Chapter 16

Question 1

Complete information

Answer 1

all market participants know everything important for making economic decisions

Question 2

asymmetric information

Answer 2

imbalance of information across participants in an economic transaction

Question 3

adverse selection / hidden information

Answer 3

one person knows more about something than the other person in an economic transaction - the probability of adverse events can’t be changed by individuals

Question 4

moral hazard / hidden action

Answer 4

when someone takes risks because they know they won’t bear the full consequences if things go wrong - probability of adverse events will be at least partly under individual’s control

Question 5

when is type observable

Answer 5

when both buyers and sellers benefit from the transaction

Question 6

when is type unobservable

Answer 6

in an asymmetric information market where only sellers know their type

Question 7

signaling

Answer 7

a solution to the problem of asymmetric information where the knowledgeable party alerts the other party to an unobservable characteristic of the good

Question 8

signal

Answer 8

a costly action taken by an economic actor to indicate something that would otherwise be difficult to observe

Question 9

deductibles

Answer 9

specified amount of $ the insured must pay before an insurance company pays a claim

Question 10

copays

Answer 10

specified amount of $ the insured must pay in addition to what the insurance company will pay

Question 11

coinsurance

Answer 11

specified % of claim the insured must pay in addition to the % the insurance company will pay

Question 12

principal-agent relationship

Answer 12

economic transactions that include information asymmetry between a principal and his hired agent whose actions the principal cannot fully observe