Please don\'t cut and paste from other answers 1. Describe each of the four prop
ID: 1186904 • Letter: P
Question
Please don't cut and paste from other answers
1. Describe each of the four properties of indifference curves.
2. Explain what is meant by "asymmetric information." Identify and explain the two basic types of problems that arise when there is asymmetric information.
3. Much has been made of the fact that people don't consistently act with scientific rationality. What is meant by rationality? Consider the three "systematic mistakes" discussed in your text. What are the costs of making those "systematic mistakes"? Is it possible to act "irrationally," or is rationality defined by the individual's approach to decision making?
4. Describe and explain the budget constraint. How does a consumer maximize utility under a given budget constraint? How do consumers know if they are not maximizing utility?
5. Explain the Condorcet Paradox, the failure of majority rule to produce transitive preferences for society. Explain Arrow
Explanation / Answer
1) No two distinct indifference curves can cross.
indifference curves are downward sloping
between two indifference curves, the one that is above the other has the more preferred bundles of goods to the other.
indifference curves are convex to origin.
2) A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge
Information Asymmetry can lead to two main problems:
1. Adverse selection- immoral behavior that takes advantage of asymmetric information before a transaction. For example, a person who is not be in optimal health may be more inclined to purchase life insurance than someone who feels fine.
2. Moral Hazard- immoral behavior that takes advantage of asymmetric information after a transaction. For example, if someone has fire insurance they may be more likely to commit arson to reap the benefits of the insurance.
3)Rationality is a state of a person who is thinking coherent according to their level of experience or knowledgeabout a given situation and they make a decision that is intended to produce an outcome that they desire basedon the need, cost benefit and evaluation. People make these systematic mistakes all the time. Take a personwho is overconfident, they tend to overestimate their knowledge; they do not implement proper risk controls or conduct proper risk assessments, as they tend to think they can control any event. When they make thissystematic mistake, they normally make a decision that effects someone