1.7.1 Information Asymmetry: Article Reading

Read the first article and answer the questions below. When finished, look at the second article (extension work).

Article 1: The Economist Explains Information Asymmetry

Questions:

1. Explain why product quality is often difficult to judge in advance.
2. Explain how warranties and brands are meant to lead customers to believe that their product is of a good quality.
3. Explain, using the market for used cars, why not enough ‘peaches’ will be sold if buyers do not know all the information about the cars.
4. Explain why the labour market suffers from asymmetric information.
5. Explain what ‘signalling’ is and how it can help to correct this type of market failure.

Article 2: Secrets and Agents