Question 1
If a buyer or seller enters into an exchange with another party who has more information, there is
◦ symmetric information and moral hazard.
◦ asymmetric information and adverse selection.
◦ a negative externality imposed.
◦ a free-rider problem.
Question 2
In the market for used motorcycles there are high-quality motorcycles and low-quality motorcycles. Potential buyers cannot determine prior to purchase whether the motorcycle is high quality or low quality. Which of the following statements best describes what is likely to happen in this market?
◦ The price of a used motorcycle will be very close to the value of a high-quality motorcycle, which will encourage people to sell high-quality motorcycles.
◦ The price of a used motorcycle will be between the value of a high-quality and low-quality motorcycle. This will encourage people to withdraw high-quality motorcycles from the market.
◦ This is an example of adverse selection, as the buyer will have more information about the quality of the used motorcycle than the seller will.
◦ Over time the price of a used motorcycle will increase in this market, as there is more of an incentive for owners of high-quality motorcycles to sell than owners of low-quality motorcycles.
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