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Econ Week 8

by: Cheyenne Thorpe

Econ Week 8 Econ 201

Cheyenne Thorpe
GPA 4.0

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Econ Class 14 + Discussion
Introduction to Microeconomics
Class Notes
Econ, Econ 201, Microeconomics, Waddell
25 ?




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This 2 page Class Notes was uploaded by Cheyenne Thorpe on Tuesday March 8, 2016. The Class Notes belongs to Econ 201 at University of Oregon taught by Waddell in Winter 2016. Since its upload, it has received 21 views. For similar materials see Introduction to Microeconomics in Economcs at University of Oregon.


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Date Created: 03/08/16
Econ 201- Microeconomics- Glen Waddell Class 14 • All standard models assume that consumers are fully informed about product prices, attributes, qualities, locations, etc, yet we would acknowledge that consumers often have incomplete information • Asymmetric information: One party to a transaction knows a material fact that the other party doesn’t o Can lead to non existence of equilibrium, or resources being used less efficiently that they would be if there were perfect inf ormation • In the used car market, is it not more likely that the current owner has Observable Low quality learned over time if the car has needed frequent repairs and if the car has been taken care of? At best, buyers may only know the probability of getting a high quality car o We try to sell ourselves high o If buyers can’t distinguish between low and high quality used cars, the cars sell for the same price High quality o Unable to distinguish - the expected value of a randomly chosen used car would be $7500 § You’re either going to get a car worth 6000 or 9000, never 7500, but suppliers are never going to sell their car for 9000, above their marginal value § The low quality cars eventually drive out the high quality cars § Used cars markets are now indicators of low quality cars o Why is it meaningful to certify cars - gives the cars meaning, Unobservable quality letting them charge more. • Can’t make them all certified because then it becomes meaningless • Certify the ones that are less costly to repair • Insurance markets: Health insurance becomes more expensive as one ages as the likelihood of needing the insurance increases. It is possible that healthy elderly people may find it too expensive to purchase health insurance o Prices are inflated by the unhealthy people o Adverse selection: As price of the policy rises, the insurance company ends up selling insurance only to those with the most need for insurance o What do insurance companies do that could be thought of as a response to adverse selection in insurance markets? § Is there equality in health insurance markets? No, but that’s not necessarily a bad thing…? • Home repair: If homeowners cannot observe the quality of workmanship, those who cut corners (yielding lower costs) may drive out those who don’t • Possible solutions: o Guarantees or warranties o Liability laws- you’re “on the hook,” willing to pay more money now o Reputation- people talk (yelp), if you have high ratings, your price goes up o Experts o Standards and certification Econ 201- Microeconomics- Glen Waddell Week 8 Discussion *David Freeman- Medieval Iceland Game Theory: Cruz Leave Stay Leave (0,0) (-1,10) Rubio Stay (12,-1) (-5,-5) Nash Equilibrium: A set of strategies in which no player wants to change given the other players actions • If Cruz stays, Rubio has a choice of -1, or -5, so he will choose -1 and leave • If Rubio leaves, Cruz has a choice of 0, or 10, so he will choose 10 and stay • If Rubio leaves, Cruz will take 10 and stay, and Rubio will take -1 (over the -5) and so the top right box is NE (game of Chicken) b 1 2 3 Underlines= Nash Equilibrium 1 Highlights= best response (10,-2) (10,3) (3,2) a 2 (0,0) (8,8) (3,5) 3 (30,-5) (1,6) (5,7)


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