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9.8: Problem Sets

  • Page ID
    48859
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    Exercise \(\PageIndex{1}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 120.

    Profits of truthfully claiming high quality with no signal are 100.

    Profits of truthfully claiming low quality are 80.

    The cost of a true signal of high quality is 16.

    The cost of a false signal of high quality is 38.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): Yes

    Answer for (2): Yes

    Answer for (3): No

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{2}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 130.

    Profits of truthfully claiming high quality with no signal are 100.

    Profits of truthfully claiming low quality are 60.

    The cost of a true signal of high quality is 32.

    The cost of a false signal of high quality is 71.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): Yes

    Answer for (2): Yes

    Answer for (3): Yes

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{3}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 140.

    Profits of truthfully claiming high quality with no signal are 120.

    Profits of truthfully claiming low quality are 70.

    The cost of a true signal of high quality is 24.

    The cost of a false signal of high quality is 75.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): Yes

    Answer for (2): Yes

    Answer for (3): Yes

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{4}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 150.

    Profits of truthfully claiming high quality with no signal are 120.

    Profits of truthfully claiming low quality are 50.

    The cost of a true signal of high quality is 31.

    The cost of a false signal of high quality is 99.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): Yes

    Answer for (2): Yes

    Answer for (3): No

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{5}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 160.

    Profits of truthfully claiming high quality with no signal are 120.

    Profits of truthfully claiming low quality are 80.

    The cost of a true signal of high quality is 41.

    The cost of a false signal of high quality is 80.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): No

    Answer for (2): No

    Answer for (3): No

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{6}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 150.

    Profits of truthfully claiming high quality with no signal are 110.

    Profits of truthfully claiming low quality are 60.

    The cost of a true signal of high quality is 38.

    The cost of a false signal of high quality is 93.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): Yes

    Answer for (2): Yes

    Answer for (3): Yes

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{7}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 140.

    Profits of truthfully claiming high quality with no signal are 110.

    Profits of truthfully claiming low quality are 70.

    The cost of a true signal of high quality is 34.

    The cost of a false signal of high quality is 66.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): Yes

    Answer for (2): Yes

    Answer for (3): No

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{8}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 130.

    Profits of truthfully claiming high quality with no signal are 110.

    Profits of truthfully claiming low quality are 50.

    The cost of a true signal of high quality is 20.

    The cost of a false signal of high quality is 82.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): Yes

    Answer for (2): Yes

    Answer for (3): Yes

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{9}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 120.

    Profits of truthfully claiming high quality with no signal are 90.

    Profits of truthfully claiming low quality are 80.

    The cost of a true signal of high quality is 29.

    The cost of a false signal of high quality is 44.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): No

    Answer for (2): No

    Answer for (3): Yes

    There is a separating equilibrium if all answers are 'Yes'

    Exercise \(\PageIndex{10}\)

    Given the following:

    Profits of falsely claiming high quality with no signal are 130.

    Profits of truthfully claiming high quality with no signal are 90.

    Profits of truthfully claiming low quality are 60.

    The cost of a true signal of high quality is 42.

    The cost of a false signal of high quality is 66.

    (1) Is truthful access to the high-quality market profitable given the signal?

    (2) Does the signal remove the incentive of high-quality firms to cheat?

    (3) Does the signal remove the incentive of low-quality firms to deceive?

    (4) Is there a separating equilibrium that corrects the lemons market?

    Answer

    Answer for (1): No

    Answer for (2): No

    Answer for (3): No

    There is a separating equilibrium if all answers are 'Yes'

    Problem Set 2. Multiple Choice

    Exercise \(\PageIndex{1}\)
    1. Which was not one of the examples of an economic signal?

    a) Low introductory prices

    b) A warranty

    c) Advertising

    d) Production management contracts

    Answer

    d

    Exercise \(\PageIndex{2}\)
    1. Which of the following is a market solution to the adverse selection problem?

    a) Incentive-based contracts

    b) First degree price discrimination

    c) Equilibrium pricing mechanisms

    d) Behavioral economics models

    e) Economic signals

    Answer

    e

    Exercise \(\PageIndex{3}\)
    1. Which of the following is a market solution to the moral hazard problem?

    a) Incentive-based contracts

    b) First degree price discrimination

    c) Equilibrium pricing mechanisms

    d) Behavioral economics models

    e) Economic signals

    Answer

    a

    Exercise \(\PageIndex{4}\)
    1. Which of the following would be the best example of a default-contingent signal?

    a) Advertising

    b) Low-introductory prices

    c) Warranties

    d) Job-market signaling with a college education

    Answer

    c

    Exercise \(\PageIndex{5}\)
    1. Which of the following would be the best example of a default-independent signal?

    a) Advertising

    b) Low-introductory prices

    c) Job-market signaling with a college education

    d) All of the above

    Answer

    d

    Exercise \(\PageIndex{6}\)
    1. Asymmetric information means

    a) One party to a transaction is better informed than another

    b) That information is freely available to both parties but neither party has correct information

    c) Both parties are about equally informed but each places a different value on the information

    d) Choices (b) and (c) only

    Answer
    Exercise \(\PageIndex{7}\)
    1. Provided there is a separating equilibrium, this mechanism can mitigate the adverse selection (lemons market) problem
    1. An incentive based contract
    2. An economic signal
    3. A tit-for-tat responses
    4. A 2nd degree price discrimination strategy
    Answer

    b

    Exercise \(\PageIndex{8}\)
    1. Which best describes a separating equilibrium

    a) A partial equilibrium model

    b) A situation where all firms signal regardless of quality

    c) A situation where only firms providing high quality find it in their interest to signal

    d) A situation where no firms signal

    Answer

    c


    This page titled 9.8: Problem Sets is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Michael R. Thomsen via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.

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