that low-risk parties will avoid its insurance because it is too costly for them, while high-risk parties will

embrace it because it looks like a good deal to them.

Self-Check Questions

1. 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

2. Why is there asymmetric information in the labor market? What signals can an employer look for that

might indicate the traits they are seeking in a new employee?

3. Why is it difficult to measure health outcomes?

Review Questions

4. Why might it be difficult for a buyer and seller to agree on a price when imperfect information exists?

5. What do economists (and used-car dealers) mean by a “lemon”?
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