Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
6.6 QUESTIONS
 
1. Explain the Pareto Optimality Criterion of Social Welfare. 
2. What are the various conditions of Pareto optimality? What are 
the deficiencies of Pareto optimality analysis? 
3. How does allocation of resources under perfect competition help 
in the attainment of maximum social welfare? 


---

 
7 
 
MODULE 4 
 
ECONOMICS OF INFORMATION 
 
Unit Structure
7.0 Objectives 
7.1 Introduction 
7.2 The Economics of Search 
7.2.1 Search Costs 
7.2.2 Searching for the Lowest Price
7.2.3 Search and Advertising 
7.3 Asymmetric Information: The Market for Lemons and Adverse 
Selection 
7.3.1 Asymmetric Information and the Market for Lemons
7.3.2 The Insurance Market and Adverse Selection 
7.4 Market Signalling
7.5 The Problem of Moral Hazard 
7.6 The Principal-Agent Problem 
7.7 The Efficiency Wage Theory 
7.8 Summary 
7.9 Questions
 
7.0 OBJECTIVES 
To know the rule as to how long a consumer search for lower 
prices 
To know the meaning and importance of asymmetric 
information and adverse selection 
To understand how the problem of adverse selection can 
usually be resolved by market signalling
To understand how moral hazard can arise in the insurance 
and how it can be overcome by coinsurance
To understand the meaning of the principal-agent problem and 
how it can be resolved by golden parachutes. 
 
7.1 INTRODUCTION 
 

---

In this unit we study the economics of information. This area 
of study is becoming increasingly important in economics - and 
deservingly so. The unit begins by examining the economics of 
search: search costs, the process of searching for the lowest price 
of the product, and the information content of advertising. The unit 
goes on to discussing asymmetric information and the market for 
lemons (i.e. defective products), the insurance market and adverse 
selection, market signalling, moral hazard, the principal-agent 
problem, and the efficiency wage theory.