【正文】 ice of credit risk. Private Information 169。 2020 Pearson AddisonWesley Part (b) shows the market for lemons. Because buyers can now spot a lemon (a car without a warranty) … the price of a lemon is $6,667 and 150 lemons are traded. The market for lemons is efficient. Private Information 169。 2020 Pearson AddisonWesley Part (c) shows the demand and supply of lemons. At $10,000 a car, 200 lemons are traded. Private Information 169。 2020 Pearson AddisonWesley In the used car market: Adverse selection exists because there is a greater incentive to offer a lemon for sale. Moral hazard exists because the owner of a lemon has little incentive to take good care of the car, so it is likely to bee even worse. The market for used cars is not working well. Private Information 169。 2020 Pearson AddisonWesley The Lemon Problem in a Used Car Market The market has two types of cars: ? Lemons worth $5,000 each. ? Cars without defects worth $25,000 each. Whether the car is a lemon or not is private information of the current owner. A buyer discovers a lemon only after buying it. Private Information 169。 2020 Pearson AddisonWesley Adverse Selection Adverse selection is the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. For example, if Jackie advertises jobs for salespeople at a fixed wage, she will attract lazy salespeople. Hardworking salespeople will prefer to work for someone who pays by results, rather than a fixed wage. The fixedwage contract adversely selects those with private information about their work effort. Private Information 169。 2020 Pearson AddisonWesley Dan is willing to pay up to $3,000 for insurance that costs the insurance pany $1,000, … so there is a gain from trading risk of $2,000 per person. Buying and Selling Risk 169。 2020 Pearson AddisonWesley Value and Cost of Insurance Figure shows that if Dan had $7,000 of wealth with no risk, … he would have the same utility as he has with $10,000 of wealth and 10 percent risk of loss. Buying and Selling Risk 169。 2020 Pearson AddisonWesley Insurance Markets How Insurance Reduces Risk Insurance reduces the risk that people face by sharing or pooling risks. When people buy insurance against the risk of an unwanted event, they pay an insurance pany a premium. If the unwanted event occurs, the insurance pany pays out the amount of the insured loss. Buying and Selling Risk 169。 2020 Pearson AddisonWesley Figure shows the choice under uncertainty. In a telemarketing job, there is a 50 percent chance that Tania will make $5,000 and a 50 percent chance that she will make $1,000. Her expected wealth is $3,000 and her expected utility is 70 units. Decisions in the Face of Uncertainty 169。 2020 Pearson AddisonWesley Expected Utility When there is uncertainty, people do not know the actual utility they will get from taking a particular action. But they know the utility they expect to get. Expected utility is the utility value of what a person expects to own at a given point in time. Decisions in the Face of Uncertainty 169。 2020 Pearson AddisonWesley Will Tania take the risky job? It will depend on how much Tania dislikes risk. Risk Aversion Risk aversion is the dislike of risk. We measure a person’s attitude toward risk by using a utility of wealth schedule and curve. Greater wealth brings greater total utility, but the marginal utility of wealth diminishes as wealth increases. Decisions in the Face of Uncertainty 169。 2020 Pearson AddisonWesley Life is like a lottery. You set up a summer business and work hard, but will you make enough ine to keep you in school next year? How do people make a decision when they don’t know what its consequences will be? Buying a new car—or a used car—is fun, but it’s also scary. You could get stuck with a lemon. How do car dealers and retailers induce us to buy goods that might turn out to be lemons? Markets generally allocate resources efficiently. Can markets lead to an efficient oute when there is uncertainty and inplete information? 169。 2020 Pearson AddisonWesley 169。 2020 Pearson AddisonWesley The probability that Tania will have $5,000 is . The probability that she will have $1,000 is also . Expected wealth = ($5,000 ) + ($1,000 ) = $3,000. Tania can now pare the expected wealth from two jobs: ? $2,000 for nonrisky painting job ? $3,000 for the risky telemarketing job Decisions in the Face of Uncertainty 169。 2020 Pearson AddisonWesley Because of diminishing marginal utility, for a loss of wealth or a gain of wealth of equal size, Tania’s pain from the loss exceeds her pleasure from the gain. Decisions in the Face of Uncertainty 169。 2020 Pearson AddisonWesley Making a Choice with Uncertainty Faced with uncertainty, a person chooses the action that maximizes expected utility. To select the job that gives her the maximum expected utility, Tania must calculate 1. The expected utility from the risky telemarketing job. 2. The expected utility from the safe painting job. 3. Compare the two expected utilities. Decisions in the Face of Uncertainty 169。 2020 Pearson AddisonWesley Buying and Selling Risk Just as buyers and sellers gain from trading goods and services, they can also gain from trading risk. Risk is a bad, not a good, so the good that is traded is risk avoidance. A buyer of risk avoidance can gain because the value of avoiding risk is greater than the price that must be paid to get someone else to bear that risk. The seller of risk avoidance faces a lower cost of risk than the price that people are willing to pay to avoid that risk. 169。 2020 Pearson AddisonWesley With