imperfect information

• What does traditional economic thought assume about consumers maximizing utility?

  Marginal utility equals zero
• Imperfect information can prevent consumers from making rational utility-maximizing decisions
• One way information can be imperfect is if it does not exist
• What are two potential problems resulting from imperfect information?

  Over or under consumption
• Examples of merit goods include healthcare and education
• Merit goods are under-consumed due to a lack of information about their benefits
• Asymmetric information occurs when information is equally shared between two parties

  False
• Match the type of good with the reason for its consumption level:

  Merit goods ↔️ Under-consumed due to lack of information

  Demerit goods ↔️ Over-consumed due to lack of negative information
• Why are demerit goods over-consumed according to the study material?

  Lack of negative information
• In labor markets, the potential worker has information about their skills, but the employer does not, leading to asymmetry
• What is a classic example of asymmetric information in labor markets?

  Employer vs. worker
• What is George Akerlof's example of asymmetric information in the second-hand car market?

  Buyer lacks information
• Steps leading to irrational decisions due to asymmetric information in the second-hand car market

  1️⃣ Seller has information about the car's state

  2️⃣ Buyer lacks information about the car's state

  3️⃣ Buyer may purchase the car without full knowledge
• Insurance companies have complete information about their customers' risk profiles

  False
• What is moral hazard in insurance markets?

  Risk without cost
• In moral hazard, individuals take more risks because they do not bear the full cost
• Imperfect information can lead to irrational decisions where utility is not maximized