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MICROECONOMICS: Theory & Applications Chapter 14 Game Theory and the Economics of Information <ul><li>By Edgar K. Browning...
Game Theory <ul><li>Game theory – a method of analyzing situation in which the outcomes of your choices depend on others’ ...
Repeated Games <ul><li>Repeated Game Model – a game theory model in which the “game” is played more than once </li></ul><u...
Asymmetric Information <ul><li>Imperfect information – the case when market participants lack some information relevant to...
Market Responses to Asymmetric Information <ul><li>Information is a scarce good. </li></ul><ul><li>The benefits from acqui...
Adverse Selection <ul><li>Adverse selection – a situation in which asymmetric information causes higher-risk customers to ...
Market Responses to Adverse Selection <ul><li>Key: there are potential gains to market participants from adjusting their b...
Moral Hazard <ul><li>Moral hazard – a situation that occurs when, as a result of having insurance, an individual becomes m...
Market Responses to Moral Hazard <ul><li>Example: medical insurance market </li></ul><ul><ul><li>Limitation on the service...
Limited Price Information <ul><li>Price dispersion – a range of prices for the same product, usually as a result of custom...
Advertising, the Full Price of a Product, and Market Efficiency <ul><li>Full price – the sum of the money price and the se...
Advertising and Its Effects on Products’ Prices and Qualities <ul><li>Firms advertise to provide information to customers....
MICROECONOMICS: Theory & Applications Chapter 16  Employment and Pricing of Inputs  <ul><li>By Edgar K. Browning & Mark A....
The Firm’s Demand Curve: One Variable Input <ul><li>Marginal value product (MVP) – the extra revenue a competitive firm re...
The Firm’s Demand Curve: One Variable Input  (continued) <ul><li>Assumption: The firm is a profit maximizer in a competiti...
The Firm’s Demand Curve: All Inputs Variable <ul><li>In general, a change in an input’s price leads a firm to also alter i...
The Supply of Inputs <ul><li>The general shape of an input supply curve depends critically on the market for which the sup...
MICROECONOMICS: Theory & Applications Chapter 20 Public Goods and Externalities <ul><li>By Edgar K. Browning & Mark A. Zup...
Public Goods and Externalities <ul><li>Public goods – those goods that benefit all consumers </li></ul><ul><li>Externaliti...
What Are Public Goods? <ul><li>Characteristics: </li></ul><ul><ul><li>Nonrival in consumption – a condition in which a goo...
Externalities <ul><li>External benefits – positive side effects of ordinary economic activities </li></ul><ul><li>External...
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Slides For Chaps 14 16 20

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Slides For Chaps 14 16 20

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

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