what is the imperfect information problem course hero

What are the problems with imperfect information?

Similar problems with imperfect information arise in labor and financial capital markets. Consider Greta, who is applying for a job. Her potential employer, like the used car buyer, is concerned about ending up with a “lemon”—in this case a poor quality employee. The employer will collect information about Greta’s academic and work history.

What is the difference between perfect information and imperfect information?

Here you have a quick summary of the differences between perfect information and imperfect information. Perfect information is when every market participant has complete information. Imperfect information is when either the buyer or the seller has incomplete information. Perfect information exists in a perfectly competitive market.

What is an example of imperfect information in a sale?

A buyer confronted with imperfect information will often believe that the price being charged reveals something about the quality of the product. For example, a buyer may assume that a gemstone or a used car that costs more must be of higher quality, even though the buyer is not an expert on gemstones.

How do employers use imperfect information to evaluate potential employees?

In labor markets, employers facing imperfect information about potential employees may turn to resumes, recommendations, occupational licenses for certain jobs, and employment for trial periods.

What happens when imperfect information is used?

The presence of imperfect information can easily cause a decline in prices or quantities of products sold. However, buyers and sellers also have incentives to create mechanisms that will allow them to make mutually beneficial transactions even in the face of imperfect information.

How does imperfect information affect equilibrium?

The presence of imperfect information can discourage both buyers and sellers from participating in the market. Buyers may become reluctant to participate because they cannot determine the quality of a product.

Why are sellers of high quality goods reluctant to participate in a trade?

Sellers of high-quality or medium-quality goods may be reluctant to participate, because it is difficult to demonstrate the quality of their goods to buyers —and since buyers cannot determine which goods have higher quality, they are likely to be unwilling to pay a higher price for such goods.

What is asymmetric information?

Asymmetric information is the condition where one party, either the buyer or the seller, has more information about the quality or price of the product than the other party. In either case (imperfect or asymmetric information) buyers or sellers need remedies to make more informed decisions.

What does it mean when a seller has limited information?

Imperfect information refers to the situation where buyers and/or sellers do not have all of the necessary information to make an informed decision about the price or quality of a product.