Unit 19

Question 1

Define asymmetric information.

Answer 1

Asymmetric information is where buyers and sellers have different amounts of information, with one group having more than the other.

Question 2

Define imperfect information.

Answer 2

Imperfect information is where buyers or sellers or both lack information to make an informed decision.

Question 3

Define information failure.

Answer 3

Information failure is where buyers or sellers or both do not have the information that is available to make a decision.

Question 4

What is a moral hazard?

Answer 4

A moral hazard is when an economic agent makes a decision in their own best interest knowing that there are potential adverse risks, and that if problems result, the cost will be partly borne by other economic agents.

Question 5

What is the principal-agent problem?

Answer 5

The principal-agent problem occurs when the goals of principals, those standing to gain or lose from a decision, are different from agents, those making decisions on behalf of the principal. Examples include shareholders (principals) and managers (agents).