Topic 18- Imperfect market knowledge

Question 1

Asymmetric information

Answer 1

When there is imperfect knowledge between the producer and consumer about a product. These restrict the ability of consumers and producers to make rational choices.

E.g when consumers purchase tobacco products they may not be fully aware of the products health issues associated, however could be argued that the market for tobacco has symmetric information with info on the pack

Question 2

Asymmetric information in the market for credit

Answer 2

-Consumers may not be aware that banks know all about their credit
-banks can determine how much credit is/isn’t available to consumers&eat what rate of interest
-consumer may have limited knowledge about their credit score
Eval: credit expert online to check credit score&helps improve your score

Question 3

Symmetric information

Answer 3

• Perfect market information

- consumers and producers have the same knowledge about the product

Question 4

Examples of asymmetric information

Answer 4

• housing market:estate agents know more about the potential problems of a house than the potential buyer
• life insurance: consumer may not real all aspects of his health profile to insurance company, making it difficult for the firm to assess risk
• financial services: bank may be unaware of the likelihood of a default by the borrower

Question 5

Dealing with asymmetric information

Answer 5

• public information/advertisements designed to close the information gap
• private sector organisations, the media and the Internet: information gap may be closed by publications which inform consumers about issues concerning products and services