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Asymmetric Information in Economics

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Questions and Answers

What is the definition of symmetric information?

An act by one party to a transaction that is not observed by the other party.

One party to a transaction has relevant information that another party lacks.

Everyone is equally knowledgeable about prices and product quality. (correct)

Everyone is equally ignorant about prices and product quality.

Which of the following best describes hidden action?

Neither party has an advantage over the other due to equal information.

One party takes economic advantage of another when circumstances permit.

An attribute of a person or thing known to one party but unknown to others. (correct)

An act by one party to a transaction that is not observed by the other party.

What is an example of hidden characteristic?

A firm’s manager using a company jet for personal use without the owners’ knowledge.

Neither party having an advantage over the other due to equal information.

One party taking economic advantage of another when circumstances permit. (correct)

The owner of a property possessing extensive information about the mineral composition of the land unknown to a mining company.

What behavior does asymmetric information lead to?

<p>Opportunistic behavior, where one party takes economic advantage of another.</p> Signup and view all the answers

What happens when both parties have equal or equally limited information in a transaction?

<p>Neither has an advantage over the other.</p> Signup and view all the answers

Study Notes

Asymmetric Information

Symmetric information refers to a situation where all parties in a transaction have equal access to information.
Asymmetric information, on the other hand, occurs when one party has more or better information than the other party in a transaction.

Hidden Action and Hidden Characteristics

Hidden action refers to a situation where one party takes an action that is not observable to the other party, affecting the outcome of the transaction.
Hidden characteristic is a trait or feature of a good or service that is not observable to the buyer, such as the quality of a used car.

Consequences of Asymmetric Information

Asymmetric information can lead to adverse selection, where one party takes advantage of the other party's lack of information, resulting in a bad deal for the uninformed party.
When both parties have equal or equally limited information in a transaction, the transaction is said to have symmetric information, which can lead to more efficient outcomes.

Note: These study notes summarize the key concepts and definitions related to asymmetric information, hidden action, and hidden characteristics.

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Description

Test your knowledge of asymmetric information in economics with this quiz. Learn about hidden characteristics and hidden actions in transactions, and how they can create information imbalances between parties.