Question from Past Microeconomics Qualifying Exam[]

Spring 2006 - Section I, Question seven, George Mason University

Asymmetric information explains why consumers buy suboptimal levels of safety.


False, It seems that if there is asymetric informaiton customers are likely to be more safe (assuming self-preservation). This would be consuming additional levels of saftey rather than fewer.

Eliminating these informaiton asymetries could make people more willing to take reasonable calculated risks. The spirit of the question holds reminds me that the government often claims to have more information than we do and thereby has a reason to use paternalism -- in our best interests the first reaction to this though is : Why not just eliminate the information asymetry.

UNCERTAIN: If I know that I will not be having any medical conditions, or a car crash, in the near term, then I'm probably paying to much for both right now. But if I know that I will be having a major medical condition, or a car crash, then I'm probably buying too little insurance.

Alternative Answer UNCERTAIN: Asymmetric information leads to problems such as moral hazard and adverse selection. Moral hazard problems are expected to lead to underprovision of insurance from the supply side. Similarly adverse selection would lead to underprovision of insurance because only below average risk people would demand insurance, which would increase the cost of insurance.

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