Unit 22: Frontiers of Microeconomics
Dropping the assumptions the rest of the course made: shared information, votes aggregating like prices, and people acting perfectly rationally.
6 topics · 20 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Asymmetric Information and Adverse Selection
- How it worksHow does a seller knowing more than a buyer about quality push good used cars out of the market, leaving mostly lemons behind?
- Common mistakeWhy doesn't every market with some uninformed buyers collapse the way the market for lemons can?
- Going furtherWhat happens to an insurance market when only the highest-risk customers find it worth buying a policy at the average price?
Your turn1 of 2
Good used cars are worth 21964 dollars, and bad ones, lemons, are worth only 6245 dollars. If buyers can't tell them apart, they offer the average price. What is that average price?Moral Hazard
- How it worksHow does being shielded from the consequences of a risk change a person's behavior after a contract is signed, not before?
- Common mistakeWhy isn't moral hazard the same problem as adverse selection, even though both come from asymmetric information?
- Ties togetherHow do insurance companies use deductibles and copays to fight moral hazard the same way markets try to fight adverse selection?
Your turn1 of 2
A driver becomes less careful after getting full insurance coverage with no deductible. When does this moral hazard problem actually take effect?Signaling and Screening
- How it worksHow does an informed party sending a costly signal, and an uninformed party designing a screening device, both try to sort out hidden quality?
- Worked exampleWalk me through an employer offering two contracts, a high base salary with no bonus and a low base salary with a big bonus, to screen for effort.
- Common mistakeWhy doesn't a signal have to be directly useful to be effective, as long as it's costly enough to fake?
Your turn1 of 2
A costly signal, like a degree, costs a low-ability worker 43928 dollars in effort but costs a high-ability worker only 14735 dollars. By how many dollars is the signal cheaper for the high-ability worker?Political Economy and the Median Voter
- How it worksHow does the median voter theorem predict that competing candidates converge toward the preference of the voter exactly in the middle?
- Common mistakeWhy doesn't majority voting always produce a single, consistent ranking of society's preferences the way a market price does?
- Going furtherWhat happens to candidates' policy positions if voters are spread out in two separate clusters instead of one smooth distribution?
Your turn1 of 2
Voters are spread evenly along a policy line from 0 to 73. Where does the median voter theorem predict two competing candidates will converge their policy positions?Behavioral Economics
- How it worksHow do bounded rationality, present bias, and loss aversion each push real decisions away from the perfectly rational choices standard theory predicts?
- Worked exampleWalk me through why someone accepts 100 dollars today over 110 dollars in a month but would happily wait a month for 110 dollars over 100 dollars a year from now.
- Common mistakeWhy isn't every deviation from a textbook-rational decision simply a mistake with no predictable pattern to it?
- Going furtherWhat happens to a retirement savings program's enrollment rate when it switches from an opt-in default to an opt-out default?
- Ties togetherHow does present bias help explain why a Pigouvian-style tax on an unhealthy habit might change behavior more than standard theory alone would predict?
Your turn1 of 2
A person accepts 108 dollars today over 132 dollars in a month, showing present bias, but would happily wait a month for 132 dollars over 108 dollars a year from now. By how many dollars does the later option exceed the sooner one?The Economics of Healthcare, a Capstone
- Ties togetherHow do asymmetric information, a positive externality from vaccination, and the equity concerns from the inequality unit all show up together in healthcare policy?
- How it worksHow does health insurance itself create the moral hazard of over-treatment even while it protects patients from catastrophic bills?
- Common mistakeWhy doesn't spending more per person on healthcare guarantee a country better health outcomes?
Your turn1 of 2
Healthcare markets involve asymmetric information between patients and providers, a positive externality from vaccination, and real equity concerns about who can afford care. How do these three issues from earlier in the course show up together in healthcare policy debates?