ECON 101 Tutorial: Week 10

Shane Murphy [email protected]

Office Hours: Monday 3:00-4:00 – LUMS C85

• • • • Roll Call Exam Study Problems Discussion

Outline

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/radio archives/episode/355/the-giant-pool-of-money