ECE1010-10 - UNIT IV: INFORMATION & WELFARE 12/10...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
• Decision under Uncertainty • Bargaining Games • Externalities & Public Goods • Review 12/10
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Decision under Uncertainty In UNIT I we assumed that consumers have perfect information about the possible options they face (their income and prices); and about the utility consequences of their choices (their preferences). Now, we will ask whether our model can be extended to deal with more realistic cases in which decisions are made without perfect information. We will also ask how imperfect (asymmetric) information affects market outcomes.
Background image of page 2
Decision under Uncertainty The Economics of Information : How can I maximize utility given incomplete info? How much info should I gather? We can distinguish between 2 sources of uncertainty: • The behavior of other actors (strategic uncertainty) • states of nature (natural uncertainty) Will it rain? Or not? Is there oil in the drilling hole? Will the roulette wheel come up red? (1 -- 35) Is the car a lemon?
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Decision under Uncertainty The Economics of Information : How can I maximize utility given incomplete info? How much info should I gather? We can distinguish between 2 sources of uncertainty: states of nature (natural uncertainty) Will it rain? Or not? Is there oil in the drilling hole? Will the roulette wheel come up red? (1 -- 35) Is the car a lemon?
Background image of page 4
Decision under Uncertainty Expected Value v. Expected Utility Risk Preferences Reducing Risk: Insurance Contingent Consumption Adverse Selection (and Moral Hazard)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Which would you prefer? A) 50-50 chance of winning $30,000 or losing $5,000 B) Sure thing of $10,000 How much would you be willing to pay for the chance to win $2n if the head comes up on nth flip? 2(1/2) + 4(1/4) + … = 1 + 1 + … =
Background image of page 6
How much would you be willing to pay for the chance to win $2 n if a heads comes up on nth flip? Expected Value (EV) : the sum of the value (V) of each possible state, weighted by the probability ( π ) of that state occurring. On 1 flip: π (H) = ½ (2) + 4(1/4) + … = 1 + 1 + … =
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
How much would you be willing to pay for the chance to win $2 n if a heads comes up on nth flip? Expected Value (EV) : the sum of the value (V) of each possible state, weighted by the probability ( π ) of that state occurring. On 1 flip: EV = π (V)H = (½)2 + 4(1/4) + … = 1 + 1 + … =
Background image of page 8
How much would you be willing to pay for the chance to win $2 n if a heads comes up on nth flip? Expected Value (EV)
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 35

ECE1010-10 - UNIT IV: INFORMATION & WELFARE 12/10...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online