EBK MANAGERIAL ECONOMICS
4th Edition
ISBN: 9781305483170
Author: FROEB
Publisher: YUZU
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Question
Chapter 19, Problem 19.5IP
To determine
The adverse selection in ‘soft selling’.
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Students have asked these similar questions
"Information asymmetry is detrimental for decision-making in the marketplace and hence is a market failure." Provide an example to illustrate this. Then suggest a policy that is used to address this problem.
In the famous court case Stambovsky v. Ackley a prospective homebuyer attempts to back out of a purchase after learning that the home was widely believed to be haunted since the current owner had it included in a tour of haunted homes. Prior to the prospective buyer backing out, what imperfect information situation applied to this situation? Explain.
One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants.
Offer an example of a company that uses a signal to help sell its product. What is the signal?
What information is the signal trying to convey?
Do you think the signal is effective? Why or why not?
Does this signal improve market efficiency? Why or why not?
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Similar questions
- How might imperfect information impact price? Group of answer choices Because buyers cannot determine the true quality of a product, they might tend to bid up the prices. Because they might not be able to present all the information about a product, sellers might temporarily lower the price to make potential buyers think the product is of excellent quality. Imperfect information might tend to cause prices to be perfectly elastic. Buyers cannot distinguish which goods have a higher quality and might be less likely to pay higher prices for that good.arrow_forwardScreening and Imperfect Information Asymmetric information refers to a market where one side (either the buyer or the seller, but usually the buyer) has less information than the other side of the market. When there is asymmetric information in a market, markets are inefficient because the side with less information doesn't want to take the risk involved in buying (or selling) the good or service. One method of solving this problem is through screening. Screening is a strategy one uses when they don't have information. A screen can be any indicator that lets the screener know if the good or service is reliable and will meet the screener's wants. • Offer an example of when you used screening to solve a lack of information. What kind of screen did you use? • Was the screen effective? Were you happy with the result?arrow_forwardHow information asymmetry can impact economic efficiency. In your answer cover the following: a) What is principal-agent problem? Support your answer with relevant examples. b) What is efficiency wage? Support your answer with appropriate graph.arrow_forward
- Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal.arrow_forwardQ6. Which is CORRECT about information asymmetry and adverse selection a. Information asymmetry refers to the situation when buyers have more information on the product than the sellers. b. Information asymmetry is the result of adverse selection. c. In a used car market, if sellers with good cars are unwilling to sell at a large discount, then only bad cars will get sold. This suboptimal outcome is so-called “adverse selection”. d. Due to information asymmetry, market investors interpret firm’s SEO announcement positively because they believe insiders consider the firm undervalued.arrow_forward1) A key difficulty facing insurance companies is that people know more about their health than do insurance companies, and that those people who are seriously ill are the most likely to want to obtain health insurance. What is this phenomenon called? A) moral hazard B) economic irrationality C) asymmetric information D) adverse selection 2) An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above? A) moral hazard B) adverse selection C) asymmetric information D) economic irrationality 3) The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is A) inefficient market hypothesis. B) moral hazard. C) information disparity. D) asymmetric information. 4) Which of the following parties is…arrow_forward
- John wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.arrow_forwardYou make delicious cupcakes that you mail to customers across the country. Your cupcakes are so unique and special that you have a great deal of pricing power. Your customers have identical demand curves for your cupcakes, and a representative customer’s demand curve is shown below. (It’s not needed, but the demand curve equation is P=5-0.2Q or Q=25-5P.) Suppose your MC=$1/cupcake, whether you produce lots or just a few cupcakes. To keep things simple, suppose there are no fixed costs, so FC=0.a) Acting as a monopolist, show the standard pricing analysis on the graph below that identifies your profit-mamximing price and quantity for your representative customer. Shade areas representing your profit and CS. (PS and profit are the same here since FC=0). b) (Suppose you offer a quantity discount: first 10 cupcakes at $3 each and any cupcakes over 10 are offered at a discounted price. What discount price will maximize your profit? Show this quantity discount arrangement on your graph…arrow_forwardWhich describes a situation with information symmetry? None of the above. The seller knows more about the true value and price of a product than the buyer The buyer and seller both know the true value and price or a product, but the buyer lacks sufficient funds to buy it All of the above. The sellers lack sufficient funds to produce a product, even when buyers are willing and able to purchase itarrow_forward
- Company X sells a high-quality product. Its problem is that consumers cannot differentiate company X’s product from competing, very low-quality products. What is this particular type of information asymmetry problem called? What is one way that company X can solve this problem (without relying on government policy)?arrow_forwardJan wants to buy a house, but her friend Kan is a much tougher negotiator. They devise a plan where Kan will tell the seller of the house that she is Jan’s agent and will make all the decisions with respect to any purchase of the house. They also agree that Kan actually will have no such authority and that Jan is the only one who will make any decisions relating to purchasing the house. They meet with the seller, and Kan says that she is Jan’s agent while Jan says nothing. Has an agency been created? Discuss in details the pros and cons of this case.arrow_forwardQuestion 3 Which of the following statements is NOT correct? Question 3 options: Asymmetric information may lead to the disappearance of a market. Information plays an important role in the economy. There are no solutions to reduce the impact of adverse selection. It is always desirable to have more information than the person one is trading with.arrow_forward
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