[ECON 101] - Midterm Exam Guide - Comprehensive Notes for the exam (37 pages long!)
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Th(cid:396)oughout the se(cid:373)este(cid:396), (cid:449)hile (cid:449)e ha(cid:448)e(cid:374)"t (cid:271)ee(cid:374) (cid:448)e(cid:396)(cid:455) e(cid:454)pli(cid:272)it a(cid:271)out it, (cid:449)e ha(cid:448)e (cid:271)ee(cid:374) assu(cid:373)i(cid:374)g that both buyers and sellers in a market have the same information about the quality of the products they have been buying and selling. However some situations arise where the buyers and sellers have asymmetric information one party knows more about the quality, say, of a good that is being sold. The seller of the used car knows more about the car than the potential buyers. They know if the car is a good (cid:272)a(cid:396) (cid:894)a (cid:862)plu(cid:373)(cid:863)(cid:895) o(cid:396) a (cid:271)ad (cid:272)a(cid:396) (cid:894)a (cid:862)le(cid:373)o(cid:374)(cid:863)(cid:895). Suppose buyers are willing to pay for a plum and for a lemon. Suppose buyers assume that if they buy a car, there is a 50/50 chance they will get a plum, a 50/50 chance they will get a lemon.
