Question from Past Microeconomics Qualifying Exam[]

Spring 2000- Section I, Question eight, George Mason University

True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.

Stigler’s theory of search implies that individuals will economize on information, and therefore have biased price expectations.


True, Chief cost of search is time - this cost is positive so both buyers and sellers cannot justify spending unlimited time engaged in search. Each person will engage in search until the marginal benefit of search equals the cost of the last unit of search. Dispersion is a function of the average amount of search, & search is a function of the nature of the commodity

  • The larger the fraction of the buyer's expenditures on the commodity, the greater the savings from search and hence the greater the amount of search
  • The larger the fraction of repetitive (experienced) buyers in the market, the greater the effective amount of search (with positive correlation of successive asking prices)
  • The larger the fraction of repetitive sellers, the higher the correlation between successive asking prices, and (by the previous assertion) the larger the amount of accumulated search
  • The cost of search will be larger, the larger the geographical size of the market

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