Text A, Paragraph 1
In the used car market, buyers often feel at a disadvantage because they don't know as much about the condition of the cars they are purchasing compared to the sellers. This imbalance in knowledge can sometimes lead to unfair outcomes where the true value of the car is not fully understood. Economists refer to this situation as asymmetric information.
Define the term asymmetric information as indicated in bold in (Text A, paragraph 1).
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Text C, Paragraph 2:
After the 2008 financial crisis, governments worldwide introduced stricter regulations on financial institutions. These regulations were designed to reduce moral hazard, ensuring that banks do not take excessive risks under the assumption that they will be rescued in the event of failure.
State two government regulations designed to prevent moral hazard as found in (Text C, paragraph 2).
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Text B, Paragraph 3:
In the context of insurance, adverse selection refers to the tendency of riskier individuals to seek coverage, while moral hazard describes how insured individuals may take more risks knowing they are protected. Both create challenges for insurance providers as more insurance claims can reduce their profitability.
Outline the difference between adverse selection and moral hazard as found in (Text B, paragraph 3).
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Text E, Paragraph 2
In job recruitment, candidates often rely on signalling to highlight their qualifications, while employers use screening to evaluate potential employees through interviews and background checks. These processes reduce uncertainty in hiring decisions.
Outline the difference between signalling and screening as found in (Text E, paragraph 2).
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Text A, Paragraph 4
The Australian government’s recent initiative to ensure transparency in the banking sector has led to many advantages. By requiring detailed disclosures on investment products, the government aims to address asymmetric information and help consumers with their decision-making.
Identify two advantages of the provision of information as found in (Text A, paragraph 4).
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Text A, Paragraph 3
The French government has mandated that food products carry more information indicating their nutritional content. This effort is part of a larger strategy to address asymmetric information, giving consumers the tools they need to make more informed dietary choices.
Outline one way the government provides information to combat asymmetric information, as found in (Text A, paragraph 3).
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Text B, Paragraph 2:
Many insurance providers have faced rising costs as a result of adverse selection, where high-risk individuals disproportionately seek out coverage. This has led to some companies struggling in certain segments of the market.
State two consequences of adverse selection as found in (Text B, paragraph 2).
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