Asymmetric Information and Its Implications in Economics

These flashcards cover key concepts related to asymmetric information, job safety, adverse selection in insurance, moral hazard, and important aspects of macroeconomics, including business cycles and economic terms.

What are risks typically associated with jobs in an office compared to factories?

Office jobs often have perceived lower risks compared to factory jobs where machinery can cause physical injuries.

Why might firms be inclined to neglect safety measures?

Implementing safety measures can be costly for firms, making it easier to ignore risks.

What is a common response from workers in jobs deemed unsafe?

Workers often demand higher wages for jobs with known risks.

How does asymmetric information create challenges in job safety?

Employers typically know more about job risks than potential employees, leading to information gaps.

What role does the government play in the context of workplace safety?

The government sets safety standards to protect workers and mediate the information gap between employers and employees.

What is adverse selection in insurance markets?

Adverse selection occurs when those with higher risks are more likely to purchase insurance, leading to an imbalanced risk pool.

How do insurance companies adjust for perceived risks in drivers?

Insurance companies often offer lower rates to groups identified as lower risk, such as good students or older drivers.

What is moral hazard in relation to insurance?

Moral hazard refers to people taking more risks because they feel covered by insurance.

How can higher deductibles influence insured behavior?

Higher deductibles encourage insured individuals to be more responsible in minimizing claims.

What does the term 'business cycle' refer to in economics?

The business cycle refers to the irregular ups and downs in the level of real economic activity over time.

What characterizes a 'growth phase' in the business cycle?

In a growth phase, output rises, unemployment falls, and inflation tends to increase.

What constitutes a recession in economic terms?

A recession is commonly defined as two consecutive quarters of declining output.

What are the two major groups of actors in an economy?

The two major groups are firms (businesses) and households.

How do firms and households interact economically?

Firms produce goods and services that households purchase while households provide labor and resources to firms.

Why do lower risk individuals still have to pay for insurance involving higher risk individuals?

To have a functional insurance system that can support everyone, including high-risk individuals.

What is one way companies provide security guarantee for consumers?

Companies offer warranties for products, which helps reduce buyer concerns regarding faulty goods.

What significant change did Tylenol implement after a poisoning scandal?

Tylenol introduced tamper-proof packaging to ensure product safety for consumers.

What does GDP measure in economic terms?

GDP measures the total value of all goods and services produced in an economy over a specific time period.

Why is long-term economic growth considered beneficial?

Long-term economic growth can lead to improved living standards and economic stability.

What can influence the relationship between inflation and the unemployment rate?

The relationship is complex; typically, output increases can lower unemployment, and inflation may rise, but this is not guaranteed.

What does 'real' economic activity refer to?

Real economic activity refers to the production and trade of tangible goods and services, adjusting for inflation.

What is meant by 'asymmetric information'?

Asymmetric information refers to situations where one party has more or better information than the other in a transaction.