Intermediate Microeconomics · free preview
Asymmetric Information
Hidden quality drives adverse selection, the lemons market unraveling as average pricing at 7 drives out good cars worth 8 to their owners, signaling separates types when education costs differ, screening offers self-selecting menus, and moral hazard hides actions, the principal-agent tradeoff between insurance and incentives.
1. The lemons
The lemons
2. Signaling
Signaling
3. Screening and menus
Screening and menus
4. Moral hazard
Moral hazard
5. The unraveling price
Why will buyers pay only 7 in a half-good half-lemon market?
6. The exit of quality
What happens to good cars when the market price is 7?
7. The signaling band
With able cost 2 and unable cost 4 per unit and premium 10, which education levels separate?
8. Moral hazard's tradeoff
What tradeoff does the principal-agent contract balance?
9. The unable type's cost
Compute the unable type's cost of 3 units of education at 4 per unit, and write the number.
10. The able type's net gain
At 3 units, compute the able type's net gain, premium 10 minus cost 6, and write the number.
11. The average's anatomy
Half the cars are good worth 10 to owners, half lemons worth 4. Why is 7 the buyers' ceiling?
12. A signal too weak
With able cost 2 and unable cost 4 per unit and premium 10, why does 2 units of education fail to separate?
13. Hidden type versus hidden act
What distinguishes adverse selection from moral hazard?
14. The deductible's logic
Why does a deductible reduce careless behavior in insurance?
15. The average car's value
With good cars worth 10 and lemons worth 4 in equal shares, compute the average value, and write the number.
16. The able type's education cost
With able cost 2 per unit, compute the able type's cost of 3 units of education, and write the number.
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