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Chapter 16: Q.2 (page 397)

Why is there asymmetric information in the labour market? What signals can an employer look for that indicate the traits they are seeking in a new employee?

Short Answer

Expert verified

Employer degrees from a particular college, grade point average, awards, and other accolades as a signal of ability and hard work are the signals an employer can look for that might indicate file traits they are seeking in a new employee. There is asymmetric information in the market that employee attributes cannot be observed by employers until after the employee is hired.

Step by step solution

01

Definition of assymetric inforemation

When one party to a transaction has more material knowledge thanthe opposite, asymmetric information occurs

02

Step2. Explanation of solution.

Person qualities cannot be observed by employers until after the employee is hired, resulting in asymmetric information in the labor market.

As a result, businesses look for schools to pre-screen individuals. Employers like to interview individuals who have a degree or, more commonly, a degree from a specific college. High-grade point averages, awards, and other honours are also seen as indicators of ability and hard effort.

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Most popular questions from this chapter

For each of the following purchases, say whether you would expect the degree of imperfect information to be relatively high or relatively low:

a. Buying apples at a roadside stand

b. Buying dinner at the neighborhood restaurant around the corner

c. Buying a used laptop computer at a garage sale

d. Ordering flowers over the internet for your friend in a different city

To what sorts of customers would an insurance company offer a policy with a high copay? What about a high premium with a lower copay?

Imagine that you can divide 50-year-old men into two groups: those who have a family history of cancer and those who do not. For the purposes of this example, say that 20% of a group of 1,000 men have a family history of cancer, and these men have one chance in 50 of dying in the next year, while the other 80% of men have one chance in 200 of dying in the next year. The insurance company is selling a policy that will pay $100,000 to the estate of anyone who dies in the next year.

(a) If the insurance company were selling life insurance separately to each group, what would be the actuarially fair premium for each group?

(b) If an insurance company were offering life insurance to the entire group, but could not find out about family cancer histories, what would be the actuarially fair premium for the group as a whole?

(c) What will happen to the insurance company if it tries to charge the actuarially fair premium to the group as a whole rather than to each group separately?

What is an actuarially fair insurance policy?

Using Exercise 16.20, sketch the effects in parts (a) and (b) on a single supply and demand diagram. What prediction would you make about how the improved information alters the equilibrium quantity and price?
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