22 FRONTIERS OF MICROECONOMICS
WHAT’S NEW IN THE SEVENTH EDITION:
A new Case Study on Left-Digit Bias has been added and a new In the News feature on \Economics\
LEARNING OBJECTIVES:
By the end of this chapter, students should understand: how to examine problems caused by asymmetric information. the market solutions to asymmetric information. why democratic voting systems may not represent the preferences of society. why people may not always behave as rational maximizers.
CONTEXT AND PURPOSE:
Chapter 22 is the last chapter in the microeconomics portion of the text. It is the second of two unrelated chapters that introduce students to advanced topics in microeconomics. These two chapters are intended to whet their appetites for further study in economics.
The purpose of Chapter 22 is to give students a taste of three topics on the frontier of microeconomic research. The first topic addressed is asymmetric information, a situation when one person in an economic relationship has more relevant knowledge than the other person does. The second topic is political economy, the application of economic tools to the understanding of the functioning of government. The third topic addressed is behavioral economics, the introduction of psychology into the study of economic issues.
KEY POINTS:
In many economic transactions, information is asymmetric. When there are hidden actions, principals may be concerned that agents suffer from the problem of moral hazard. When there are hidden characteristics, buyers may be concerned about the problem of adverse selection among the sellers. Private markets sometimes deal with asymmetric information with signaling and screening.
Although government policy can sometimes improve market outcomes, governments are themselves imperfect institutions. The Condorcet paradox shows that the majority rule fails to produce transitive preferences for society, and Arrow's impossibility theorem shows that no voting system will be perfect. In many situations, democratic institutions will produce the outcome desired by the median voter, regardless of the preferences of the rest of the electorate. Moreover, the individuals who set government policy may be motivated by self-interest rather than national interest.
The study of psychology and economics reveals that human decision making is more complex than is assumed in conventional economic theory. People are not always rational, they care about the fairness of economic outcomes (even to their own detriment), and they can be inconsistent over time.
CHAPTER OUTLINE: This is a great chapter to get students interested in further study of economics. It is important for the students to learn that economics is a growing and developing science and that economists are always looking for new areas to study and new phenomena to explain. Asymmetric Information
A. Many times in life, one person holds more knowledge about what is going on than another. Such a
difference in access to relevant information is known as an information asymmetry.
B. Examples
1. A worker knows more than his employer about the level of his work effort. This is an example of a
hidden action.
2. A seller of a used car knows more than the buyer does about the car's condition. This is an example of
a hidden characteristic.
C. When there is asymmetric information, the party without the relevant knowledge would like to have such
knowledge, but the other party may have an incentive to conceal it.
D. Hidden Actions: Principals, Agents, and Moral Hazard
1. Important Definitions
a. Definition of moral hazard: the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior.
b. Definition of agent: a person who is performing an act for another person, called the principal.
I.
c. Definition of principal: a person for whom another person, called the agent, is performing some act.
2. The employment relationship is the classic example.
a. Workers (agents) may be tempted to shirk their work-related responsibilities because their
employers (the principals) do not monitor their behavior closely.
b. Employers can respond by providing better monitoring, paying higher wages, or delaying part of
the worker's pay until later in the worker's life.
3. FYI: Corporate Management
a. From an economic standpoint, the most important feature of the corporate form of organization
is the separation of ownership and control.
b. This creates a principal–agent problem where the shareholders are the principals and the
managers are the agents.
c. Managers’ goals may not always coincide with shareholders' goal of profit maximization.
d. As a result, many managers are provided compensation packages that provide incentives to act
in the best interest of corporate profits.
E. Hidden Characteristics: Adverse Selection and the Lemons Problem
1. Definition of adverse selection: the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party.
2. Examples include the used car market, the labor market, and the market for insurance.
3. When markets suffer from adverse selection, the invisible hand does not necessarily work well.
a. In the used car market, owners of \
sell them at a low price.
b. In the labor market, wages may be stuck at a level above the equilibrium wage, resulting in
unemployment.
c. In insurance markets, buyers with low risk may decline to purchase insurance because the price
is too high.
F. Signaling to Convey Private Information
1. Definition of signaling: an action taken by an informed party to reveal private information to an uninformed party.
2. Examples of Signaling
a. Firms may spend money on advertising to signal the high quality of their products.
b. Students may spend time in school to signal that they are high-ability individuals.
3. For a signal to be effective, it must be costly. However, it must be less costly (or more beneficial) to
the person or firm with the higher-quality product.
4. Case Study: Gifts as Signals
a. Because people know their own preferences better than anyone else, we would expect that they
would prefer cash gifts.
b. However, the ability to choose the right gift for someone may serve as a signal of an individual's
love.
c. Note that choosing the right gift is costly and the cost depends on how well the giver knows the
recipient (which may be determined as a measure of the giver's level of interest in the recipient).
G. Screening to Uncover Private Information
1. Definition of screening: an action taken by an uninformed party to induce an informed party to reveal information.
2. Examples of Screening
a. A buyer of a used car may ask to have the car examined by a mechanic prior to purchase.
b. An insurance company may offer different policies that would lead safe or risky drivers to reveal
themselves. Safe drivers are likely to prefer policies with low premiums and high deductibles. Risky drivers are more likely to prefer policies with higher premiums and low deductibles.
H. Asymmetric Information and Public Policy
1. Market failures such as externalities, public goods, imperfect competition, and poverty show that
governments can sometimes improve market outcomes.
2. Asymmetric information is another reason why market outcomes may be inefficient.
3. However, three factors make it difficult for the government to improve the outcome in some cases.
a. The private market can sometimes deal with information asymmetries on its own using a
combination of signaling and screening.
b. The government rarely has more information than the private parties do.
c. The government is itself an imperfect institution.
Activity 1—A Market for Lemons Type: Topics: Materials needed: Time: Class limitations: In-class demonstration Asymmetric information, signaling, regulation Prepared instruction sheets and record sheets 50–60 minutes Works in any size class, although using a larger number of groups will result in a larger amount of time necessary to complete each round Purpose This classroom experiment demonstrates how a market for lemons can develop when buyers have no information on the quality of a product available for sale. Instructions Divide the class into seven groups, three sellers and four buyers. Try to keep the groups separated and make sure that students know not to reveal their cost or value information to anyone. Pass out instruction sheets and record sheets for each group. Here are the rules for the first few rounds of the game: 1. Sellers must decide their product quality and price simultaneously. Each seller can choose only one product quality but can sell up to two units each period. Sellers' decisions are recorded and given to the instructor. 2. Once all of the sellers have made their decisions, the instructor lists the sellers' product quality and the price on the board. 3. The instructor draws a number from a hat (1 through 4) and this will be the first buyer to make a purchase. Buyers decide which firm to buy from based on preferred quality and price. Buyers may purchase only one unit each period. Once a seller has sold two units, he or she can sell no more and should be eliminated from the list of choices. 4. Profit for sellers will be the difference between the price and the cost (given to them on their instruction sheets) for each unit sold. Due to rising marginal cost, the cost of the second unit is $ more than the first. The cost information for each firm is: Quality 1 Quality 2 Quality 3 stCost of 1 unit $ $ $ ndCost of 2 unit $ $ $ 5. For the buyers, consumer surplus will be the difference between the value to the consumer (given on their instruction sheets) and the price paid. The value for each buyer is: Quality 1 Quality 2 Quality 3 Value to the buyer $ $ $ 6. Once a few rounds have been played, the instructor should announce that he will only list the sellers' prices on the board. Buyers must base their decisions entirely on price information.
曼昆经济学原理英文版文案加习题答案22章
