True or False 1.In a game with asymmetric information, if there exists a pooling

Question

True or False

1.In a game with asymmetric information, if there exists a pooling equilibrium, then there must be no separating equilibrium.

2.Since a signal has to be costly to be credible, a separating equilibrium may decrease the total efficiency.

3.In the optimal contract s(y) = y – R, R is higher if the agent’s outside option is better, other things being equal.

4.Medical insurance’s practice of charging copays for drugs is a method to counter moral hazard.

5.In private value auctions, if the format is changed from first price to second period, bidders will bid lower.

Explanation / Answer

1.In a game with asymmetric information, if there exists a pooling equilibrium, then there must be no separating equilibrium.
True

PE: different types of senders, sending same message

SE: differtnt types of senders sending different message. Like a resume sent to an employer, from several candidates.

Only one PE is possible, because, in PE, the signal receiver, is completely unaware of the senders profile and so he cannot distinguish between the workers with high worth and low worth,

But in SE, when assymetrical information is provided, the receiver will distingish , and due to this SE occurs.

2.Since a signal has to be costly to be credible, a separating equilibrium may decrease the total efficiency.

False.

SE, is sending differnt messages by different persons. Let us say there was a job posted. Qualification is post doctoreal and 5 to 10 yrs experience. And the company had set an application fee of $500.

Than we get resumes from employemnt seekers, who have required qualification and a real need for a job.

3.In the optimal contract s(y) = y – R, R is higher if the agent’s outside option is better, other things being equal.

False

4.Medical insurance’s practice of charging copys for drugs is a method to counter moral hazard.
True

Here the insurer in the uninformed, or the exact infromation will be with the insured. So to negate the effect of this opportunish by the insureed, they ask for bill copies. Just to reduce the loss if at all an assymentic information is provided.

5.In private value auctions, if the format is changed from first price to second period, bidders will bid lower.

Flase.

Bidders will bid for higher value in the second prrice auction, here the bidders are sure that they have to pay an amount which is the next highest to the winning bid

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