ECON 369 - Public Sector Economics

Out of Class Exercise - Rational Ignorance

1.  Graphically and in words - explain rational ignorance.

*Remember that marginal benefits and marginal costs are subjective to an individual.  So when you draw the marginal benefit/marginal cost curves -- you are drawing curves for a particular individual.  What might make searching for information more costly for one person (or more beneficial) might not be true for another person.

2.  Draw another graph like above but assume that it represents the MC and MB of Bob.  Bob has been asked by his boss to search for information on a particular bill that, if passed, might impact his business.  Bob, like most people - will end up being rationally ignorant with respect to this search. 

Draw Bob's situation on a graph.  Show how much time he would search - given the situation above.

Now - Bob learns that Betty, another employee of the firm, has been asked to partner with Bob on this information search.  Bob has a crush on Betty and has been dying to get to know her better.  Graphically demonstrate how Bob's situation would change once he finds out about the partnership with Betty.  Would he search for a longer or shorter time?  Explain.

3.  Betty, on the other hand, hates Bob and can't stand being around him.  How long will Betty want to search?  Show graphically how her situation would change once she discovers that she has to work with Bob.  (Show the change on one graph).