A Level Economics AQA Practice Exam

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In which situation does asymmetric information occur?

  1. Both parties have equal information

  2. One party has more information than the other

  3. All participants are unaware of market prices

  4. There is full transparency in the market

The correct answer is: One party has more information than the other

Asymmetric information occurs when one party in a transaction has more or better information than the other party. This situation can lead to imbalances in decision-making, as the informed party may exploit their advantage, potentially resulting in market failures. For example, in the context of used car sales, the seller may know more about the car’s condition than the buyer, creating an information gap that can influence the price and trust in the sale. In contrast, having both parties with equal information would negate the concept of asymmetric information, since decisions would be made based on the same knowledge level. If all participants are unaware of market prices, it does not necessarily imply asymmetric information as it affects everyone equally. Similarly, full transparency in the market means that all information is accessible to all parties involved, completely eliminating the notion of asymmetry.

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