Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Question
Chapter 12, Problem 4MCQ
To determine
To identify:
The option that correctly explains the used-car market.
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1
Lemons Market
Assume that there is a market for used cars where the market is characterized by the table below.
Further assume that buyers are not budget constrained and have the capacity to buy all of the
cares on the market should they choose to.
Quality Level
High
Percentage of Cars
20%
Value to Seller
Value to Buyer
50%
30%
$20,000
$15,000
$10,000
$24,000
$18,000
$12,000
Moderate
Low
a. Assume that both sides of the market can accurately identify the quality of the cars. Explain
the potential equilibrium of the market.
b. Assume instead that neither side of the market knows the quality of a car until after a
transaction. Explain the potential equilibrium of the market.
c. Assume now that the sellers know the quality of the car they are trying to sell while the
buyers only discover this information after a transaction. Can you find a market equilibrium in
which all cars sell? Only Moderate and Low? Provide a clear argument along with the equilibrium
structure for each case.
31. You may be unwilling to buy a used car because you suspect the last owner found out the car
was a lemon. You may treat a car you rented with a little less care than you'd use on your own
car.
a. Both examples primarily illustrate adverse selection.
b. Both examples primarily illustrate moral hazard.
c. The first example primarily illustrates adverse selection; the second primarily illustrates
moral hazard.
d. The first example primarily illustrates moral hazard; the second primarily illustrates adverse
selection.
Alana wishes to obtain auto insurance. She wants 100/300/100 liability coverage, $250 deductible collision and full coverage comprehensive. She lives in territory 2 and has been assigned to driver class 2 with a rating factor of 1.25. Based on Table 19-6 and Table 19-7, what would be her total premium, if her three-year-old car were in model class L? (Round your answer to the nearest cent.)
a. $355.00
b. $365.00
c. $456.25
d. $465.38
Chapter 12 Solutions
Foundations of Economics (8th Edition)
Ch. 12 - Prob. 1SPPACh. 12 - Prob. 2SPPACh. 12 - Prob. 3SPPACh. 12 - Prob. 4SPPACh. 12 - Prob. 5SPPACh. 12 - Prob. 6SPPACh. 12 - Prob. 7SPPACh. 12 - Prob. 8SPPACh. 12 - Prob. 9SPPACh. 12 - Prob. 10SPPA
Ch. 12 - Prob. 11SPPACh. 12 - Prob. 1IAPACh. 12 - Prob. 2IAPACh. 12 - Prob. 3IAPACh. 12 - Prob. 4IAPACh. 12 - Prob. 5IAPACh. 12 - Prob. 6IAPACh. 12 - Prob. 7IAPACh. 12 - Prob. 8IAPACh. 12 - Prob. 9IAPACh. 12 - Prob. 1MCQCh. 12 - Prob. 2MCQCh. 12 - Prob. 3MCQCh. 12 - Prob. 4MCQCh. 12 - Prob. 5MCQCh. 12 - Prob. 6MCQCh. 12 - Prob. 7MCQ
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- Many people in the property and liability insurance industry complain about the “automobile problem.” The “automobile problem” consists of a series of interrelated problems. What factors have combined to produce a problem in the automobile insurance area?arrow_forwardWhat is the problem of moral hazard?arrow_forwardFor each of the following purchases, say whether you would expect the dogma of imperfect information to be relatively high or relatively low: Buying apples at a roadside stand Buying dinner at the neighborhood restaurant around the comer Buying a used laptop computer at a garage sale Ordering flowers over the internet for your friend in a different cityarrow_forward
- What is the key difference between a fee-for-service healthcare system and a system based on health maintenance organizations?arrow_forward. How would you analyze the crime related information that the police haveif you had access and what actions would you take as a result.arrow_forwardAdverse selection can occur when a. all persons involved in a transaction have full information one person has information not available to othersarrow_forward
- Which of he following sections of an insurance contract limits coverage? A.Waiver of Premium B.Conditions C.Exclusions D.Declarationsarrow_forwardHow does the presence of asymmetric information in the used car market impact the behavior of buyers, sellers, and market outcomes?arrow_forwardwhat was the relationship between the premiums, deductibles, and coverage limits for your insurance coverage?arrow_forward
- 14. Akali is the only nurse in Ionia. Ionia has 21 ninja households distributed one-tenth of a mile along the main street. Each ninja household goes to see Akali for her services at most one time per week. There are additional dangers on the street going there-and back again which are equal to $0.5 for every tenth of the mile. The reservation price of each ninja to pay for Akali services is $10. To serve each ninja, Akali incurs $2 costs. What the maximum price should Akali charge if she wants to serve the whole Ionia? How much would she earn?arrow_forwardWhich of the following is a method used by a private seller to help reduce imperfect information problems? A. Warranty B. Money-back guarantee C. Publishing customer reviews D. All of the abovearrow_forward
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