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Questions and Answers
What is the definition of symmetric information?
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?
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?
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?
What behavior does asymmetric information lead to?
What happens when both parties have equal or equally limited information in a transaction?
What happens when both parties have equal or equally limited information in a transaction?
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.
