Question

Which of the following situations is least likely to involve information asymmetries?

• Loaning money to a friend.

• Purchasing auto insurance.

• Buying breakfast cereal.

• Buying a used car.

Answer 1

Answer. (c) buying breakfast cereal

Explanation: To understand this question, understand what is an informational asymmetry. It is a situation in which the two parties/agents involved in a transaction have different amounts of information about the good or service being traded.

So while buying a breakfast cereal, you are the consumer and the manufacturer of the cereal can be taken as the seller. In this transaction, both of you have almost the same amount of information. Like the standards under which it was manufactured, the nutrient content in that food, its expiry date, its price, etc.

As compared to this, all other options will likely have informational asymmetries. Like, you can't really say when your friend will return your money. So this puts your money at risk. In purchasing an auto insurance, the insurance company doesn't completely know how you drive, whether you drink and drive, etc. So this puts the company at a risk of huge losses. While buying a used car, you don't completely know whether the car is of good quality, were there any previous crashes or major repairs, etc. So this risks your money again, as well as your life.