Behavioural Economics

Question 1

What is a good literary economic example to dash in when talking about asymmetric information?

Answer 1

…famed case of Akerlof’s lemons deals with the situation of asymmetric information, where the seller of a second hand car has better info about its characteristics than the buyer. If a good 2nd hand car (peach) is worth 10000 and a poor one (lemon) is worth 5000 and 50% of 2nd hand cars fall into each category, the expected value of a second hand car is 7500. Owners of a peach hence have reason not to offer their car for sale since they won’t achieve full value for them. Overtime, there will be more lemons in the market.

Question 2

How do we define information failure?

Answer 2

Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make choices that may not be utility maximising

Question 3

Define bounded rationality

Answer 3

When consumers do not have the time, information or cognitive capacity required to make utility maximising decisions.

Question 4

Another way of saying ‘but this is a value judgement’

Answer 4

But this is a normative assessment and cannot be proven