Book contents
- Frontmatter
- Contents
- Preface
- PART ONE INTRODUCTION
- PART TWO PREFERENCE, CONSUMPTION, AND DEMAND
- PART THREE THE FIRM AND THE INDUSTRY
- 6 The Business Firm
- 7 Equilibrium in the Product Market – Competitive Industry
- 8 Monopolies, Cartels, and Networks
- 9 Product Quality and Product Variety
- 10 Competition Among the Few: Oligopoly and Strategic Behavior
- 11 Dealing with Uncertainty – The Economics of Risk and Information
- PART FOUR FACTOR MARKETS AND INCOME DISTRIBUTION
- PART FIVE EXCHANGE
- PART SIX ECONOMICS AND TIME
- PART SEVEN POLITICAL ECONOMY
- Answers to Selected Questions
- Name Index
- Subject Index
11 - Dealing with Uncertainty – The Economics of Risk and Information
from PART THREE - THE FIRM AND THE INDUSTRY
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- Preface
- PART ONE INTRODUCTION
- PART TWO PREFERENCE, CONSUMPTION, AND DEMAND
- PART THREE THE FIRM AND THE INDUSTRY
- 6 The Business Firm
- 7 Equilibrium in the Product Market – Competitive Industry
- 8 Monopolies, Cartels, and Networks
- 9 Product Quality and Product Variety
- 10 Competition Among the Few: Oligopoly and Strategic Behavior
- 11 Dealing with Uncertainty – The Economics of Risk and Information
- PART FOUR FACTOR MARKETS AND INCOME DISTRIBUTION
- PART FIVE EXCHANGE
- PART SIX ECONOMICS AND TIME
- PART SEVEN POLITICAL ECONOMY
- Answers to Selected Questions
- Name Index
- Subject Index
Summary
Up to now consumers have been assumed to be entirely aware of their incomes and personal preferences, and suppliers fully informed as to the technology and costs of production. Although assuming complete certainty is not realistic, most of the results obtained so far – for example, that demand curves are negatively sloped – hold even when people are less than perfectly informed. Nevertheless, uncertainty is often crucial. Without uncertainty there would be no insurance industry, no need for consultants, no litigation, no advertising, no reason to engage in scientific research.
Another crucial aspect of uncertainty is that some market participants are likely to be better informed than others. A jeweler usually knows a lot more about the quality of a diamond offered for sale than do potential buyers. This chapter introduces the tools necessary to deal with imperfect information and with unbalanced distributions of knowledge.
DECISIONS UNDER UNCERTAINTY
Expected Gain versus Expected Utility
Suppose an airline must decide whether to send off a flight from Los Angeles to Chicago, despite being unsure about the weather at O'Hare Airport in Chicago by the time the flight arrives. The plane already has 100 people aboard. If the flight is dispatched and O'Hare is open, suppose the airline will gain $40,000. If the airline holds the flight until the weather clears, the disruption in the schedule will make its gain smaller, say only $20,000.
- Type
- Chapter
- Information
- Price Theory and ApplicationsDecisions, Markets, and Information, pp. 307 - 336Publisher: Cambridge University PressPrint publication year: 2005