Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 15] THE ECONOMICS OF INFORMATION 339
Internet A collection of thousands of computers, businesses, and millions of people throughout the world linked together
in a service called World Wide Web.
Market signaling Signals that convey product quality, good insurance or credit risks, and high productivity.
Moral hazard The increased probability of a loss when an economic agent can shift some of its costs to others.
Principal-agent problem The fact that the agents (managers and workers) of a firm seek to maximize their own benefits
(such as salaries) rather than the total profits or value of the firm, which is the owners’ or principals’ interest.
Search costs The time and money spent seeking information about a product.
Search goods Goods whose quality can be evaluated by inspection at the time of purchase.
Review Questions
1. The cost of search may include (a) time spent to learn the properties of the product, (b) time spent to compare the
product to possible substitutes, (c) time spent to find lower-price sellers of the product, (d) money spent to purchase
information on the product, (e) all of the above.
Ans. (e) See Section 15.1.
2. With each additional search, the marginal benefit from more search (a) increases, (b) declines, (c) first increases and
then decreases, (d) does not change.
Ans. (b) See Section 15.2.
3. With a greater range of product prices, the marginal benefit from search (a) increases, (b) decreases, (c) does not
change, (d) can increase or decrease.
Ans. (a) See Section 15.2.
4. Asymmetric information refers to the case where (a) the seller of a product or service has more information than the
buyer, (b) the buyer of a product has more information than the seller, (c) the seller or the buyer of a product or
service has more information than the other, (d) information is irrelevant to the transaction,
Ans. (c) See Section 15.3.
5. Which of the following statements is correct? (a) Asymmetric information leads to adverse selection, (b) adverse
selection leads to asymmetric information, (c) adverse selection leads to an insurance problem, (d) moral hazard
leads to asymmetric information.
Ans. (a) See Section 15.3.
6. How can the problem of adverse selection be overcome? (a) By buyers getting more information about the quality or
the good or service, (b) by sellers providing more information of the quality of the good or service, (c) by brand
names and chain retailers, (d) by professional licensing, (e) all of the above.
Ans. (e) See Section 15.3.
7. Credit companies reduce the adverse selection problem that they face by (a) sharing borrowers’ credit histories with
other credit companies, (b) asking borrowers to purchase health insurance, (c) asking borrowers for a medical
checkup, (d) all of the above.
Ans. (a) See Section 15.3.
8. Which of the following is not a market signaling device? (a) Guarantees and warranties, (b) coinsurance and deductibles,
(c) hedging, (d) a college education.
Ans. (c) See Section 15.4.