Information Asymmetries Quiz

A firm that has a well-earned reputation for providing high quality:

• has found a way to address the free-rider problem.

• has found a way to address the moral hazard problem.

• has found a way to address the problem of adverse selection.

• will not survive in a market if low quality is provided at a lower price.

The interest rates charged on most credit cards is:

• high due to the problem of adverse selection.

• high because Visa and MasterCard have a virtual monopoly on this business.

• high due to diseconomies of scale that exist in this market.

• lower than they should be given the problem of adverse selection.

Assume there are two companies. Both issue stock, but one is high quality and the other low quality. If potential investors cannot distinguish the quality of the company:

• the shares of the low quality firm will disappear from the market.

• the shares of both companies will trade on the market.

• the shares of the high quality firm will disappear from the market.

• this is an example of moral hazard and the shares of both companies will cease to trade.

The publication, Consumer's Reports, is one tool designed to address:

• adverse selection.

• moral hazard.

• the free-rider problem.

• symmetric information.

In the bond market, the assigning of a risk premium is a tool designed to address the problem of:

• adverse selection.

• information asymmetry.

• the free-rider.

• moral hazard.

Used car dealers that provide warranties on the cars they sell are addressing the:

• lemons problem.

• monopoly problem.

• problem of people preferring foreign cars.

• free rider problem of buyers preferring new versus used cars.

Adverse selection:

• increases the efficiency of most markets.

• usually causes prices to adjust faster than they otherwise would.

• makes it easier for all customers to find what they want.

• results in fewer market transactions.

Which of the following statements is true?

• Adverse selection is a problem of monopoly and moral hazard is a problem of information asymmetry.

• Adverse selection and moral hazard are problems stemming from asymmetric information.

• Adverse selection is a problem that occurs after a transaction.

• Moral hazard is a problem that occurs before a transaction.

Which of the following statements is true?

• Adverse selection is a problem that occurs after a transaction.

• Moral hazard is a problem that occurs before a transaction.

• Adverse selection is a problem stemming from asymmetric information.

• Both adverse selection and moral hazard occur before a transaction.

One reason lenders usually require a lot of information from loan applicants is to avoid:

• the problems of moral hazard.

• the problem of adverse selection.

• being harmed by symmetric information.

• charges of discrimination in lending.