Lecture 2

Question 1

2 types of information disparity

Answer 1

1. Missing information for all
2. Information unevenly distributed (info assymetry)

Question 2

Consequences of missing information for all

Answer 2

There is no market for outputs involving high levels of uncertainty. Only solution left could be autonomous production

Question 3

2 types of Assymetric information

Answer 3

Hidden information (Ex-ante)
Hidden action (Ex-post)

Question 4

What does hidden information lead to?

Answer 4

Leads to adverse selection

Question 5

Hidden information meaning

Answer 5

One party has more information than the other BEFORE signing the exchange contract. Only a possibility that party will use that information to harm or might use it because of ignorance

Question 6

Adverse selection meaning

Answer 6

One party has more information than the other BEFORE signing the exchange contract and uses it to make himself better off

Question 7

Hidden action meaning

Answer 7

One party has more information than the other AFTER signing the exchange contract. Only a possibility that party will use that information to harm or might use it because of ignorance

Question 8

Moral hazard meaning

Answer 8

One party has more information than the other AFTER signing the exchange contract and uses it to make himself better off

Question 9

What happens with markets when information is unevenly distributed or lacking

Answer 9

Markets are inefficient

Question 10

price-taker

Answer 10

agent has to accept the market price and cannot expect to influence the price level

Question 11

On what circumstance can we say that price is a sufficient statistic?

Answer 11

In perfect competition, where everyone is a price-taker

Question 12

Contingent claims contract meaning

Answer 12

derivative with a payout that is dependent on the realization of some uncertain future event

Question 13

incomplete contracting meaning

Answer 13

situation where it is not possible or practical to specify all the terms and contingencies of a contract comprehensively

Question 14

The fundamental paradox of information

Answer 14

the value of information can only be realized by revealing it
to another party, but such disclosure destroys its value

Question 15

solution for hidden information

Answer 15

signalling

Question 16

signalling meaning

Answer 16

action that can be taken by the owner of private information to indicate the real value of product or characteristics

Question 17

screening meaning

Answer 17

strategy that the other party may use toward owners of private information

Question 18

solution for hidden action

Answer 18

screening (increase observability), risk-sharing arrangements

Question 19

Decision tree nodes

Answer 19

Square node - individual has to choose an act

Circle node - random process of choice

Question 20

Complete information

Answer 20

Information that removes all uncertainty

Question 21

Rival good

Answer 21

A good that can only be consumed by one person at a time

Question 22

Non-rival good

Answer 22

A good that can be consumed by multiple people at the same time (e-book or INFORMATION)

Question 23

Durable economic good

Answer 23

A good that you can use multiple time

Question 24

Non-durable economic good

Answer 24

A good that you can use only once

Question 25

Information goods characteristics

Answer 25

Non-rival, may be costly to produce, cheap to reproduce

Question 26

3 aspects of the digital revolution

Answer 26

-“winner takes all” markets produce monopolies
-digital revolution leads to new companies which are often less labour intensive tha the companies they replace
-Digital platforms enable a rising sharing economy