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Asymmetric Information Quiz

1) The document is a solution key for an assignment that tests understanding of concepts related to asymmetric information in markets, including adverse selection, moral hazard, and free-rider problems. 2) The questions cover identifying whether problems occur before or after transactions, the impact of asymmetric information on quality of used cars, definitions of free-rider problems and how they relate to solving information problems, and tools used to address adverse selection such as credit ratings and collateral requirements. 3) The solution key provides answers to multiple choice and true/false questions testing comprehension of foundational concepts around problems of asymmetric information in economics.

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akshat gupta
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197 views2 pages

Asymmetric Information Quiz

1) The document is a solution key for an assignment that tests understanding of concepts related to asymmetric information in markets, including adverse selection, moral hazard, and free-rider problems. 2) The questions cover identifying whether problems occur before or after transactions, the impact of asymmetric information on quality of used cars, definitions of free-rider problems and how they relate to solving information problems, and tools used to address adverse selection such as credit ratings and collateral requirements. 3) The solution key provides answers to multiple choice and true/false questions testing comprehension of foundational concepts around problems of asymmetric information in economics.

Uploaded by

akshat gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Solution: Assignment 5

1) The problem created by asymmetric information before the transaction occurs is called ________,
while the problem created after the transaction occurs is called ________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification

2) Because of the lemons problem in the used car market, the average quality of the used cars
offered for sale will be ________, which gives rise to the problem of ________.
A) low; moral hazard
B) low; adverse selection
C) high; moral hazard
D) high; adverse selection

3) The free-rider problem


A) occurs when people who do not pay for information take advantage of the information other
people have to pay for.
B) suggests that the private sale of information will only be a partial solution to the lemons problem.
C) prevents the private market from producing enough information to eliminate all the asymmetric
information that leads to adverse selection.
D) Only A and B
E) all of the above.

4) In the used car market, asymmetric information leads to the lemons problem because the price
that buyers are willing to pay will
A) reflect the highest quality of used cars in the market.
B) reflect the lowest quality of used cars in the market.
C) reflect the average quality of used cars in the market.
D) none of the above

5) Economies of scale means that the percentage return on a financial transaction rises as the size of
the transaction rises.
Answer: FALSE

6) A conflict of interest occurs when


A) a financial firm sells a service to its customers for a price that exceeds the cost of producing the
service.
B) lenders prefer higher interest rates and borrowers prefer lower interest rates.
C) riskier borrowers are the ones who are more likely to apply for loans.
D) people expected to provide reliable information to the public have incentives not to do so.

7) Moral hazard in equity contracts is known as the ________ problem because the manager of the
firm has fewer incentives to maximize profits than the stockholders might ideally prefer.
A) principal-agent
B) adverse selection
C) free-rider
D) debt deflation

8) The following tools help solve ADVERSE SELECTION PROBLEMS in financial markets:
A. private production and sale of credit ratings for individuals and firms
B. government regulation to increase information to investors
C. use of financial intermediaries that specialize in the gathering of information about would-be
borrowers
D. inclusion of collateral requirements in loan contracts as a quality signal
E. Only A, C and D
F. all of the above

9) Collateral requirements lessen the consequences of ________ because the collateral reduces the
lender's losses in the case of a loan default and it reduces ________ because the borrower has more
to lose from a default.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) adverse selection; diversification
D) diversification; moral hazard

10) When those most likely to produce the outcome insured against are the ones who purchase
insurance, insurance companies are said to face the problem of
A) fraudulent claims.
B) moral hazard.
C) adverse selection.
D) pecuniary purchases.

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