Lesson test: Asymmetric information

1.[3p]
Someone with $u (w) = \sqrt{w}$ has £10,000 and faces a 25 per cent chance of losing £3,600. What is their certainty equivalent, in pounds?

CorrectNot quite: 9025

3.[2p]
What makes a utility function represent risk aversion?

It is concave, so the utility of the average exceeds the average of the utilities

Correct

It is increasing, so more wealth is always preferred

The answer is: It is concave, so the utility of the average exceeds the average of the utilities

It is convex, so gambles are preferred to sure sums

The answer is: It is concave, so the utility of the average exceeds the average of the utilities

It is linear, so expected utility equals expected wealth

The answer is: It is concave, so the utility of the average exceeds the average of the utilities

4.[3p]
Half of used cars are good, worth £8,000 to owners and £10,000 to buyers, and half are lemons, worth £3,000 to owners and £4,000 to buyers. What happens when buyers cannot tell them apart?

Buyers will pay at most £7,000, so good cars are withdrawn and only lemons trade

Correct

All cars trade at £7,000, the average value

The answer is: Buyers will pay at most £7,000, so good cars are withdrawn and only lemons trade

Good cars trade at £10,000 and lemons at £4,000

The answer is: Buyers will pay at most £7,000, so good cars are withdrawn and only lemons trade

Nothing trades at all

The answer is: Buyers will pay at most £7,000, so good cars are withdrawn and only lemons trade

5.[2p]
Adverse selection concerns hidden characteristics known before the contract, while moral hazard concerns hidden actions taken after it.

True

Correct

False

The answer is: True

6.[3p]
High types are worth £80,000 and low types £50,000. Education costs £10,000 a year for low types and £5,000 for high types. What is the smallest number of years that separates them?

CorrectNot quite: 3

7.[3p]
What must be true of a signal for it to separate types?

Select all that apply

It must be costly, or everyone would send it

Correct

It must be cheaper for the type it is meant to identify

Correct

It must raise the productivity of the sender

The answer is: It must be costly, or everyone would send it, It must be cheaper for the type it is meant to identify, It must be observable by the uninformed party

It must be observable by the uninformed party

Correct

8.[3p]
An agent produces output $20 e$ at personal cost $e^{2}$ and keeps a share $s$ . What effort do they choose?

$e = 10 s$ , so effort falls in proportion to the share they keep

Correct

$e = 10$ , since the cost of effort is unchanged

The answer is: $e = 10s$, so effort falls in proportion to the share they keep

$e = 20 s$ , since output is twenty times effort

The answer is: $e = 10s$, so effort falls in proportion to the share they keep

$e = 10 / s$ , since a smaller share requires more effort

The answer is: $e = 10s$, so effort falls in proportion to the share they keep

9.[3p]
What did Chiappori and Salanié find when testing French motor insurance for adverse selection in 2000?

No correlation between coverage bought and claims made among new drivers

Correct

A strong positive correlation, confirming the theory

The answer is: No correlation between coverage bought and claims made among new drivers

That moral hazard explained the entire correlation

The answer is: No correlation between coverage bought and claims made among new drivers

That insurers could perfectly observe driver types

The answer is: No correlation between coverage bought and claims made among new drivers

Sign in

Asymmetric information

1.[3p]
Someone with $u (w) = \sqrt{w}$ has £10,000 and faces a 25 per cent chance of losing £3,600. What is their certainty equivalent, in pounds?

2.[3p]
For that person, what is the most they would pay for full insurance, in pounds?

3.[2p]
What makes a utility function represent risk aversion?

4.[3p]
Half of used cars are good, worth £8,000 to owners and £10,000 to buyers, and half are lemons, worth £3,000 to owners and £4,000 to buyers. What happens when buyers cannot tell them apart?

5.[2p]
Adverse selection concerns hidden characteristics known before the contract, while moral hazard concerns hidden actions taken after it.

6.[3p]
High types are worth £80,000 and low types £50,000. Education costs £10,000 a year for low types and £5,000 for high types. What is the smallest number of years that separates them?

7.[3p]
What must be true of a signal for it to separate types?

8.[3p]
An agent produces output $20 e$ at personal cost $e^{2}$ and keeps a share $s$ . What effort do they choose?

9.[3p]
What did Chiappori and Salanié find when testing French motor insurance for adverse selection in 2000?

1.[3p] Someone with u(w)=w has £10,000 and faces a 25 per cent chance of losing £3,600. What is their certainty equivalent, in pounds?

2.[3p] For that person, what is the most they would pay for full insurance, in pounds?

3.[2p] What makes a utility function represent risk aversion?

4.[3p] Half of used cars are good, worth £8,000 to owners and £10,000 to buyers, and half are lemons, worth £3,000 to owners and £4,000 to buyers. What happens when buyers cannot tell them apart?

5.[2p] Adverse selection concerns hidden characteristics known before the contract, while moral hazard concerns hidden actions taken after it.

6.[3p] High types are worth £80,000 and low types £50,000. Education costs £10,000 a year for low types and £5,000 for high types. What is the smallest number of years that separates them?

7.[3p] What must be true of a signal for it to separate types?

8.[3p] An agent produces output 20e at personal cost e2 and keeps a share s. What effort do they choose?

9.[3p] What did Chiappori and Salanié find when testing French motor insurance for adverse selection in 2000?

1.[3p]
Someone with $u (w) = \sqrt{w}$ has £10,000 and faces a 25 per cent chance of losing £3,600. What is their certainty equivalent, in pounds?

2.[3p]
For that person, what is the most they would pay for full insurance, in pounds?

3.[2p]
What makes a utility function represent risk aversion?

4.[3p]
Half of used cars are good, worth £8,000 to owners and £10,000 to buyers, and half are lemons, worth £3,000 to owners and £4,000 to buyers. What happens when buyers cannot tell them apart?

5.[2p]
Adverse selection concerns hidden characteristics known before the contract, while moral hazard concerns hidden actions taken after it.

6.[3p]
High types are worth £80,000 and low types £50,000. Education costs £10,000 a year for low types and £5,000 for high types. What is the smallest number of years that separates them?

7.[3p]
What must be true of a signal for it to separate types?

8.[3p]
An agent produces output $20 e$ at personal cost $e^{2}$ and keeps a share $s$ . What effort do they choose?

9.[3p]
What did Chiappori and Salanié find when testing French motor insurance for adverse selection in 2000?