Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Question
Chapter 20, Problem 11P
To determine
To determine: If one would be willing to pay $10 100 for a plum.
Concept introduction
Expected Value: It is defined as the weighted average of probable events where the weights of each probable value corresponds to the chances of that value occurring. The formula to calculate expected value is:
Where,
- is expected value.
- is probability of event 1.
- is probability of event 2.
- is probability of event N.
- is event 1.
- is event 2.
- is event N.
Expected Utility: It is defined as the value of a person’s total utility, so that there is no certainty about future results.
Adverse Selection: It is a situation in which seller and buyer do not have perfect information about the product which leads to market failure.
- Take an example of old car market. Those cars which are in good condition are called plum and those which are not are called lemons. In this case, buyer does not have enough information about the car whether it is a lemon or a plum.
- In case of insurance market, insurance companies do not have enough information about the buyer who is needy and what price should be offered to different people.
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