Chapter 17 - Uncertainty and Asymmetric Information Flashcards Preview

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Flashcards in Chapter 17 - Uncertainty and Asymmetric Information Deck (14):
1

payoff

The amount that comes from a possible outcome or result.

2

expected value

The sum of the payoffs associated with each possible outcome of a situation weighted by its probability of occurring.

3

fair game or fair bet

A game whose expected value is zero.

4

diminishing marginal utility

The more of any one good consumed in a given period, the less incremental satisfaction is generated by consuming a marginal or incremental unit of the same good.

5

expected utility

The sum of the utilities coming from all
possible outcomes of a deal, weighted by the probability of each occurring.

6

risk-averse

Refers to a person’s preference of a certain
payoff over an uncertain one with the same expected value.

7

risk-neutral

Refers to a person’s willingness to take a bet with an expected value of zero.

8

risk-loving

Refers to a person’s preference for an uncertain deal over a certain deal with an equal expected value.

9

risk premium

The maximum price a risk-averse person will
pay to avoid taking a risk.

10

asymmetric information

One of the parties to a transaction has information relevant to the transaction that the other party does not have.

11

adverse selection

A situation in which asymmetric information results in high- quality goods or high-quality consumers being squeezed out of transactions because they cannot demonstrate their quality.

12

market signaling

Actions taken by buyers and sellers to communicate quality in a world of uncertainty.

13

moral hazard

Arises when one party to a contract changes behavior in response to that contract and thus passes on the costs of that behavior change to the other party.

14

mechanism design

A contract or an institution that aligns the interests of two parties in a transaction. A piece rate, for example, creates incentives for a worker to work hard, just as his or her superior wants. A co-pay in the health care industry encourages more careful use of health care, just as the insurance company wants.