ECON 104 Lecture Notes - Lecture 9: Moral Hazard, Adverse Selection, Unemployment Benefits

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Econ 104
Lecture 9
Imperfect information
-don’t know what we need to know
-price
-consumers need to know their own value of this product
-producers need to know the price and cost
-you cannot make correct decisions without perfect information
-experience goods: products and services whose value can only be truly
determined by consuming or experiencing them ex wine, books, movies
-you make decisions with expectations, however its usually wrong based on
expectations
Value: $20
Expected value: $40
Cost:$30
“Inefficient” because no one know the value beforehand
-The only way to improve efficiency is better information
-heuristics: Do stuff by guessingmake decisions based on rule of thumb
Anchoring: Making estimates by starting from an initial value that is then adjusted
to get the final answer. The adjustment is usually insufficient.
Availability: Judging the probability of an event or the frequency of a class
based on the ease with which occurrences or instances can be brought to mind.
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