Transcript Naked Economics Power Point: ANSWER KEY

Naked Economics
Undressing the Dismal Science
Why did the chicken cross the road?
• To maximize its utility, i.e. make itself better off
• Utility not always monetary
• Varies for each of us
Who feeds Paris?
• The market, i.e. individuals pursuing their own self interest
• Paradoxically this leads to benefit of the whole
What is GDP?
• Gross domestic product, i.e. monetary value of all the finished
goods and services produced within a country's borders in a
specific time period
• Why is it a good measure?
– Its shows how well are addressing scarcity
• Why is it NOT a good measure?
– How are individuals affected?
– Measures some bad things (e.g. prisons), doesn’t measure some
good things
• Real GDP – inflation adjusted
What is price discrimination?
• selling the same item to different people at different prices,
e.g. airplane tickets
Do incentives matter?
• Yes, when we work on commission, we work harder
Perverse incentives
• an unintended and undesirable result which is contrary to the
interests of the incentive makers
• e.g. car seats on airplanes led to MORE deaths
• "Law of unintended consequences"
What is the “superstar phenomenon”?
• small differences in talent tend to become magnified into huge
differences in pay as a market becomes very large (e.g. pop
music, pro sports)
What is creative destruction?
• New technology “destroys” old ones, and thus jobs, e.g. VCR
repairmen
• Who loses out most often?
– Unskilled workers, less educated
What is human capital?
• a measure of the economic value of an employee's skill set
• Most important investment, as you always have it
Do brands matter?
• Yes, they provide information about a company’s product or
service
• provide an element of trust required in a complex economy
How can black rhinos be saved?
• Private ownership to incentivize their protection
• Sawing off horns didn’t work
What are the two basic assumptions that economists make
about individuals and firms?
1. Self-interested
2. Rational
Limits of determining self interest? (next slide)
prisoner's dilemma
• example of a game that shows why two individuals might not
cooperate, even if it appears that it is in their best interest to
do so
• Ac, Bc – 1 year, 1 year
• Ac, Bs – 0 , 2 years
• As, Bc – 2 years, 0
• As, Bs – 3 months, 3 months (BEST alternative)
C= cooperate, S=silent/don’t confess
Role of prices in the market economy?
• determining an efficient distribution of resources in a market
system.
• signal for shortages and surpluses which help firms respond to
changing market conditions
Advantage of market economy?
• Allocative efficiency
• The best available model
• BUT . . . (market failures), e.g. resources not always directed to
areas of greatest need (medicine, food)
• Resources not evenly distributed among people, nations
Adverse selection
• When you do business with people you would be better off
avoiding. Adverse selection can be a problem when there is
asymmetric information between the seller of insurance and
the buyer
• “What you don’t know CAN hurt you”?
Informational asymmetry
• transactions where one party has more or better information
than the other.
• E.g. – buying a used car, life insurance (adverse selection)
Principal-Agent problem
• principal–agent problem or agency dilemma concerns the
difficulties in motivating one party (the "agent"), to act on
behalf of another (the "principal").
• E.g. corporate management (agent) and shareholders
(principal), fast food employees
What is an externality?
• is a cost or benefit that is not transmitted through prices, and is
incurred by a party who was not involved in the transaction.
• negative externality – pollution from a factory
• positive externality – fire department
What is a public good?
• Nonexcludability
• Nonrivalry
Role of Government
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Stability
legal framework
Protection of property rights
Protection of contracts
What is productivity?
Why are many poor countries poor?
Are foreign sweat shops bad?
What is the primary role of the Federal Reserve?