Econ+395+Final+Exam+Fall+2008+-+Bonus+Question

Econ+395+Final+Exam+Fall+2008+-+Bonus+Question -...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 395 Topics in Risk and Uncertainty Final Examination Fall 2008 Bonus Question Name:____________________________________ UMID:_______________
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Bonus Question (a) What does the term “adverse selection” mean? Feel free to use clear but simple examples to help explain. Consider a simple environment where agents try to sell used lawnmowers. These used lawnmowers vary in quality, and the lawnmower’s quality is well know to its current owner. High quality lawnmowers are worth $300 to a buyer, whereas low quality lawnmowers are worth only $100 to a buyer. The owners of the lawnmowers have reservation prices of $250 for the high quality mower and $75 for the low quality mower. (b) If there are 100 high quality lawnmowers available and 100 low quality lawnmowers available, and if there are 80 buyers currently searching for a mower, describe the most efficient pattern of trade. (c) If lawnmower owners are unable credibly to establish the true quality of their
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: lawnmowers, do you think that the efficient outcome can be attained in equilibrium? Explain your answer. (d) What opportunities could you introduce into this simple environment that would allow lawnmower owners to establish the quality of their lawnmowers? (e) In the insurance market model, we know that a separating equilibrium often exists. A separating equilibrium involves giving the agents a choice between alternative contracts, knowing that different types of agents will choose different contracts. In other words, by choosing the right contract, an agent can credibly establish his or her private information to the insurance seller. Explain how the insurance market model provides the low-risk buyers the chance to establish themselves credibly, but the lemons market did not. What is fundamentally different between the types of decisions that the privately informed agents are making in the two scenarios?...
View Full Document

Page1 / 2

Econ+395+Final+Exam+Fall+2008+-+Bonus+Question -...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online