Question

1. When a market is efficient:

there are no additional exchanges that can make anyone better off without someone becoming worse off.

a central planner must be involved.

total surplus is zero.

an increase in price will reduce the deadweight loss.

2. The problem arising in the used car market can be alleviated by

providing buyers with more complete information on the condition of a used car.

sellers offering warranties.

having third parties certify the condition of a used car.

All of these statements are true.

3. The principal-agent problem occurs:

when the principal has less information than the agent.

when the principal has more information than the agent.

when the agent has less information than the principal.

not observed in reality.

4. The result of effective screening and signaling can be:

more transactions take place.

surplus is increased for buyer and/or seller.

more information is credibly shared.

All of these statements are true.

Answer 1

1. A market is efficient when there are no additional exchanges make anyone better off without making someone becoming worse off. Option A is correct.

2. The problem arising in the used car market can be alleviated by providing buyers with all the information which is required to be known by the buyer of the used car. Option A is correct.

3. Principal-Agent Problem arises when the agent usually has more information than the principal. Option A is correct.

4. Effective screening and signaling can occur when more information is credibly shared.  Option C is correct.