ASYMMETRIC INFORMATION.ppt

DISCUSSION This question applies the technique for deriving a market equilibrium with adverse selection presented in the math supplement. Suppose that the demand for genuine antiques is D = 4 - p, and the supply is S = p - 2, where D and S are in thousands of units a month, and p represents price in hundreds of dollars. In addition, some sellers produce 500 fakes at zero marginal cost. ? In a market of purely genuine antiques, what will be (i) the buyers marginal benefit from a quantity Q, (ii) the sellers marginal cost of providing a quantity Q, (iii) the market equilibrium price and quantity. In a market including both genuine antiques and fakes, what will be (i) the buyers marginal benefit from a quantity Q, (ii) the sellers marginal cost of providing a quantity Q, (iii) the market equilibrium price and quantity. * * Premiums are annual, in Singapore dollars, effective May 2000. Civil servant group policy: maximum policy coverage is for person aged below 45, $300,000 for person aged above 45, $200,000 no medical examination What explains the differences in price and sales conditions? * Examples of imperfect information: tomorrow’s weather tomorrow’s SP 500 Index or Hang Seng Index All people have equally poor information about future event – no asymmetry. Contrast: auto insurance: driver has better information about care and habits than insurer – asymmetric information insurer also has imperfect information about driver’s care and habits * Many people may have imperfect information about some event, only person with something at stake will bear risk Contrast next month’s weather for farmer school-teacher Contrast next year’s SP500 for investor person with no stock market investment * Essential problem: two markets – one for high quality and one for low quality – compressed into one What will be the equilibrium? supply: 1000 cases of bad quality and Q thousand cases of good vintage combined supply begins with bad quality