ECON 101 Tutorial: Week 1

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ECON 101 Tutorial: Week 10
Shane Murphy
[email protected]
Office Hours: Monday 3:00-4:00 – LUMS C85
Outline
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Roll Call
Exam Study
Problems
Discussion
Exam Study
Normal form game (NE, 2X2, 3X3, 3-player, etc)
Extensive form games (SPNE, convert to normal, etc)
Monopoly (natural monopoly, profit maximization,
diagram)
Duopoly (Solve Cournot, diagram Bertrand, define
Stackelberg)
Monopsony (diagram, compare to monopoly)
Adverse Selection and Moral Hazard
Giant Pool of Money
• Subprime mortgage:
– Loans
• No income no asset loan:
– Adverse Selection or Moral Hazard?
• Adverse Selection
– It describes a situation wherein an individual's demand for
insurance (the propensity to buy insurance and the quantity
purchased) is positively correlated with the individual's risk
of loss (higher risks buy more insurance), and the insurer is
unable to allow for this correlation in the price of insurance.
• Moral Hazard
– In economics, moral hazard occurs when one person takes
more risks because someone else has agreed to bear the
burden of those risks.
Exercise
2) Give an example of Moral Hazard
People with car insurance might drive in a more
risky manner
3) Give an example of Adverse Selection
Car insurance companies might not be able to
charge different premiums to groups with different
levels of risk
Exercise
6) Should governments make it easier for poorer
people to borrow money?
7) What kind of changes might reduce the probability
of a repeat of the recent financial crisis?
Bonus
http://www.thisamericanlife.org/radioarchives/episode/355/the-giant-pool-of-money

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