Managerial Economics and Business Strategy - Chapter 12: The Economics of Information

A set of vocabulary flashcards based on key concepts from the lecture notes on the Economics of Information in Managerial Economics.

Random Variable

A variable that measures the outcome of an uncertain event.

Mean (Expected Value)

The sum of the probabilities that different outcomes will occur multiplied by the resulting payoffs.

Variance

The sum of the probabilities that different outcomes will occur multiplied by the squared deviation from the mean of the resulting payoffs.

Standard Deviation

The positive square root of the variance.

Risk-Averse Consumer

A consumer who prefers a sure amount of money to a risky prospect with an equal expected value.

Risk-Loving Consumer

A consumer who prefers a risky prospect with a higher expected value over a sure amount.

Risk-Neutral Consumer

A consumer indifferent between a risky prospect with an expected value and a sure amount.

Asymmetric Information

A market condition where some participants have more or better information than others.

Adverse Selection

Situations where individuals have hidden characteristics that lead to a pool of individuals with undesirable traits.

Moral Hazard

A situation where one party to a contract takes hidden actions that benefit themselves at the expense of another party.

Signaling

An attempt by an informed party to send a reliable indicator of their hidden characteristics to an uninformed party.

Screening

An attempt by an uninformed party to sort individuals by their characteristics through a self-selection device.

Optimal Search Strategy

Rejecting prices above the reservation price and accepting prices below it.

Diversification

The process of potentially reducing risk by investing in multiple projects.

Expected Marginal Revenue

The revenue that a firm expects to receive from producing one more unit of a good or service.

Profit Maximization

The process of determining the price and output level that generates the most profit.

Auction

A mechanism where potential buyers compete for the right to own a good, service, or item of value.

English Auction

An ascending sequential-bid auction where bidders can see others' bids.

First-Price, Sealed-Bid Auction

A simultaneous auction where bidders submit bids without seeing others' bids.

Second-Price, Sealed-Bid Auction

A simultaneous auction where the winning bidder pays the second-highest bid.

Dutch Auction

A descending-bid auction where the auctioneer lowers the price until a bidder agrees to pay.

Reservation Price

The price at which a consumer is indifferent between purchasing at that price and searching for a lower price.

Expected Benefits and Costs

The financial advantages and expenses anticipated from an action.

Chain Stores

Retail outlets owned by one company that aims for standardized service and reputation.

Market Price

The current price at which a good is bought and sold in a market.

Price Quote

The stated price for a good or service offered by a seller.

Risk Profile

An individual's or manager's characterization regarding their tolerance for risk.

Expected Profit

The profit that can be anticipated based on various scenarios and probabilities.

Managerial Decisions Under Uncertainty

Choices made by managers that take into account risks and uncertainties associated with outcomes.

Incentive Contract

A contract designed to motivate parties to act in a way that benefits another party.

Competitive Market

A market where multiple firms compete to sell similar products.

Cost Function

A mathematical representation of the costs incurred by a firm in production.

Payment Structure

The method or arrangement of how payments are made for goods or services in an auction.

Bidding Strategies

The tactics used by bidders to win an auction while minimizing their costs.

Market Participation

The act of engaging in buying or selling in a market.

Consumer Search

The process of looking for better prices or products before making a purchase.