SOLUTIONS TO SELF-CHECK QUESTIONS

15.1 The Problem of Imperfect Information and Asymmetric Information

1. If the buyer and seller have different assessments of the quality of a good, or the costs that went into producing it, it can be difficult for them to agree on a price.
2. A “lemon” is a good that is of very low quality, and where the quality cannot be verified until after purchase.
3. Sometimes governments subsidize domestic industries that lose from trade, or help workers retrain for more competitive professions.

15.2 Insurance and Imperfect Information

1. Some people will receive more benefits than they pay in premiums, while some will receive less, with the long run payments and benefits averaging out in the aggregate.
2. An actuarially fair policy is one in which the average benefits paid out equal the average cost to the policy holder.
3. Moral hazard is the observation that people behave in more risky ways when the cost of risky behavior is decreased.