Q1:

Suppose that you sell bicycle theft insurance and bicycle owners do not know whether they are high- or low-risk consumers.

True or False: This situation causes an adverse selection problem, but only if the person is a high-risk consumer.

True

False

Q2:

When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. Assume that incumbent managers and new managers had similar qualifications.

True or False: This result stems from both incumbent managers and outside bidders having perfect information.

False

True