Chapter 6.4

Question 1

Asymmetric information

Answer 1

Situations where buyers and sellers don’t have equal access to information

Question 2

Adverse selection

Answer 2

A situation where one party in a transaction has more information about the quality of the product being sold than the other party

Question 3

Government solutions to adverse selection where the seller knows more than the buyer

Answer 3

Regulation
Provision of information
Licensure

Question 4

Private solutions to adverse selection where the seller knows more than the buyer

Answer 4

Screening
Signalling

Question 5

Screening

Answer 5

A method used by the party with limited information to get more information about what they’re buying

Question 6

Signalling

Answer 6

A method used by the party with more information to convince buyers that the product being sold is of good quality

Question 7

Moral hazard

Answer 7

A situation where one party takes risks but doesn’t face the full cost of those risks because the full costs of the risks are borne by the other party