4.1.2.2 Imperfect information Quiz: AQA Economics, Unit 1

The 20 questions

1. Imperfect information means that:

   • consumers always know everything about the goods they buy, so that no purchase ever leads to regret or a poor decision in any market.
   • all prices in the economy are equal, so that consumers can compare goods without needing to know any detail of what they are buying.
   • economic agents do not have full or accurate knowledge of relevant market information.
   • markets always clear without any supply or demand, so that buyers and sellers never need to make a decision about how much to trade.

2. Asymmetric information occurs when:

   • both buyers and sellers know exactly the same facts about a good, so that neither side can gain an advantage in any bargain.
   • a government sets all prices equally for every consumer, so that no buyer or seller has any information that the other lacks.
   • one party to a transaction has significantly more or better information than the other.
   • information is available only after a purchase is complete, so buyers learn about quality too late to change their choice.

3. Which of the following is the best example of asymmetric information in a second-hand car market?

   • The seller knows the car's condition better than the buyer.
   • Both buyer and seller have identical knowledge of the car's history.
   • The buyer knows the car's condition better than the seller.
   • The car's price is set by the government.

4. Why is imperfect information a potential source of market failure?

   • Because consumers may make decisions that do not maximise welfare, leading to misallocation of resources.
   • Because it makes markets perfectly competitive, so that firms earn only normal profit and there is no scope for any welfare loss.
   • Because it always leads to prices that are too low, which means that producers are unable to cover their costs in the market.
   • Because it eliminates all opportunity costs, which means that resources are never allocated to a less valued use in any market.

5. Which of the following best describes adverse selection?

   • A situation where the price of insurance falls as demand rises, because competition among insurers always lowers premiums.
   • A situation where insurers always know the health of every customer, so each premium exactly matches that person's risk.
   • A situation where all insurance buyers are identical in risk, so insurers can price every policy at the same level.
   • A situation where high-risk buyers are more likely to buy insurance, because insurers lack information about their risk.

6. A bank lends to borrowers without fully knowing their repayment ability. Which problem is most directly illustrated?

   • Perfect competition, because all banks lend at the same rate and no borrower has any information that the bank lacks about the market.
   • Moral hazard alone, with no information gap, because the bank has perfect knowledge of every borrower's ability to repay the loan it makes.
   • Economies of scale, because a larger loan book lowers the average cost of lending for the bank as it grows over time in the market.
   • Asymmetric information, which may lead to bad loans.

7. Which of the following would best reduce the effects of asymmetric information in the second-hand car market?

   • Introducing a standardised vehicle history check that both parties can access.
   • Removing all consumer protection laws, so that sellers are free to set whatever terms they like without any legal restriction on the sale.
   • Setting a single price for all cars regardless of condition, so buyers never need to know anything about quality.
   • Allowing sellers to hide defects from buyers, which keeps prices high and avoids the cost of disclosing the condition of each vehicle.

8. Which statement best explains why information is important for decision making?

   • Information reduces the amount of resources available, because each piece of data takes up time that could make goods.
   • Information only matters to firms, not to consumers, since households never need to compare products before buying anything at all.
   • Information allows agents to compare alternatives and make choices that better meet their objectives.
   • Information is irrelevant because all decisions are made by chance, and no amount of data can change the outcome of a choice.

9. A consumer buys a product with a hidden defect that could have been detected with better information. What is the economic consequence?

   • The consumer makes an informed decision that maximises welfare, because the purchase was free and the product was accepted.
   • The consumer gains utility equal to the cost of the product, because the defect does not affect the satisfaction it gives.
   • The producer loses all revenue from the sale, because the defect is found at once and the buyer demands a full refund.
   • The consumer's decision may be suboptimal, reducing welfare relative to full information.

10. Which of the following is an example of a market where asymmetric information is commonly discussed?

    • The market for identical bottles of mineral water sold at a fixed price.
    • The market for second-hand cars.
    • The market for standardised bulk commodities with fixed grades.
    • The market for a fully transparent government bond.

11. Which of the following is the most accurate evaluation of the claim that all information problems can be solved by government regulation?

    • The claim is correct because markets always solve information gaps automatically, so regulation is never needed.
    • The claim is correct because regulation always removes asymmetric information, so markets have full knowledge after each law.
    • The claim is incorrect because information problems never affect welfare, so government has no reason to intervene at all.
    • The claim is overstated, because regulation can be costly and may not remove every information gap.

12. A firm knows more about the safety of its product than the regulator does. Which concept best describes this situation?

    • Economies of scope.
    • Asymmetric information.
    • Price discrimination.
    • Cross elasticity of demand.

13. Which of the following would best illustrate the effect of imperfect information on resource allocation?

    • Consumers buy a product that is less suitable for them because they lacked information, so resources go to a less valued use.
    • Firms reduce output because the market is perfectly competitive, so resources are idle and the market fails to use inputs.
    • Consumers buy the same product at the same price with full information, so resource allocation is unchanged by data.
    • Consumers buy more of a product because its price falls, increasing demand without any change in information.

14. Why do insurance markets often suffer from information problems?

    • Because insurers always know more about the risk of each customer than customers do.
    • Because insurance has no price.
    • Because customers typically know more about their own risk than insurers do.
    • Because insurance is always supplied by the government.

15. Which of the following statements best describes how consumers can respond to imperfect information?

    • By searching for information, comparing products and using reviews or certification.
    • By buying the most expensive product, which always has the most information attached to it about its quality and its history.
    • By refusing to make any purchase, which is the only sensible response to a market where information is incomplete or unreliable.
    • By ignoring all available information, because trusting the seller is always the safest course of action for any buyer in any market.

16. A market is described as having 'perfect information'. Which statement is correct?

    • Buyers have more information than sellers, so that the buyer always knows more about the product's quality than the seller who sells it.
    • Prices are fixed by a central authority, so that buyers and sellers need not gather any information about the prices charged in the market.
    • Buyers and sellers have full and accurate knowledge of prices, quality and alternatives.
    • Sellers have no information about their own products, which means that they cannot describe the goods they are offering for sale to buyers.

17. Which of the following best evaluates the effect of imperfect information on market efficiency?

    • It always improves efficiency because consumers become more cautious and so buy only the goods that they really need in every market.
    • It increases productive efficiency because firms know more about their costs, so they can produce each good at lowest cost.
    • It can reduce allocative efficiency by leading to decisions that do not reflect true preferences or costs.
    • It has no effect because prices always reflect full information, so that every market is efficient whatever information buyers have.

18. Which of the following is a likely outcome when a seller has far more information about a product's quality than buyers do?

    • Buyers will always pay a fair price for each product, because the seller's knowledge ensures prices reflect true quality.
    • The market will become perfectly competitive, because the seller's knowledge makes every product identical in the eyes of buyers.
    • Sellers will always reveal all faults voluntarily, since honesty is the most profitable policy in every market with asymmetric information.
    • Buyers may become cautious, which can reduce demand and the trade of good-quality products.

19. Which of the following is an example of asymmetric information in the labour market?

    • The government sets a single wage for all jobs in the sector, so that neither side has any information that the other lacks about pay.
    • An employer knows far more about the firm's true working conditions than an applicant can learn before accepting a job offer.
    • Workers can see the full pay and conditions of every firm before they apply, so there is no information gap in the labour market at all.
    • Both the employer and the applicant have identical knowledge of the applicant's productivity before the job offer is made by the firm.

20. Which of the following best explains why a product warranty can help reduce the effects of imperfect information for buyers of household appliances?

    • A warranty removes all risk for buyers, so the seller never has to repair or replace any faulty appliance after sale.
    • A warranty signals the seller's confidence in product quality, giving buyers information they cannot easily observe.
    • A warranty is required by law for every purchase, so consumers no longer need to search for any information about goods.
    • A warranty reduces the price of the appliance, which means that buyers do not need to check quality before making their decision to buy.

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