Question

Part II- Long Answers

1.When a smoker successfully manages to obtain insurance coverage as a non-smoker, what kind of market failure happens? Explain.

2.You really want a job as an economist. You think you are the perfect fit for the position and offer to work for much less than the job’s current salary posting. Do you think it a credible and right signal to your prospective employer? Explain.

Answer 1

1.
The smoker has different information about himself, while the insurance company has different information about the smoker. This is a situation of information asymmetry. The market transaction happened when the insurance policy was provided by the company to the smoker, but it was in the best interest of the smoker to provide incomplete information, which leads to an information failure in the market.

2.
It might be a right signal to the prospective employer telling them that your desire for the given role is high. That would easily go on to mean that someone is willing to take a pay-cut for the sake of the job content, rather than the pay. But on the other hand, this gives the employer an advantage of having the upper hand in negotiating the salary, since the employer knows, that the prospective employee would be willing to work for a much lesser pay. While this might be a morally happy situation for the prospective employee where he/she gets the job, the employer would not hesitate to use this opportunity to notice the desperate attempt by the employee, so that economically, the employer is better off. Hence, it does not seem like a credible decision.