Explain why imperfect information can lead to market failure. Explain how the market can solve the problem of imperfect information
Under what circumstances may it be more efficient for the government to produce information instead of relying on the market?
If consumers have imperfect information they can make mistakes in purchasing decisions. If consumers are misinformed as to the quality of a product they may buy too little or too much of the product. The market can solve the problem of imperfect information by selling information and consumers should purchase information up to the point where the additional value of the information equals the additional cost of the information. Because information is essentially a public good it will be underproduced in the marketplace. It would be more efficient for the government to collect and disperse information when information is very costly for individuals to collect.
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You are an economist for the City Subway Commission. Presently, the price of a subway ride is 80¢, and 200,000 seats are filled weekly. The price elasticity of demand for subway rides is -0.40, and the income elasticity of demand is -0.60.
(i) The Commission wants to ensure that the subway has enough excess capacity to handle any extra demand that might occur during an economic decline. If a recession lowered area incomes by 5%, how many additional seats per week would the subway need? (ii) The Commission has just approved a subway price increase of 10¢ per ride. The Commission wants to know if it can use the opportunity to retire two aging subway cars that each provide 8,000 seats weekly. When the price hike goes into effect, can neither, one, or both cars be retired?
Referring to Figure 19.2, a depreciation of the dollar is represented by a movement from point
A) a to c. B) c to a. C) c to d. D) b to a.
A phenomenon closely related to market overreaction is
A) the random walk. B) the small-firm effect. C) the January effect. D) excessive volatility.
Corporations have a separation and control problem because
A. the shareholders control the firm. B. taxes are paid only by the board of directors. C. most of the profits are reinvested. D. owners and managers frequently have different incentives.