Notes-Wk7 - Section Notes Price Controls & Other...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Section Notes Price Controls & Other Government Interventions February 21 & 22, 2011 1 Asymmetric Information • Asymmetric Information: When buyers or sellers have information that other individuals in the market do not. – Ex: Health Insurance Market: Individuals have more information about their health then the insurance companies • Adverse Selection: A special case of asymmetric information where sellers have more information about the product than buyers causing the buyers to act differently because they are uncertain of the true state of the product they are purchasing. – Ex: Used car markets • Expected Value: If an individual is missing information (let’s say about whether a car is lemon or plum), then they have an expectation of the value of the commodity which is based on their believed probability of it being in one state (say “lemon”) or the other. A simple formula for the expected value is: EV = P r(Lemon) · V (Lemon Car) + (1 − P r(Lemon)) · V (P each Car) • Practice Exam Question: #2 • Question 14, Chapter 9 Lemon Plum Buyer $1200 $6000 Seller $1000 $4800 1 2 Taxes Burden & Subsidy Benefit Whether the consumer or the supplier bears the burden (benefit) of a tax (subsidy) depends on the relative elasticity of supply and demand at the new equilibrium. • General Rule: if demand (supply) is relatively more inelastic then the consumer (producer) will bear the larger burden from a tax or the larger benefit from a subsidy • Consumer￿ s T ax Burden = • P roducer￿ s T ax Burden = • Questions 2 from Chapter 9 Pcons −Porig. equilibrium T ax Porig. equilibrium −Pprod. T ax • Practice Exam Question: #3 2 3 Price Ceilings & Floors • Price Floor: price is set above the market equilibrium price ⇒ creates a surplus – Ex: ____________________ • Price Ceiling: price is set below the market equilibrium price ⇒ creates a shortage – Ex: ____________________ • What is the difference between a binding and non-binding price control? • Question 10, Chapter 9 Price 70 135 200 265 330 395 460 QD 4.3 4.1 3.9 3.7 3.5 3.3 3.1 QS 1.5 2.0 2.5 3.0 3.5 4.0 4.5 • Practice Exam Question: #1, #4, #5 3 • Question 13, Chapter 9 – Gains with D1 – Losses with D1 4 – Gains with D2 – Losses with D2 5 ...
View Full Document

This note was uploaded on 02/21/2011 for the course ECONOMICS 101 taught by Professor Gerson during the Winter '11 term at University of Michigan.

Ask a homework question - tutors are online