 Explain how asymmetrical information creates economic problems  Understand how the subprime mortgage crisis was a moral hazard issue  Explain how.

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Presentation transcript:

 Explain how asymmetrical information creates economic problems  Understand how the subprime mortgage crisis was a moral hazard issue  Explain how branding can create monopolies

 Asymmetrical Information- A situation in which one party in a transaction has more or superior information compared to another.

 What are some problems caused by asymmetry of information?

 Naked Economics: How does buying a used car illustrate the problems caused by asymmetry of information?

 What is the moral hazard problem?

 Exists when one person does not have to suffer the consequences personally yet can receive rewards  Paul Krugman described moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.” Paul Krugman

 How are the problems in the healthcare system related to information issues?  How does the solution of the “personal mandate” solve a problem of information in the health care industry?

 Why do businesses spend so much money creating an effective brand?

 How does an absence of or partial information lead to discrimination?  What do you think about the racial profiling example?

 Mortgage- A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.  Foreclosure- A situation in which a homeowner is unable to make full principal and interest payments on his/her mortgage, which allows the lender to seize the property, evict the homeowner and sell the home and interestmortgagelender  Subprime loan- a risky loan to people who are likely to default

 Mortgage backed security: A type of asset- backed security that is secured by a collection of mortgages.