Question : 12.1   The Lemons Problem and its Solution 1) Private information a : 1241098

12.1   The Lemons Problem and its Solution

1) Private information is a situation in which

A) two parties to an exchange have information that is available to outsiders if they ask.

B) one party to an exchange has information that is not available to the other.

C) the marginal cost of a person’s obtaining additional information is zero.

D) the marginal cost of making information available to one more person is zero.

E) outsiders have relevant information that is not available to the people in the market.

2) Of the following, the best example of private information is when

A) Michael knows the price of a gallon of milk at the minimart but Michelle doesn’t know.

B) you are selling a used car and you know your used car’s defects but a potential buyer cannot find out about them until after buying.

C) you are selling a used car and you do not know your used car’s defects

D) you don’t know the quality of a used car and must hire a trained mechanic who tells you all its defects.

E) you pay the owner of a used car a little extra and she lets you know all of the car’s defects.

3) Adverse selection is created by

A) incentives to change behavior after two parties have reached an agreement.

B) risk.

C) signaling.

D) taxes.

E) private information.

4) Adverse selection can occur when

A) all parties have full information.

B) one party has information not available to the other party.

C) information is not full but both parties have the same information.

D) incentives result in one party not reaching an agreement with the other party.

E) nobody has any information.

5) The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as

A) adverse selection.

B) a pooling selection.

C) moral hazard.

D) the market for oranges.

E) a signal.

6) Adverse selection is the tendency for people who accept contracts to be those who

A) buy goods and then regret it later.

B) buy goods for more than their own reservation price.

C) want to avoid the lemons problem.

D) plan to use private information to the disadvantage of the less well-informed party.

E) engage in a number of searches larger than that specified in the contract.

7) In the used car market, adverse selection is a problem primarily when

A) sellers cannot judge buyers’ creditworthiness.

B) buyers cannot signal their willingness to buy.

C) buyers cannot determine the quality of a used car.

D) sellers offer warranties on all used cars.

E) sellers and buyers both agree that a particular used car is a lemon.

8) The used car market without warranties suffers from

A) perfect competition.

B) a separating equilibrium.

C) oligopoly.

D) adverse selection and moral hazard.

E) excessive signaling.

9) Without warranties, used car buyers can assume that all used cars are “lemons” because of

A) moral hazard.

B) false signals.

C) moral dilemma.

D) adverse selection.

E) adverse reaction.

10) In the used car market without warranties, adverse selection results in

A) sellers of “lemons” claiming that their car is a lemon.

B) only lemons being available for sale.

C) the market price of used cars equal to that of good used cars.

D) an efficient pooling equilibrium.

E) all of the above