Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling. but buyers do not Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30.000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $ 25500. (Enter your response rounded to the nearest dollar.) Which of the following would best "solve" the asymmetric information problem in this market? O A. Prohibiting the sale of low-quality cars. O B. High-quality sellers could offer warranties or product guarantees. OC. Low-quality sellers could establish industry standards. OD. Itis not possible to solve the asymmetric information problem in this market.

Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $14,000. Suppose there are two types of individuals: those with $112,000.00 in the bank and those with $3,500.00 in the bank. Assume that individuals with $3,500.00 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse. In this scenario, the actuarially fair price of full insurance, in which all damages are paid by the insurance company, is .   Assume that the price of insurance is set at the actuarially fair price. At this price, drivers with $112,000.00 in the bank likely    buy insurance, and those with $3,500.00 in the bank likely    buy insurance. (Hint: For each type of driver, compare the price of insurance to the expected cost without insurance.)   Suppose a state law has been passed…

Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in market failure? a. Only good quality cars are sold, hence the market under-provides used cars. b. Both poor and good quality cars are sold, hence the market over-provides used cars. c. Only poor quality cars are sold, hence the market under-provides used cars. d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.

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Shane just bought a house worth $360,000 in an area that is known for floods. A flood occurs with a 5% chance and if it occurs, his home is ✓ for reduced in value to $202,500. Shane has utility function given by U(X)=√√X. He would be willing to pay a maximum of flood insurance. The fair insurance premium for flood insurance is Shane's risk premium is Suppose, instead, that Shane's utility function is given by U(X) = X². Then, the maximum he would be willing to pay for flood insurance is

Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?

Provide an example of Moral Hazard from personal observation or experience.

Half of the used cars for sale in a market are good and the other half are lemons. Owners of good cars are willing to sell them for $1,200, while owners of lemons are willing to sell them for $50. There are many potential buyers who are willing to pay $1,500 for a good car and $300 for a lemon. Buyers cannot tell good cars from lemons, but the original owners know whether a car is a lemon or not. There will be an equilibrium in which all used cars sell for $1,150. There will be an equilibrium in which lemons sell for $50 and good used cars sell for $1,200. There will be an equilibrium in which all used cars sell for $800. The only equilibrium is one in which only lemons are sold. There will be an equilibrium in which lemons sell for $300 and good used cars sell for $1,500.