Chapter 9 Market Failure: Imperfect Information, External Benefits, and External Costs

91) The lemons model predicts that

A) if there are low-quality goods in the market, there will be fewer or no high-quality items.

B) if there are high-quality goods in the market, there will be fewer or no low-quality items.

C) the more low-quality goods there are in the market, the more high-quality goods there will be in the market.

D) if buyers are pessimistic about the percentage of low-quality goods on the market sellers of low-quality goods will be able to charge higher prices than if buyers had neutral beliefs.

92) In the used pick-up truck market,

A) some of the predictions of the lemons model are observed some of the time.

B) the lemons model accurately describes the market.

C) none of the predictions of the lemons model are observed.

D) there is no asymmetric information, and so the lemons model does not apply.

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s).

93) Recall the Application. Baseball players who switch teams are more likely to suffer from injuries because the player's ________ team has superior information concerning the health of the player and, if they believe the player will be prone to injury in the future, they ________ be willing to outbid another team.

A) new; will not

B) old; will not

C) new; will

D) old; will

94) Recall the Application. The market for baseball pitchers suffers from an asymmetric information problem because

A) the pitcher's current team has superior information concerning the health of the pitcher.

B) the potential new teams have superior information concerning the health of the pitcher.

C) baseball teams never sign injury-prone pitchers.

D) a physical exam ensures that both the player's current team and potential new teams have the same information concerning the player's health.

95) Recall the Application. The market for baseball players suffers from adverse selection because ________ the used car market, buyers (potential new teams) ________ goods (pitchers) that are lemons (low quality).

A) unlike; have difficulty identifying

B) like; have difficulty identifying

C) unlike; can more easily identify

D) like; can more easily identify

96) Recall the Application. Pitchers who switch teams ________ pitchers who do not switch teams.

A) spend more time on the disabled list, on average, than

B) spend less time on the disabled list, on average, than

C) spend exactly the same amount of time on the disabled list as

D) are less injury-prone than

97) There is asymmetric information in the used car market because sellers cannot distinguish between lemons (low-quality) and plums (high-quality) but buyers can.

98) If a typical consumer is willing to pay $3,000 for a plum and $1,000 for a lemon, and there is a 50% chance of getting a lemon, the typical consumer is willing to pay $2,000 for a used car.

99) If eight lemons (low quality) and two plums (high quality) are supplied and buyers assume that there is a 40% chance of getting a lemon, there is an equilibrium.

100) When buyers assume that there is a 70% chance of getting a lemon, and seven lemons (low quality) and three plums (high quality) are supplied, there is an equilibrium.