Economics A170 Lecture 9: Economics_A170_Lecture_9

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15 May 2020

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Economics A170

Manuel Kellogg

● Principle 3: Rational People Think at the Margin

■ Rational People?

■ People that do their best to they can to achieve their objectives.

■ People should always consider the additional benefit (Marginal Benefit)

and additional cost (Marginal Cost) of a decision.

■ Take action only if MB >= MC

● Why take action if MB = MC?

● Ex: Intel wants to make additional chips. MC = 4 and MB =5.

Should Intel make the chip?

● What if MB =4.5?

● What if MB =4.1? When should Intel stop making chips?

○ Principle 4: People Respond to Incentives

■ Incentives: Something that makes people act.

● Because rational people make decisions by comparing costs and

benefits, they respond to incentives.

● Ex: Increase in prices of apples does what to sellers and buyers of

apples?

● Ex: Increase in wages does what to laborer supply and companies’

demand for workers?

● Ex: Price of oil increase which increases gas prices

● What were some outcomes?

● What did car manufactures do?

● What did consumers do?

● Are there more sales of Prius?

● What about Chevy Tahoes?

● Second Set of Principles: How People Interact

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Document Summary

Principle 3: rational people think at the margin. People that do their best to they can to achieve their objectives. People should always consider the additional benefit (marginal benefit) and additional cost (marginal cost) of a decision. Take action only if mb >= mc. Ex: intel wants to make additional chips. Because rational people make decisions by comparing costs and benefits, they respond to incentives. Ex: price of oil increase which increases gas prices. Second set of principles: how people interact. Principle 5: trade can make everyone better off. Without trade, each economy (person, family, nation) would need to do everything itself. Increases variety and quantity which lowers cost. Principle 6: markets are usually a good way to organize economic. Markets allocate resources through decentralized decisions of the firms and households. These firms interact with only their self interest in mind. Individuals trying to maximize their own happiness make the society as a whole better off.

Related Questions

More than 1.5 million vehicles collide with deer annually, killing hundreds of people and causing over $1 billion in vehicle damage. Some states, such as Michigan, attributed one in seven vehicle accidents to deer. Additional evidence indicates that many deer-related accidents go unreported.

The problem escalates in the fall of each year during deer mating season as more deer are on the move. While deer whistles and other vehicle warning systems appear ineffective in dealing with the problem, clearing brush in the road ditches to make deer more visible appears to help. Deer warning signs also appear to make drivers more vigilant and lower deer-vehicle collisions. What's the best advice? Drivers should be cautious when in deer country and when you see one deer there are likely others around.

Driving an insured vehicle in deer country could create a moral hazard problem. Since the insured knows the company will cover losses, it might make people less vigilant. While it may not be the case with automobile insurance, we do see people take more risks if they know they will not bear the entire burden of the possible negative outcome of their action.

1. What is the purpose of automobile insurance?

2. How does insurance encourage risky behavior?

3. If insurance companies did not cover deer/vehicle collisions or had a very high deductible, what should we observe?

mauvedolphin78

Topic:
How would you explain the finding that people in high-income economies seem happier than people in low-income economies, but, over time, people in high-income economies do not seem to be any happier even if their country grows richer? Briefly discuss.

Optional Reading:

Income and Happiness

The Declaration of Independence in 1776 identified âcertain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.â This did not guarantee happiness but did establish the pursuit of happiness as an âunalienableâ right, meaning that right cannot be taken away, given away, or sold. Eighteenth century philosopher and social reformer Jeremy Bentham argued that government policy should promote the greatest happiness for the greatest number of people.

Many people today apparently agree. In recent polls, 77 percent of Australians and 81 percent of Brits believed that a government's prime objective should be promoting the greatest happiness rather than the greatest wealth. The United Nations in 2007 sponsored an international conference on âHappiness and Public Policy.â Thailand now compiles a monthly Gross Domestic Happiness Index. Even China has joined in the fun reporting a happiness index based on polling results about living conditions, income, the environment, social welfare, and employment. Australia, Canada, and the United Kingdom are also developing happiness indexes.

Economists have long shied away from asking people how they feel, preferring instead to observe their behavior. But more now see some value in asking questions. In the most extensive of polls, the Gallup organization asked people in 130 countries: âHow satisfied are you with your life, on a scale of zero to ten?â The results, reported in 2007, are not surprising. Most people in the high income areas, such as the United States, Europe, and Japan, said they are happy. Most people in the poor areas, especially in Africa, said they are not. Also, within a given country, income and happiness are positively related. After evaluating all the results of the Gallup world poll, Angus Deaton of Princeton concluded: âThe very strong international relationship between per capita GDP and life satisfaction suggests that, on average, people have a good idea of how income, or the lack of it, affects their lives.â 8

So these results are no surprise. What does puzzle economists is that other surveys suggest that in affluent countries people do not seem any happier over time even though each generation became richer than the last. For example, in the United States, the proportion of people who say they are happy has stayed about the same despite 60 years of economic growth. In Japan, happiness responses actually declined despite a substantial increase in real income over the last 50 years.

Here are two possible explanations. First, people begin taking for granted those luxuries they most desired. For example, two generations ago color TVs, automobiles, and major appliances were luxuries, but now they are must-items for most households. Computers and flat screen HDTVs will soon move from luxuries to necessities. As each generation attains a higher standard of living, people become less sensitive to the benefits, they take them for granted, and thus they say they are no happier.

Second, research suggests that what matters is not just the absolute level of income but income relative other people in the reference group. Imagine you have a choice between (1) earning $50,000 a year while others in your reference group make $25,000 or (2) earning $100,000 a year while others make $250,000 (suppose, too, that prices remain the same, so $100,000 is double the real income of $50,000). Which would you prefer? Studies show that when people face this hypothetical choice, most pick the $50,000 option. That is, they prefer to make more than others even if that means a lower real income. Thus, if all incomes rise on average over time, this does not affect that aspect of happiness linked to oneâs relative standing. As the social critic H. L. Mencken long ago observed, "A wealthy man is one who earns $100 a year more than his wife's sister's husband."

SOURCES: Daniel Gilbert, Stumbling On Happiness, (New York: Knopf, 2006); Marina Kamenev, âRating Countries for the Happiness Factor,â Business Week, 11 October 2006; Angus Deaton, âIncome, Aging, Health, and Wellbeing Around the World: Evidence from the Gallup World Poll,â Princeton Working Paper, (August 2007); and âWhere Money Seems to Talk,â Economist, 12 July 200

1. When economists speak of "marginal," they mean
a. Opportunity.
b. Scarcity.
c. Incremental.
d. Unimportant.

2. Managers undertake an investment only if
a. Marginal benefits of the investment are greater than zero.
b. Marginal costs of the investment are greater than marginal benefits of the investment.
c. Marginal benefits are greater than marginal costs.
d. Investment decisions do not depend on marginal analysis.

3. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly, and they cost $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs break down?
a. Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250.
b. Total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250.
c. Total variable cost is $5,000; total fixed cost is $14,250; total cost is $19,250.
d. Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250.

4. Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. Which of the following is true if marginal cost is constant?
a. FC = $100
b. FC = $200
c. FC = $300
d. FC = $400

5. A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare
a. The total benefits gained from the two factories to the total costs of running the two factories.
b. The incremental benefit expected from the second factory to the total costs of running the two factories.
c. The incremental benefit expected from the second factory to the cost of the second factory.
d. The total benefits gained from the two factories to the incremental costs of running the two factories.

6. A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1,500 per week. If the price of each unit is $12,
a. The MR of hiring the worker is $1,500.
b. The MC of hiring the worker is $1,200.
c. The firm should not hire the worker since MB < MC.
d. All the above

7. A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of $7 per hour is sufficient.
What is the marginal cost of the 13th worker?
a. $117
b. $9
c. $33
d. $84

8. If a firm's average cost is rising, then
a. Marginal cost is less than average cost.
b. Marginal cost is rising.
c. Marginal cost is greater than average cost.
d. The firm is making an economic profit.

9. After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you of committing the sunk-cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough sale. Which of the following suggests the sales representative may be right?
a. Most of the costs of drug development are sunk, not fixed.
b. Sales representatives are paid a sales commission on revenue, so they don't care about the costs of drug development.
c. Sales representatives don't worry that a low price today may make it more difficult for the company's other sales representatives to charge higher prices to their customers, tomorrow.
d. Sales representatives think only about one thing, sales.

10. A company is producing 15,000 units. At this output level, marginal revenue is $22, and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40.
What can we conclude from this information?
a. The company is making a loss.
b. The company needs to cut production.
c. The company needs to increase production.
d. Not enough information is provided.

Economics A170 Lecture 9: Economics_A170_Lecture_9

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