Intermediate Microeconomics by Patrick M. Emerson

True or false

Module 22: Asymmetric Information

1. Information must be asymmetric between buyers & sellers for perfectly competitive markets to be socially efficient.

2. Adverse selection involves hidden characteristics, whereas moral hazard involves hidden actions.

3. Adverse selection can result in a product remaining unsold even though it would have been exchanged as part of a surplus-producing transaction in a market with full information.

4. The market for lemons is a classic example of market failure resulting from moral hazard.

5. Adverse selection creates market inefficiencies only when the party with less information is unaware of the information asymmetry.

6. An ironic consequence of adverse selection is that in the extreme, it can result in the adversely selected product being the only one for which a market remains.

7. Adverse selection results in deadweight loss primarily because some buyers who expect to purchase high-quality products instead end up dramatically overpaying for low-quality variants.

8. Both buyers & sellers of high-quality products have incentive to invest in methods to reduce information asymmetries leading to adverse selection.

9. Moral hazard occurs when insurance mitigating the cost of risk results in the insured engaging in riskier behavior.

10. By monitoring driver behavior, Snapshot can potentially reduce both the adverse selection and moral hazard problems faced by Progressive.

11. The adverse selection explanation for Volvo drivers being more reckless than others is that the safety features of Volvos reduce the cost of driving more riskily.

12. The moral hazard explanation for Volvo drivers being more reckless than others is that relatively bad drivers choose Volvos because they are safer cars.

13. Moral hazard raises the cost of insurance, but only for the highest-risk groups.

14. Moral hazard can cause the lowest-risk groups to drop out of insurance markets.

15. Adverse selection can cause the lowest-risk groups to drop out of insurance markets.

16. Adverse selection is the primary information asymmetry affecting principal-agent relationships.

17. Incentive-based compensation is a standard way of dealing with principal-agent inefficiencies.

18. Moral hazard was the primary information asymmetry that the individual mandate component of the ACA attempted to address.