Question

1.Which of the following is not required for the “invisible hand” described by Adam Smith to benefit society?

A.Both parties to a transaction must be rational and well informed.

B.Both parties to a transaction must care about each other, and want to make the other person happy.

C.Property rights must be well defined.

D.Property rights must be clear and enforced by law.

2.George Akerloff focused the market for used cars and discussed an issue later generally called the “lemons problem.” A “lemon” is a low quality used car, with the seller but not the potential buyer aware of this. Since sellers have more information about the quality of the car:

A.moral hazard causes an inefficiently small number of transactions to occur.

B.adverse selection causes an inefficiently large number of transactions to occur.

C.adverse selection causes an inefficiently small number of transactions to occur.

D.moral hazard causes an inefficiently large number of transactions to occur.

Answer 1

1.

B.Both parties to a transaction must care about each other, and want to make the other person happy.

Reason: This is not a condition for the invisible hand to work in the economy. This is because people are rational and only care about their happiness.

2.

B.adverse selection causes an inefficiently large number of transactions to occur.

Reason: Adverse selection occurs when one party in the transaction has more information than the other party, leading to the buyer making a poor choice, and there being inefficiently large number of transactions taking place.