4.1.2.2 Imperfect information NOTES

What forms the foundation of decision making in economics?

• Information

• Management skills

• Technology

• Capital

What does information allow decision makers to assess?

• Only technological advancements

• Only financial gains

• Employee performance

• Risks and uncertainties

In a market economy, what depends on the availability and accuracy of information?

• Corporate governance

• Product design

• Marketing strategies

• Efficient resource allocation

What does asymmetric information often lead to?

• Stable market conditions

• Market inefficiencies

• Increased transparency

• Higher consumer satisfaction

When buying a used car, what is a common consequence of adverse selection?

• Decreased production costs

• Higher-quality cars become cheaper

• Lower-quality cars are over produced

• Equal information distribution between buyer and seller

What term is used to describe a scenario where one party benefits at the expense of another due to hidden actions?

• Adverse selection

• Principal-agent problem

• Moral hazard

• Market signaling

What problem occurs when a principal cannot fully monitor an agent's actions?

• Resource maximization

• Perfect competition

• Optimal decision making

• Principal-agent problems

Which role do institutions play in addressing asymmetric information?

• Setting price controls

• Directing consumer choices

• Funding new businesses

• Promoting transparency and accountability

How does moral hazard impact insurance markets specifically?

• Increases policy sales

• Reduces the need for oversight

• Leads to higher claims than expected

• Enhances customer satisfaction

What is a direct result of information asymmetry in financial markets?

• Uniform asset pricing

• Decreased trading activity

• Increased market volatility

• Improved investment efficiency