Question

Asymmetric Information & Behavioral Economics. Need help with these problems

2. T/F/Explain - The presence of lemons in the market and the asymmetric information about which cars they are leads to an adverse selection of used cars for customers to choose from 3. Name some of the reasons why health care spending is going up in the US. What are some possible solutions? 4. T/F/Explain - Anchoring happens when firms take advantage of consumer behavior by, for example, posting inflated 'original' prices.

Answer 1

2)

This is true statement:

Under the lemon and asymmetric market, there is unequal distribution of information among the buyers and sellers. Thus, outcomes might not be efficient. In lemon market or second hand car market, sellers have more information about the condition of cars, while buyers do not have right information. Thus, buyers might end up buying low quality cars.

3)

US health care spending is rising day by day. US spends close to 18 % of GDP on health care. it is one of the highest in world. Following are reasons:

• Usually insurances are provided by the private sector firms, so automatically expenditure rises.
• Chronic illnesses such as heart diseases and diabetes are rising, so these are pushing up health care expenditure.
• Pharma sector is not being regulated appropriately, so expenditure is rising.

Solution:

There must be adequate regulation on private sector insurance firms,.

Further, young people must be encouraged to subscribe to insurance, it will help to cross subsidize health care expenditure by elders and old.