2.10 Market failure: asymmetric information questions for IB Economics

Explain the assumptions underlying the model of rational consumer choice.

Using real-world examples, discuss the view that imperfect information is the main reason why consumers fail to maximize their utility.

Define the term anchoring indicated in bold in the text (Text A, paragraph 1).

Define the term framing indicated in bold in the text (Text A, paragraph 2).

Using information from Text A, paragraph 3, calculate the percentage discount claimed by Voltix during the promotion.

Using information from Text A, paragraph 3, calculate the price elasticity of demand (PED) for the laptop based on the price at which it had usually been sold.

Using information from Text A, paragraphs 2 and 3, calculate how much more a consumer pays by using the monthly payment option rather than paying the promotional price in full.

Using a demand diagram, explain how displaying a “was” price may increase Voltix's sales of the laptop even if the price actually charged is unchanged (Text A, paragraph 1).

Explain two reasons why consumers may be more likely to buy a laptop advertised as “only HVL 42 a month” than one advertised at its full price (Text A, paragraph 2).

Using Table 1, calculate the average amount owed on BNPL accounts as a percentage of average monthly income.

A consumer buys a jacket priced at DVN 240 using BNPL and misses two of the four payments, paying the late fee each time.

Using Table 1, calculate the percentage by which the total amount paid exceeds the price of the jacket.

BNPL providers display prices on shopping websites as “4 interest-free payments of DVN 60” beside the full price of DVN 240.

Outline how framing may encourage consumers to use BNPL.

Using the information provided, explain two limitations of the assumptions of rational consumer choice that may explain the rise in the percentage of BNPL users who missed a payment.

Explain how anchoring and framing may cause consumers to make choices that do not maximize their utility.

Using real-world examples, discuss the view that governments should protect consumers from firms that exploit consumer biases.

Define the term imperfect information indicated in bold in the text (Text A, paragraph 1).

Define the term availability bias indicated in bold in the text (Text A, paragraph 2).

Using information from Text A, paragraph 2, calculate the percentage change in the number of insured high-risk homes between 2021 and 2022.

Using information from Text A, calculate the percentage of high-risk homes that were insured in 2025.

Explain two reasons why the number of insured high-risk homes fell between 2022 and 2025 (Text A, paragraphs 1 and 2).

Using Table 1, calculate the average value of claims paid per policy in 2021 and in 2025.

Using Table 1, calculate the percentage change in the average annual premium between 2021 and 2025.

Using your answer to part (a)(i) and Table 1, outline why the data suggest that adverse selection is occurring in Valdoria's health insurance market.

The government is considering a subsidy of VDL 150 per policy, paid to insurers. It estimates that the premium paid by households would fall from VDL 780 to VDL 690 and that the number of policies sold would rise from 8.4 million to 8.8 million.

Calculate the total cost of the subsidy to the government.

Using the information in part (a)(iv), calculate the change in the total revenue received by insurers from premiums and the subsidy.

Using the information in part (a)(iv), calculate the price elasticity of demand (PED) for private health insurance as the premium paid by households falls from VDL 780 to VDL 690.

Using a demand and supply diagram and the information provided, explain the effect of the proposed subsidy on the market for private health insurance in Valdoria.

Explain two methods that insurers in Valdoria could use to screen applicants for health insurance.

The following options are being discussed by the government of Valdoria:

• Premium subsidy: VDL 150 per policy, costing about VDL 1.3 billion a year; the government's budget deficit is 3.9 % of GDP.

• Compulsory insurance for formal-sector employees: premiums deducted from wages; about 38 % of Valdoria's workers are in the informal sector and would not be covered.

• Late-enrolment penalty: premiums 2 % higher for each year after the age of 30 that a person first buys cover; experience elsewhere suggests it increases enrolment by younger people only gradually.

• Expanding public hospitals: a VDL 4 billion programme to halve waiting lists within five years.

• Standard policy summaries: insurers required to publish a one-page summary of each policy's cover and exclusions in the same format.

Using the information provided and your knowledge of economics, recommend a policy that the government of Valdoria could introduce to increase the number of people with health insurance.