ECON-221 Lecture Notes - Lecture 30: Conspicuous Consumption, Adverse Selection
12 Oct 2020
School
Department
Course
Professor
Document Summary
Conspicuous consumption as a signal of ability: people with highest ability tend to receive highest income. Cost benefit principle the more someone earns, the more likely they will spend on high quality goods and services. Tendency leads to assessing a persons ability from amount and quality of goods they consume. The things people consume will convey information about their respective ability levels. In a competitive market with perfect information, price that buyers pay equals sellers cost of providing the service. However, in a market, seller doesn"t know exact cost of servicing each buyers, thus missing information has economic value. If seller can develop rough estimate of missing information they can improve position. Firms often do this buy imputing characteristics to individuals on the basis of groups to which they belong: remaining in business, companies must collect money to cover cost of claims and administrative expenses. Occurs when people are judged on basis of groups they belong to.
