week 11

Question 1

what is choice under risk and uncertainty

Answer 1

uncertainty - situations where the probability of certain occurrences is not known
risk - uncertainty quantified

Question 2

what is the expected value

Answer 2

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

Question 3

how do you know if the lottery is fair

Answer 3

if EV - cost = 0

Question 4

what is risk neutral

Answer 4

a person who is only interested in whether the odds yield a profit on average

Question 5

what is risk averse

Answer 5

a person who will refuse a fair gamble

Question 6

what is risk loving

Answer 6

a person who bets even if the odds are unfavourable

Question 7

what is asymmetric information

Answer 7

a situation in which one side of an economic relationship has better information than the other

Question 8

what are hidden characteristics

Answer 8

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

Question 9

what are hidden actions

Answer 9

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

Question 10

what is asymmetric information in imperfectly competitive markets

Answer 10

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

Question 11

what is asymmetric information in perfectly competitive markets

Answer 11

when one party has more information than the other
eg workers may choose to reveal higher level skills

Question 12

what is adverse selection

Answer 12

a phenomenon under which the uniformed side of a deal gets exactly the wrong people trading with it

Question 13

what is moral hazard

Answer 13

people take fewer precautions when they know they are insured

Question 14

what is co-insurance

Answer 14

a provision in an insurance policy under which the policyholder picks up some percentage of the bill for damages when there is a claim

Question 15

what is an excess or deductible insurance policy

Answer 15

a provision under which the person buying the insurance has to pay the initial damages up to some set limit

Question 16

what is absolute advantage

Answer 16

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

Question 17

what is a production possibilities curve

Answer 17

a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good

Question 18

what is the attainable point

Answer 18

any combination of goods that can be produced using currently available resources

Question 19

what is the unattainable point

Answer 19

any combination of goods that cannot be produced using currently available resources

Question 20

what is the efficient point

Answer 20

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

Question 21

what is the inefficient point

Answer 21

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

Question 22

what is comparative advantage

Answer 22

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

Question 23

why should international trade be based on comparative advantage

Answer 23

improves overall global output

Question 24

what are tariffs

Answer 24

taxes on imports
distort the operation of the market and lead to a welfare loss