ECON 1101 WEEK 12 - Economics of Information Frank,...

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Economics of Information Frank, Jennings, and Bernanke: Ch 14 1
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2 Introduction How the middleman adds value The optimal amount of information Asymmetric information Disappearing political discourse Information and healthcare delivery
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3 The invisible hand theory assumes that buyers are fully informed Given that consumers are not fully informed, they must employ strategies for gathering information
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4 Peoples’ perceptions differ regarding the role of manufacturer and the role played by wholesalers, retailers and sales agents The economic role of sales agents is essentially the same as that of production workers Example: How does better information affect economic surplus?
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5 Although more information is better than having less, information is costly to acquire As additional information is acquired, MB of information will decline and its MC will rise Apply cost-benefit test to determine the optimal amount of information
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6
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7 In practice, the exact value of additional information is difficult to know The cost-benefit principle provides a strong conceptual framework for this problem 1. Spending additional search time is more likely to be worthwhile for expensive items than for cheap ones (e.g. 14.3) 2. When search becomes more costly, expect to do less of it (e.g. 14.4)
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8 As buyers must decide how much information to gather, sellers must decide how much information to provide to prospective buyers Does the invisible hand assure that the optimal amount of advice will be made available to consumers? Why is finding a knowledgeable salesperson often difficult?
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9 Expected value of a gamble: The average amount you would win (or lose) if you played that gamble an infinite number of times. It is calculated as the sum of the possible outcomes of the gamble multiplied by their respective probabilities Example: Should you search further for an apartment?
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Suppose a business opportunity has a 40% chance of earning you $1000, a 30% chance of breaking even, and a 30% chance of losing $300. What is the expected value of earnings from this
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This note was uploaded on 07/28/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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ECON 1101 WEEK 12 - Economics of Information Frank,...

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