Economic Recitation Notes 10.30.07

Economic Recitation Notes 10.30.07 - Asymmetric I...

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Unformatted text preview: Asymmetric I nformation 1) Either the buyer or the seller has more information than the other. 2) 2 Types of problems: a. Adverse selection: one party knows more about the products attributes than the other party does i. Example 1: used car market; problem is that seller of the car knows its quality (lemon or a peach) but buyers are unsure of the quality 1. Make a lower offer 2. Result: lemons are the only cars available ii. Example 2: health insurance; problem is that the firm cannot observe how healthy an individual is 1. Result: price of insurance will reflect the price of a sicker or less healthy than average person, healthy people feel that they would rather take a risk and not get health insurance iii. Example 3: labor market; firm is unable to observe the quality of a worker 1. Result: only low quality workers are hired; a high wage will attract high and low quality workers but too many low quality workers in the pool will cause the firm to lose money; pay the wage optimal for low quality workers...
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This note was uploaded on 01/26/2010 for the course ECON 150 taught by Professor Parly during the Spring '10 term at Linn Tech.

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Economic Recitation Notes 10.30.07 - Asymmetric I...

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