1. Which of the following statements is NOT correct? - Information plays an impo
ID: 1225993 • Letter: 1
Question
1. Which of the following statements is NOT correct?
- Information plays an important role in the economy.
- Asymmetric information may lead to the disappearance of a market.
- It is always desirable to have more information than the person one is trading with.
- Adverse selection will not occur if there is no asymmetric information.
2.
Jane wants to buy a beautiful doll as a gift for her sister's birthday. She knows that the same product is offered in different shops with prices of $120, $100, and $80 with odds of one-third of finding each price. She just stopped at a shop and knows that the price is $100. Suppose that there is a search cost of $5 for each search. Should she search one more time? Please explain
-
Yes
-
No
-
She should toss a coin.
-
Insufficient information to determine.
- Information plays an important role in the economy.
- Asymmetric information may lead to the disappearance of a market.
- It is always desirable to have more information than the person one is trading with.
- Adverse selection will not occur if there is no asymmetric information.
2.
Jane wants to buy a beautiful doll as a gift for her sister's birthday. She knows that the same product is offered in different shops with prices of $120, $100, and $80 with odds of one-third of finding each price. She just stopped at a shop and knows that the price is $100. Suppose that there is a search cost of $5 for each search. Should she search one more time? Please explain
-
Yes
-
No
-
She should toss a coin.
-
Insufficient information to determine.
Explanation / Answer
(1) Option (b) is incorrect.
Asymmetric information does not result in disappearance of a market - it only refers to the less-than-optimal and undesirable consequences that takes place in a market where everyone does not have equal access to all information.
(2) NO
Let her search one more time. Then,
Expected price ($) = (1/2) x (120 + 80) + $5 = (1/2) x $200 + $5 = $100 + $5 = $105
Since expected value of the next search results in a price higher than price in current search, she should not search one more time.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.