IMCH6new07 - Chapter 6 The Economics of Information and...

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Chapter 6 The Economics of Information and Choice under Uncertainty Chapter Summary Information is not free, so economic principles apply to the generation and allocation of it. This chapter examines the characteristics of the information market, including the issues of ability to fake, full disclosure, choosing a relationship, and conspicuous consumption. Because the future is uncertain, there is no easy way to acquire reliable information about current market baskets that involve future benefits. Probabilities and expected value concepts are related to the preferences people have for risk. Utility functions for wealth are developed for risk lovers, risk neutral consumers, and risk averse types. This makes it possible to analyze the amount of money people are willing to pay to absorb or avoid risk. Insurance problems like adverse selection, moral hazard, and statistical discrimination are also considered. The appendix of this chapter takes a look at the process of searching for the highest wages and the lowest prices, and the problem of the winners curse at an auction. Chapter Outline Chapter Preview The Economics of Information Choice under Uncertainty Insuring Against Bad Outcomes Appendix: Search Theory and the Winners Curse Summary Teaching Suggestions 1. Contrast the simple world of Chapters 1 through 4 with the real world, where time introduces uncertainty and risk, and where information is not perfect. Options are never certain, and market baskets are full of items with partial information tags on them as well as price tags. Warranties, insurance policies, seat belts, and return and refund policies all are designed to help us cope with the uncertainties of life. Out of all this develops markets to spread risk and see that those most able to bear it do the absorbing. In my opinion, the best way to communicate this is to work up examples like the bicycle case in the study guide. Adapt something to the experience of the students in your class. What kinds of insurance do they have? Are they risk averse or risk lovers? Some may argue that uncertainty does not add pleasure to anything, and that it is morally wrong to gamble. Even those students might be convinced that they would not play cards or compete in any game if they knew the outcome of the game before they started. One way or another, we will need to manage risk and find markets to absorb it efficiently. 2. Get the students to debate the merits of data bases that help people find relationships. Would it not be far more efficient to buy profiles of people that match your criteria for a relationship than to search for the information by yourself? Why are these methods on the rise and would it not be an enterprising venture for some students to start such a business on campus? The incentive to provide misleading information on a profile could cause problems, but then why would someone lie if they would be found out upon meeting their match in person? These and other issues tend to create a lively discussion among undergraduates. 3.
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This note was uploaded on 09/16/2011 for the course ECON/ACCOU 101 taught by Professor Jang,hajoon during the Spring '11 term at Korea University.

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IMCH6new07 - Chapter 6 The Economics of Information and...

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