📚 Topic Summary
Information asymmetry exists when one party in a transaction has more or better information than the other. This imbalance can lead to market inefficiencies and give the informed party market power. Market power, in turn, is the ability of a firm to influence the market price of a good or service.
This quiz will test your understanding of these concepts and how they relate to real-world scenarios. Let's dive in!
🧠 Part A: Vocabulary
Match the terms with their definitions:
| Term |
Definition |
| 1. Adverse Selection |
A. The ability of a firm to influence the market price of a good or service. |
| 2. Moral Hazard |
B. A situation where one party takes on more risk because someone else bears the cost of that risk. |
| 3. Information Asymmetry |
C. A situation where one party in a transaction has more or better information than the other. |
| 4. Market Power |
D. A situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality. |
| 5. Hidden Information |
E. The tendency for those with private information that makes them a high risk to be more likely to engage in transactions. |
Match the correct letter (A-E) to each number (1-5).
📝 Part B: Fill in the Blanks
Complete the following paragraph with the correct terms:
__________ occurs when one party changes their behavior after a deal has been struck, knowing that the other party cannot observe this change. This is often linked to __________, where one party has more knowledge than the other. This imbalance can lead to __________, where individuals with more risk are more likely to participate in a transaction. Firms with __________ can exploit these information gaps to influence prices.
Choose from: Market Power, Information Asymmetry, Moral Hazard, Adverse Selection.
💡 Part C: Critical Thinking
Explain how information asymmetry can lead to market failure. Provide a real-world example.