Answer to Question #67523 in Microeconomics for sneha satheendran

Question

Write short notes on any two of the following:
(a) Envelope theorem
(b) Hidden information
(c) Actuarially Fair Premium

Answer 1

(a) The envelope theorem is a general principle describing how the value of an optimization problem changes as the parameters of the problem change. In principle it is only a minor reduction in computational complexity. In practice it often clarifies one's view of a problem, and it is particularly important in allowing one to intuit the answer to certain important questions.
(b)Hidden information refers to the situation where the agent has better knowledge about the decisions he/she is taking on behalf of the principal.
Sources: https://www.igi-global.com/dictionary/hidden-information/13003
https://cupid.economics.uq.edu.au/mclennan/Classes/Ec5113/ec5113-lec13-3.4.99.pdf