191T11 - ECON191 (Spring 2009) 4-5.5.2009 (Tutorial 11)...

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1 ECON191 (Spring 2009) 4-5.5.2009 (Tutorial 11) Chapter 12 Economics of Information (Chapter 17 of Textbook) Signaling s The process of sellers using signals to convey information to buyers about the product’s quality. b The better informed party plays an active role to send signals to the other party b In order to make the information transmitted credible, the agent concerned may have to make the signaling costly (costly signaling) s Examples: Chrysler’s 5-year warranty, HKD put option, Insurance…etc. Screening s The less informed party tries to extract as much as information as they can s Example: Health insurance b Two different types of insurance policies: (1) Low premium + high deductible (2) High premium + low deductible b Relatively healthy people will choose (1), and less healthy people will chose (2) Moral hazard s Moral hazard problem arises when the marginal benefit for engaging in certain activity is bigger than the marginal cost b People change their behaviors when constraints change s Example: Insurance, global financial crisis, politicians’ behavior…etc. b Moral hazard occurs when the insured party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event b Individual may change behavior because of insurance. If my home is insured, I might be less likely to lock my doors or install a security system
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2 Chapter 13General Equilibrium (Chapter 16 of Textbook) s Partial equilibrium : it is reached when DD = SS in a particular market. Markets are isolated, it assumes that changes in price can occur without causing significant changes in price in other markets. s General equilibrium : Simultaneous determination of the prices and quantities in all markets. It examine the repercussions of a change occurs in one market on the prices and outputs in other markets. Some Basics: Edgeworth box and the initial endowment
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This note was uploaded on 10/11/2009 for the course ECON 191 taught by Professor Chen during the Spring '08 term at HKUST.

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191T11 - ECON191 (Spring 2009) 4-5.5.2009 (Tutorial 11)...

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