Question

Pick the correct analysis of the following example.

As an employee, $10 per month is deducted from your paycheck for life insurance--as it is for all 500 employees at the company where you work. After you retire, you decide to continue payments on your own. But you now must pay $250 a month (not $10).

this is an example when asymmetric information leads to prices that are too high because the buyer has less information than the seller

this is an example when asymmetric information leads to prices that are too low because the seller has less information than the buyer

this is an example when asymmetric information leads to prices that are too low because the buyer has less information than the seller

this is an example when asymmetric information leads to prices that are too high because the seller has less information than the buyer

Answer 1

Answer: 1^st option

In a contract if one party has greater information about the related-material fact than the other party, then such information is asymmetric, because there is information failure. The payment of $250 is too high compare to $10. It means the buyer of insurance is managed by the insurance company with superiority. A life-policy of same benefit must not have two different premium amounts -- $10 and $250. It has only happening here because the buyer doesn’t have much knowledge about it.