Principles of Economics- Mankiw (5th) 581

Principles of Economics- Mankiw (5th) 581 - CHAPTER 26 U N...

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CHAPTER 26 UNEMPLOYMENT AND ITS NATURAL RATE 599 equilibrium wage of $2 and hiring Ted. It can offer $10 per hour, inducing both Bill and Ted to apply for the job. By choosing randomly between these two applicants and turning the other away, the firm has a fifty-fifty chance of hiring the compe- tent one. By contrast, if the firm offers any lower wage, it is sure to hire the incom- petent worker. In many situations in life, in- formation is asymmetric: One person in a transaction knows more about what is going on than the other person. This possibility raises a variety of interesting problems for eco- nomic theory. Some of these problems were highlighted in our description of the theory of efficiency wages. These prob- lems, however, go beyond the study of unemployment. The worker-quality variant of efficiency-wage theory illus- trates a general principle called adverse selection. Adverse selection arises when one person knows more about the at- tributes of a good than another and, as a result, the unin- formed person runs the risk of being sold a good of low
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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