ECON 356

In Class Exercise Seven - Choices Without Perfect Information

1.        Explain why one of the first things that a business does is invest in stationary and business cards that have their logo, or at least business name and address, on them (use economic theory we discussed in class).

2.       Why, when someone is selling their used car, do we see ads like, “must sell, moving overseas,” or “injured hand, must sell my stick shift BMW” (using economic theory we discussed in class).

3.       Explain the full-disclosure principle.  Use an example other than what we talked about in class.

4.       Explain what will happen to an insurance company that charges teenage males the same rates for automobile insurance as it charges its other customers (using economic theory we discussed in class).  State any assumptions you make.

5.       If you were attempting to choose a trustworthy employee, what group membership might you look for as a signal (other than what we talked about in class)?  What about choosing a hardworking employee?  What group membership might you use (other than what we talked about in class).

6.  A friend of mine often complains that men say they want to find financially independent and non-gold digging type women (of which my friend meets the criteria).  Yet, she says, most of the signals that men give off to attract women have to do with their financial success (nice car, expensive gifts, etc.).  Are the men lying about what they want?  Are they hypocrites?  Help my friend out -- what is going on?  Think about the signaling that might be going on and think like an economist.

7.  Explain how resale (or retail) price maintenance might be used as a quality signaling device by manufacturers.

8.  Explain two reasons that someone might increase the intensity of their search (when buying a product).

9.  What is the difference between a firm using resources lobbying to try to get a favor from the government to stimulate business versus using resources to advertise to stimulate business (but not being successful)? Answer from an economist's point of view -- are they both wasteful activities?  Why or why not?

10.  One of the mandates in the new health care reform is to make insurance "mandatory" (similar to car insurance for some states).  If someone does not buy insurance, they will pay a fine.  Also - insurance companies (or a government option) will not be allowed to a) turn you down for a pre-existing condition and b) drop your insurance if you get some kind of major illness.

            What are the economic implications of this? 

            Try to come up with some new implications.

    11. Graphically and in words explain (in standard economic terms) how long a

         consumer will search for a particular good and a particular price.