Intermediate Microeconomics: information economics
Summary
Intermediate microeconomics: information economics- Summary - Tilburg university - Economics
128 views 4 purchases
Course
Intermediate Microeconomics: information economics
Institution
Tilburg University (UVT)
Instagram: ECOsummaries DM me for 20% discount!
Summary for the course ''Intermediate microeconomics: information economics''. This summary was written in order to study for the final. Everything you need to know is available in this summary. Advice: this summary alone will not be enough, the t...
Intermediate Microeconomics: information economics
All documents for this subject (4)
Seller
Follow
ecosummaries
Reviews received
Content preview
INTERMEDIATE
MICROECONOMICS:
INFORMATION
ECONOMICS
SUMMARY
@ECOsummaries
→ 20% discount
1
,Intermediate Microeconomics Summary
Lecture 1 – Introduction and Uncertainty
Decisions under uncertainty: uncertainty when some information is missing. But parties have similar
information
Information economics: parties involved have different or asymmetric information.
- Before contract: before buying health insurance, farmer knows more about health status
- After contract: After buying health insurance, farmer can take action that can increase probability
of getting sick. If she gets sick, her doctor and herself know more than the insurance company.
Choice under Uncertainty: expectations and probabilities
Bad event probability = π → low payoff x
Good event probability = 1- π → high payoff y
Expected value: πx + (1- π)y
Risky asset
Example: lottery ticket for tom
- Tom has $100
- lottery ticket costs $6
- if he buys: win = $200 lose = $95
- if he doesn’t buy win = $100 lose = $100
Choice:
- Safe asset that preserves his wealth (ϴ) with certainty
2. Risky asset that reduces wealth to P(x) = π and P(y) = 1- π
Preferences under uncertainty
Utility function:
- perfect substitutes: U(x) = x and U(y) = y
- Cobb Douglas: U(x) = ln(x) and U(y) = y
Prefer the risky asset if :
Risk preferences
- if U(wealth) = U(risk) → risk-neutral → linear
- if U(wealth) > U(risk) → risk-averse → concave (diminishing marginal utility) → (women, elderly)
- if U(wealth) < U(risk) → risk-seeker → convex (increasing marginal utility) → (men)
2
,Certainty Equivalent (CE):
guaranteed amount of income that would yield the same expected utility as the given risky asset.
(Amount of wealth equivalent to taking the gamble)
If CE < EV(wealth) → risk averse, since she is willing to leave out money in order to min. risk
Risk premium: EV – CE
Insurance: tool for reducing risk for risk-averse people
- trades wealth in different states
- transfer wealth from the good state to the bad state
- many people pay a premium to cover the losses of a few
- pooling risk: sharing all risks among a group of insurance companies
https://www.collinsdictionary.com/dictionary/english/risk-pooling
State-contingent: A contract that is implemented only when a particular state of nature occurs
e.g. the insurance company will only pay if he faces a loss
State-contingent consumption plan: how much wealth to have in each state of nature
- Needed Tom’s preferences
- Needed Tom’s state-contingent budget constraint
3
, indifference curves of concave U function
x=Tom’s wealth if the bad state occurs
y=Tom’s wealth if the good state occurs
Calculating the MRS:
https://www.youtube.com/watch?v=tCreeXzCNRc → nice explaining video
Lecture 2 – Uncertainty and insurance game theory
Budget constraint (market opportunity line)
Without uncertainty: consumers choose consumption plan (x,y) from budget line
W = p1*x + p2*y
With uncertainty: market also determines the combinations of x and y from which individuals
is able to choose → market opportunity line
Market opportunity line: state-contingent budget constraint
See example: Insurance of Tom
• Probability 1% of getting $25.000 + C – pC (C=coverage, p=price)
• Probability 99% of getting $35.000 – pC
Budget line with slope
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ecosummaries. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.06. You're not tied to anything after your purchase.
