14_01_lec33

# 14_01_lec33 - 1 Adverse Selection 1 14.01 Principles of...

This preview shows pages 1–2. Sign up to view the full content.

1 1 Adverse Selection 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen December 7, 2007 Lecture 33 Asymmetric Information Outline 1. Chap 17: Adverse Selection 2. Chap 17: Moral Hazard 1 Adverse Selection 1.1 Used Car Market Buyers do not know the quality of each car but know quality distribution. Assume there are three cars, and their prices are 0, 5, and 10, respectively. The consumer’s willingness to pay is 5, so the seller of 10 will leave the market. As a result, the consumer’s willingness to pay decreases to 2.5; thus the seller of 5 will leave the market. Finally, the willingness to pay decreases to 0; market fails, and only car stays is the worst one. This is called the Lemon Problem. 1.2 Insurance Market Insurance companies do not know how healthy each person is. For instance, the probabilities of getting sick of A and B are shown in Table 1. When one is sick, the insurance company gives him 10 dollars to cover medical expense. Sick

This preview has intentionally blurred sections. Sign up to view the full version.

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

## This note was uploaded on 11/18/2011 for the course ECON 14.01 taught by Professor Pindyck during the Fall '08 term at MIT.

### Page1 / 2

14_01_lec33 - 1 Adverse Selection 1 14.01 Principles of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online