1.

Which of the statements below are true:

I. A contract is incomplete when information is unavailable or unverifiable.
II. Asymmetric information is a problem in the interaction between two parties of a
transaction when their objective functions differ. This means that the informed party has no
incentive to share information with the uninformed one.
a) I only
b) II only
c) I and II
d) Neither

2. Which of the statements below are true:

I. An employer-worker relationship suffers from a form of asymmetric information
problem known as hidden attributes.
II. A firm’s recruiter faces a hidden action problem because candidates have more
information about their own qualifications and past experience than the recruiter and have an
incentive to conceal negative signals.
a) I only
b) II only
c) I and II
d) Neither

3. Which of the following is NOT a reason why there is a hidden attributes / an

adverse selection problem in the market for used cars?
a) The seller has more information about the quality of a particular car than the
buyer does.
b) The minimum acceptable price for a seller under full information is higher than
the willingness to pay of the buyer for a given car.
c) The average value of a car is the most a perspective buyer is willing to pay and
this drives sellers of high-quality cars out of the market.
d) Quality verification before a sale takes place is impossible / too costly for the
buyer.
 4. Imagine there are ten cars on the market, valued at 0, 5000, 10000 … 45000
Euros. Sellers are willing to sell as long as they receive strictly more than half of the true value
of the car, while buyers are willing to buy as long as they pay at most the true car value. Which
of the following statements is true?
a) The average value of a car on this market is 25000 Euros and this is the price
potential buyers are willing to pay for a car in this market under asymmetric information.
b) Under asymmetric information, sellers whose car is valued at 25000 Euros or
more will drop out of the market immediately.
c) It is Pareto efficient to sell all cars because the value the buyers assign to a
particular vehicle (willingness to pay) is higher than the value assigned by the seller (minimum
acceptable price).
d) If the buyers observed the true car value, all mutually beneficial trades would
occur and the price would equal the willingness to pay of the buyer.

5. Now consider the same ten cars on the market. Assume that sellers are willing to
sell as long as they receive strictly more than half of the true value of the car (as before) but
buyers are willing to buy as long they pay at most 1.5 times the value of the car. Which of these
statements are true for the case of asymmetric information?
I. Buyers in this market are willing to pay 33750 Euros.
II. The willingness to pay of buyers for a car with an average quality is higher than
the minimum acceptable price of the seller of the highest quality car on the market so there is no
adverse selection problem.
a) I only
b) II only
c) I and II
d) Neither

6. Consider a health insurance market with 100 potential buyers where 90 of them
are healthy (90% chance of making no claim and 10% chance of making a claim of 10K) and 10
of them are sick (50% chance of making no claim and 50% chance of making a claim of 20K).
What is the expected claim in this population?
a) 1.4K
b) 1.6K
c) 1.9K
d) 2.1K

7. Now consider the same health insurance market. Imagine that all potential buyers
are risk averse and willing to pay 1K premium on top of their expected claim. What is the
expected loss or profit for the insurer if he prices the product at 1.5K? And what about 1.9K?
a) Loss of 50K; Break even
b) Loss of 40K; Break even
c) Break even; Profit of 20K
d) Profit of 10K; Profit of 40K

8. In which of those markets there is NO asymmetric information problem?

a) dating / marriage market
b) the market for dental insurance
c) university admission
d) FX trading

9. Which is NOT a possible remedy for a hidden attributes problem?

a) face-to-face negotiation and bargaining
b) public information sharing
c) repeated interaction and long-term contractual arrangements
d) reliance on expert opinion

10. Which of the following is NOT an attempt to mitigate a hidden attributes problem
in a particular market?
a) a credit registry
b) seller ratings on Ebay
 c) an employment contract with a trial period clause
d) incentive pay

11. In a borrower-lender relationship there is an ex-ante moral hazard problem when

the borrower has no incentive to put effort into the project because in the event of default it is the
lender who bears the cost. On the other hand, an ex-post moral hazard problem is when a
borrower has a successful project but still has no incentives to repay the loan.
Which of the following statements are NOT true?
a) A collateral can help mitigate both an ex-ante and an ex-post moral hazard
problem and there are no equity concerns in requiring such for a loan.
b) A loan with a very high interest rate exacerbates both an ex-ante and an ex-post
moral hazard problem as reduces incentives for the borrower to put an effort into the project and
to repay the loan conditional on success.
c) Both types of moral hazard problem could lead to a market failure.
d) Group lending can mitigate the moral hazard problem in lending by making
borrowers jointly liable for their loans. This creates incentives for group members to help each
other which increases the probability of success of a project (mitigates ex-ante moral hazard) and
the personal relationship to other group members creates social pressure to repay the loan
conditional on success (mitigates ex-post moral hazard).

12. Which of the following is NOT an example of a merit good, which is commonly
provided free of charge in most modern societies?
a) legal representation
b) housing for children
c) basic healthcare
d) college education