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Solutions to Informational Problems quiz

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  • What is signaling in the context of informational problems?
    Signaling is when the informed party takes action to reveal their private information to the uninformed party to reduce information asymmetry.
  • How does a used car salesman use signaling to address information asymmetry?
    A used car salesman can offer a warranty to signal that the car is in good condition, reassuring the buyer.
  • In a job application, what serves as a signal to potential employers?
    A college degree serves as a signal to employers that the applicant is intelligent and capable.
  • What is screening in the context of informational problems?
    Screening is when the uninformed party takes action to induce the informed party to reveal their private information.
  • How do health insurers use screening to separate risky and non-risky policyholders?
    Health insurers offer plans with different deductibles, which encourages risky policyholders to choose low-deductible plans and non-risky ones to choose high-deductible plans.
  • Why would a risky policyholder prefer a low-deductible health insurance plan?
    Risky policyholders expect to use insurance more and want to avoid high out-of-pocket costs, so they prefer low-deductible plans.
  • How does commission-based pay help employers screen employees?
    Commission-based pay incentivizes hard-working employees and discourages those who might slack off, helping employers identify motivated workers.
  • What is the economic term for 'slacking off' at work?
    The economic term for 'slacking off' is 'shirking.'
  • How do year-end bonuses function as a screening tool for employers?
    Year-end bonuses incentivize employees to work harder throughout the year, helping employers identify and reward diligent workers.
  • What is the main difference between signaling and screening?
    Signaling is initiated by the informed party to reveal information, while screening is initiated by the uninformed party to extract information.
  • How do signaling and screening help solve adverse selection?
    Both signaling and screening help reveal private information, reducing the risk of adverse selection by making transactions more transparent.
  • What is information asymmetry?
    Information asymmetry occurs when one party in a transaction has more or better information than the other.
  • Why might a salesman be willing to offer a warranty only if the car is good?
    A salesman with a good car expects few repairs, so offering a warranty is less costly and signals quality to buyers.
  • How does a deductible in health insurance act as a screening mechanism?
    A high deductible discourages risky individuals from choosing certain plans, allowing insurers to separate customers based on their risk levels.
  • What informational problems do signaling and screening aim to address?
    Signaling and screening aim to address adverse selection and moral hazard by reducing information asymmetry.