ADEclass11_10-11_72 - Session #11 Outline: Case study...

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Session #11 Outline: Case study discussion: toxic assets Analysis of last week’s market simulation Asymmetric information in markets: adverse selection.
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For next session: Problem set 3. Review the concepts (again): Conditional probability Conditional expectation
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Market simulation We will analyze a market very similar to the one we ran in class Same cost function for sellers: Level 1 Level 2 Level 3 Same utility for buyers: Production cost, 1st unit €1.40 €4.60 €11.00 Production cost, 2nd unit €2.40 €5.60 €12.00 Level 1 Level 2 Level 3 Value €4.00 €8.80 €13.60
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Market simulation Difference: we will assume that the market is “perfectly competitive” and works as follows: An auctioneer announces a price. Buyers and sellers decide how much they buy r sell at that price. or sell at that price. Standard market in Microeconomics. We will find the competitive equilibrium price and quantities sold: Competitive equilibrium price = price that makes supply equal demand.
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Market simulation First we will assume perfect information b 3 markets : one for each quality level We will assume there are 6 sellers and 6 buyers in each market (in class, there were a total of 6 sellers and 6 buyers)
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Market simulation Market for good of quality 2 Production cost 1st unit: 4.6 Production cost 2nd unit: 5.6. Aggregate supply function? p 6 12 4.6 5.6 8.8 q
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Adverse selection Market for good of quality 2 Value for buyers: 8.8 Demand function? p 6 4.6 5.6 8.8 q
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Market simulation Market for good of quality 2 Equilibrium? 4.6 p 2 * 5.6; q 2 *=6 p 6 12 4.6 5.6 8.8 q
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Market simulation Market for good of quality 2 Total value? U = (8.8 - p 2 *)*6 + (p 2 * - 4.6)*6 = (8.8 – 4.6)*6 = 25.2 p 6 12 4.6 5.6 8.8 q
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Market simulation Market for good of quality 1 Production cost 1st unit: 1.4 Production cost 2nd unit: 2.4. Aggregate supply function? p 6 12 1.4 2.4 4 q
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Market for good of quality 1 Value for buyers: 4 Demand function? p
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ADEclass11_10-11_72 - Session #11 Outline: Case study...

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