Lec_15_econ_of_uncertainty - Chapter 12: Economics of...

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1 • Problem Set 3 (reviewed Oct 28 - Nov 2): Chapter 10, pages 290-291: problems 1 and 2 Chapter 11, pages 320-322: problems 3, 4, 8, and 9 • No class Wednesday, Nov 2 (but discussion sections will meet) • Answers to Practice Exam 2A will be reviewed in discussion section Nov 4-9 • A second practice exam is also available on course web page http://econ.ucsd.edu/~jhamilto/Econ2.html Chapter 12: Economics of Information A. Probabilities B. Expected value C. Risk aversion D. Value of information Free rider problem: Once information is known, it may be possible to use or disseminate without paying for it Would lead us to expect that too little information is supplied by the private market 12-4 LO 12 - 2 $/unit Units of information MB The Optimal Amount of Information ± More information is better than less ± Gathering information has a cost ± Marginal benefit starts high, then falls rapidly ± Low-Hanging Fruit Principle ± Marginal cost starts low, then increases ± Optimal amount of information is I* where MC = MB MC I * Optimal 12-5 LO 12 - 2 Rational Search Guidelines ± Additional search time is more likely to be worthwhile for expensive items than cheap ones ± Apartment search in Paris, Texas involves less time than Paris, France ± Texas has lower rents and narrower price range ± Prices paid will be higher when the cost of a search is higher ± Two buyers, only one with a car ± Buyer with the car will look at more pianos before
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Lec_15_econ_of_uncertainty - Chapter 12: Economics of...

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