Micro Asymmetric information

Question 1

Risk-neutral

Answer 1

Given two investment opportunities, for example, a risk-neutral investor only looks at the potential gains of each investment and ignores the potential downside risk.

Question 2

Pareto improvement

Answer 2

a Pareto improvement occurs when a change in allocation harms no one and helps at least one person, given an initial allocation of goods for a set of persons.

Question 3

Adverse selection

Answer 3

Traders with better private information about the quality of a product will selectively participate in trades which benefit them the most, at the expense of the other trader.

Information Asymmetrie hurts both parties at the end. Tradings don’t take place.

Question 4

Solutions to the lemons problem

Answer 4

reducing asymmetric information directly

incentives for truthful quality reporting

Question 5

residual demand curve: perfect information about price

Answer 5

horizontal

Question 6

residual demand curve: imperfect information about price

Answer 6

declining (market power)

Question 7

elasticity of knowledgable customers?

Answer 7

more elastic

Question 8

Signaling

Answer 8

A solution to the problem of asymmetric information in which the knowledgeable party alerts the other party to an unobservable characteristic of the good

Question 9

moral hazard

Answer 9

Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other..

Question 10

principal-agent relationship

Answer 10

The principal–agent problem, in political science and economics, (also known as agency dilemma or the agency problem) occurs when one person or entity (the “agent”) is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the “principal”.This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard.

Question 11

signal

Answer 11

Signaling occurs when a person in the market who has information that others do not have – known as an insider – triggers selling or buying behavior by those who do not have information, because of the actions of that insider.

Signaling is a solution for one of the main features or causes of market failure – asymmetric information.

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