2. Individual Economic Decision Making - Imperfect Information & Decision Making

Question 1

What may prevent consumers from acting in a rational, utility maximising manner?

Answer 1

Information Failure - imperfect information

Question 2

What are the two types of information failure?

Answer 2

Lack of informationAsymmetric Information

Question 3

What are the consequences of lack of information?

Answer 3

Goods/Service tend to be over or under consumed - de/merit goods for example - there is not enough information telling people how good/bad they are for consumers - irrational decisions that aren’t utility maximising occur as a result

Question 4

What are the consequences of asymmetric information?

Answer 4

Information not being shared and passed between parties fully may lead to irrational, non utility maximising decisions - in labour markets for instance, the potential employee has all the info. about productivity etc. the employer doesn’t, this may lead to the employer making an irrational decision and employing someone who’s MC > there MRP