week 11 Flashcards
what is choice under risk and uncertainty
uncertainty - situations where the probability of certain occurrences is not known
risk - uncertainty quantified
what is the expected value
a risk has a likely outcome and the degree of variation in possible outcomes
the expected value is the the probability weighted average of the value from each possible outcome
how do you know if the lottery is fair
if EV - cost = 0
what is risk neutral
a person who is only interested in whether the odds yield a profit on average
what is risk averse
a person who will refuse a fair gamble
what is risk loving
a person who bets even if the odds are unfavourable
what is asymmetric information
a situation in which one side of an economic relationship has better information than the other
what are hidden characteristics
things that one side of a transaction knows about itself that the other side would like to know but does not know
1. sellers are better-informed
2. buyers are better-informed
what are hidden actions
actions taken by one side of an economic relationship that the other side of the relationship cannot observe
1. firms vs employees
2. insurance companies vs their customers
what is asymmetric information in imperfectly competitive markets
one party, either buyer or seller, has more information about the products quality or price than the other party
company can create a self-selection device to sort consumers
what is asymmetric information in perfectly competitive markets
when one party has more information than the other
eg workers may choose to reveal higher level skills
what is adverse selection
a phenomenon under which the uniformed side of a deal gets exactly the wrong people trading with it
what is moral hazard
people take fewer precautions when they know they are insured
what is co-insurance
a provision in an insurance policy under which the policyholder picks up some percentage of the bill for damages when there is a claim
what is an excess or deductible insurance policy
a provision under which the person buying the insurance has to pay the initial damages up to some set limit
what is absolute advantage
one person has an absolute advantage over another if an hour spent in performing a task earns more than the other person can earn in an hour at the task
what is a production possibilities curve
a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good
what is the attainable point
any combination of goods that can be produced using currently available resources
what is the unattainable point
any combination of goods that cannot be produced using currently available resources
what is the efficient point
any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in production of the other
what is the inefficient point
any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other
what is comparative advantage
one person has comparative advantage over another in a task if their opportunity cost of performing a task is lower than the other persons opportunity cost
why should international trade be based on comparative advantage
improves overall global output
what are tariffs
taxes on imports
distort the operation of the market and lead to a welfare loss
