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Slides For Chaps 14 16 20

Slides For Chaps 14 16 20






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    Slides For Chaps 14 16 20 Slides For Chaps 14 16 20 Presentation Transcript

    • MICROECONOMICS: Theory & Applications Chapter 14 Game Theory and the Economics of Information
      • By Edgar K. Browning & Mark A. Zupan
      • John Wiley & Sons, Inc.
      • 9 th Edition, copyright 2006
      • PowerPoint prepared by Della L. Sue, Marist College
    • Game Theory
      • Game theory – a method of analyzing situation in which the outcomes of your choices depend on others’ choices, and vice versa
      • Elements common to all game theory:
        • Players – decision makers whose behavior we are trying to predict and/or explain
        • Strategies – the possible choices of the players
        • Payoffs – the outcomes or consequences of the strategies chosen
    • Repeated Games
      • Repeated Game Model – a game theory model in which the “game” is played more than once
      • Tit-for-tat – a strategy in which each player mimics the action taken by the other player in the preceding period
      • Table 14.6
    • Asymmetric Information
      • Imperfect information – the case when market participants lack some information relevant to their decisions
      • Asymmetric information – a case in which participants on one side of the market know more about a good’s quality than do participants on the other side
      • The “Lemons” Model
    • Market Responses to Asymmetric Information
      • Information is a scarce good.
      • The benefits from acquiring information about product quality will not always be worth its costs.
      • It might be efficient for consumers to be less than fully informed.
    • Adverse Selection
      • Adverse selection – a situation in which asymmetric information causes higher-risk customers to be more likely to purchase or sellers to be more likely to supply low-quality goods
      • Application – insurance markets in which the assumption of full information (both firms and customers know the risks) is modified
    • Market Responses to Adverse Selection
      • Key: there are potential gains to market participants from adjusting their behavior to account for the adverse selection problem
      • Examples:
        • Upper limit on insurance coverage
        • Requirement of physical exams and/or a waiting period
        • Group plans covering all employees
    • Moral Hazard
      • Moral hazard – a situation that occurs when, as a result of having insurance, an individual becomes more likely to engage in risky behavior
      • The problem arises when insurance companies lack knowledge of the actions people take that may affect the occurrence of unfavorable events.
    • Market Responses to Moral Hazard
      • Example: medical insurance market
        • Limitation on the services covered by insurance
        • Requirement of the insured person to pay part of the costs:
          • Coinsurance rate – the share of the cost borne by the patient
        • Deductibles – the amount that the patient must pay before insurance coverage is effective
    • Limited Price Information
      • Price dispersion – a range of prices for the same product, usually as a result of customers’ lacking price information
      • Search costs – the costs that customers incur in acquiring information
      • Price dispersion will fall when the benefit from search is higher than the cost.
    • Advertising, the Full Price of a Product, and Market Efficiency
      • Full price – the sum of the money price and the search costs that consumers incur
      • Advertising is a substitute for the consumer’s own search efforts, and thereby reduce search costs.
      • Advertising is a low-cost way of conveying information, and thereby increases market efficiency.
    • Advertising and Its Effects on Products’ Prices and Qualities
      • Firms advertise to provide information to customers.
      • Effects of advertising:
        • Reduce price dispersion and lower the average price
        • Solve the lemons problems by giving high-quality sellers an advantage over low-quality sellers
        • Introduce consumers to new products
    • MICROECONOMICS: Theory & Applications Chapter 16 Employment and Pricing of Inputs
      • By Edgar K. Browning & Mark A. Zupan
      • John Wiley & Sons, Inc.
      • 9 th Edition, copyright 2006
      • PowerPoint prepared by Della L. Sue, Marist College
    • The Firm’s Demand Curve: One Variable Input
      • Marginal value product (MVP) – the extra revenue a competitive firm receives by selling the additional output generated when employment of an input is increased by one unit
      • MVP curve = firm’s demand curve for a given input when all other inputs are fixed
      • Wage rate = MVP L =MP L *P
      • Figure 16.1
      • (Continued)
    • The Firm’s Demand Curve: One Variable Input (continued)
      • Assumption: The firm is a profit maximizer in a competitive market
      • Conclusions:
        • The marginal value product curve identifies the most profitable employment level for the input at each alternative cost.
        • The marginal value product curve slopes downward.
    • The Firm’s Demand Curve: All Inputs Variable
      • In general, a change in an input’s price leads a firm to also alter its employment of other inputs.
      • Long-run demand curve
      • Assume that other inputs’ prices are unchanged.
      • Final product’s price is constant.
      • Figure 16.2
    • The Supply of Inputs
      • The general shape of an input supply curve depends critically on the market for which the supply curve is drawn.
      • Figure 16.5
    • MICROECONOMICS: Theory & Applications Chapter 20 Public Goods and Externalities
      • By Edgar K. Browning & Mark A. Zupan
      • John Wiley & Sons, Inc.
      • 9 th Edition, copyright 2006
      • PowerPoint prepared by Della L. Sue, Marist College
    • Public Goods and Externalities
      • Public goods – those goods that benefit all consumers
      • Externalities – the harmful or beneficial side effects of market activities that are not fully borne or realized by market participants
    • What Are Public Goods?
      • Characteristics:
        • Nonrival in consumption – a condition in which a good with a given level of production, if consumed by one person, can also be consumed by others
        • Nonexclusion – a condition in which confining a good’s benefits, once produced, to selected persons is impossible or prohibitively costly
      • Free-Rider Problem
        • A consumer who has an incentive to underestimate the value of a good in order to secure its benefits at a lower, or zero, cost
        • As the group size increases, it is more likely that everyone will behave like a free rider, and the public good will not be provided.
    • Externalities
      • External benefits – positive side effects of ordinary economic activities
      • External costs – negative side effects of ordinary economic activities
      • Distinction between externalities and public goods:
        • External effects are unintended side effects of activities undertaken for other purposes.
        • Both are likely to lead to an inefficient allocation of resources.