information about the quality or price of the product than the other party. True or False.

a. True

b. False

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2 Nov 2020
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Related questions

1. What happens when we reverse the information assumptions in the Akerlof model? Let us assume that buyers have perfect information about car quality, and that sellers have no information about the quality of any specific car (although they do know the distribution of car quality). Assume that all other basic assumptions apply as usual, including the buyer and seller utility functions.

(a) Explain how these information assumptions might be possible in certain circumstances. What sorts of goods would likely have markets that feature these counterintuitive assumptions?

(b) Imagine that you are a car seller who owns car i with quality Xi (un- known to you). What strategy could you pursue to sell the car in such a way that your utility increases?

(c) Does adverse selection occur in this market?

1. From an economist's perspective, an important consideration for policies to address global warming is:

The market for recyclable inputs

The supply and demand for recycled products

The marginal cost and marginal benefit of the policies

A lawsuit that can arise from the enactment of the policies

2. When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we'd have a demand-side market failure.

True

False

3. In a well-functioning cap-and-trade system for pollution rights, the right to pollute will go to those who can acquire the largest net benefit from using the scarce resource "clean air".

True

False

4. Which of the following does not illustrate the asymmetric information problem:

Ordinary financial investors do not know the motivations of financial advisers

Ordinary customers do not know how sanitarily the food is prepared in a restaurant

Ordinary stock-buyers do not know what will happen to the stock's price next week

Ordinary car buyers do not know the actual quality of the various cars in the dealer's lot

5. Better Business Bureaus in various cities exist partly to try to deal with inadequate buyer information about sellers.

True

False

(Karloff) Consider the following market for used cars. There are many sellers of used cars. Each seller has exactly one used car to sell and is characterized by the quality of the used car he wishes to sell. Let θ ∈ [0, 1] index the quality of a used car and assume that θ is uniformly distributed on [0, 1]. If a seller of type θ sells his car (of quality θ) for a price of p, his utility is us (p,θ). If he does not sell his car, then his utility is 0. Buyers of used cars receive utility θ − p if they buy a car of quality θ at price p and receive utility 0 if they do not purchase a car. There is asymmetric information regarding the quality of used cars. Sellers know the quality of the car they are selling, but buyers do not know its quality. Assume that there are not enough cars to supply all potential buyers.

(a) Argue that in a competitive equilibrium under asymmetric information, we must have E(θ | p) = p

(b) Show that if us (p,θ) = p − θ/2, then every p ∈ (0, 1/2] is an equilibrium price.

(c) Find the equilibrium price when us (p,θ) = p − √θ. Describe the equilibrium in words. In particular, which cars are traded in equilibrium? (d) Find an equilibrium price when us (p,θ) = p − θ 3. How many equilibrium are there in this case? (e) Are any of the preceding outcomes Pareto efficient? Describe Pareto improvements whenever possible.

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