ECON 100 MIDTERM FALL 2022 AHMAD
Chapter 5 Practice Problem 2: For the following contracts, explain who the principal is, who the agent is, what at least one hidden-action problem is (there may be more than one!), and (if applicable) how contracts may help even if they are incomplete. (No one right answer, but I want you to generalize from the examples we have seen in class and in your book to think about hidden-action problems in the real world).
(A) A Rhodes student rents an apartment from a landlord (B) Liberty Mutual offers Mary an auto-insurance policy (C) Rhodes hires a new professor in the History Department (D) Boris take his Buick to the mechanic for an oil change (E) Ying takes out a loan from a bank to start a dentistry practice (F) Kashif hires a contractor to build a deck for his house
Chapter 4 Practice Problem 1: Suppose Chuck and Delilah are partners. They enjoy spending time together but have different inter-ests: Chuck likes the opera, and Delilah likes watching soccer. Suppose that Chuck's payoff if he goes to the opera is 5 if he goes with Delilah, and 0 if he goes alone; if he goes to the soccer game, his payoff is 3 if he is with Delilah, and 0 if he is alone. For Delilah, her payoffs from going to the opera are 3 if she is with Chuck and 0 if she is there alone, and from watching soccer, 5 from being with Chuck and 0 if she is alone. Suppose one Friday night, they need to (independently and without communicating) leave their separate workplaces to one of the two activities available that night (the opera or soccer game).
(A) Draw a bimatrix (a two-by-two box) for their problem with Chuck as the row player and Delilah as the column player, being sure to label their actions and associated payoffs. (B) Does Chuck have a dominant strategy here? If so, what is it? What about Delilah? Is there a dominant strategy equilibrium and if so, what is it? (C) Does this game have one or more Nash equilibria? If so, what are they? Do any of the Nash equilibrium outcomes Pareto-dominate others? (D) Looking over your previous answers, would you describe this game as analogous to the Invisible Hand game(where self-interest leads to Pareto-optimal outcomes), a social dilemma (where self-interest leads to Pareto-dominated outcomes), a coordination game (where there is more than one pure-strategy Nash equilibrium)or an anti-coordination game (where there is no pure-strategy Nash equilibrium)? (E) If we change the game so that one player moves first and then the other follows, is there a unique equilib-rium? Draw a game tree assuming that Chuck moves first and Delilah follows. Would Delilah prefer to go first?
Chapter 4 Practice Problem 2: Suppose Elaheh and Farhaad are class-mates working on a group project. If they both work on it, they get an A: if only one of them works on it, they both get a B, and if neither of them works on it, they get a C(blame grade inflation!). Suppose that each values at A at 5 utils, a B at 3 utils and a C at 1 util, and that working causes disutility equal to 1 util.
(A) Draw a bimatrix (a two-by-two box) for their problem with Elaheh as the row player and Farhaad as the column player, being sure to label their actions and associated payoffs. (B) Does Elaheh have a dominant strategy here? If so, what is it? What about Farhaad? Is there a dominant strategy equilibrium and if so, what is it? (C) Does this game have one or more Nash equilibria? If so, what are they? Do any of the Nash equilibrium outcomes Pareto-dominate others? (D) Looking over your previous answers, would you describe this game as analogous to the Invisible Hand game(where self-interest leads to Pareto-optimal outcomes), a social dilemma (where self-interest leads to Pareto-dominated outcomes), a coordination game (where there is more than one pure-strategy Nash equilibrium)or an anti-coordination game (where there is no pure-strategy Nash equilibrium)? (E) If we change the game so that one player moves first and then the other follows, is there a unique equi-librium? Is it different from the simultaneous case? Draw a game tree assuming that Elahah moves first and Farhaad follows (suppose that they can split the group project and she must complete her part before Farhaad chooses his action). Would Farhaad prefer to go first? (F) Going back to the simultaneous version of the game, suppose that the disutility of work is 3 utils for each student rather than 1 util. How does this change your answer to the questions above?
Chapter 4 Practice Problem 3: Messi and Neuer are soccer players: suppose that Messi is taking a penalty-shot with Neuer defending in the goal. Messi can kick to the left or to the right: Neuer can jump to the left or jump to the right. 2 Let's assume that Messi's payoff is 1 if he selects a location where Neuer is not, and 0 otherwise. Neuer's payoff is 1 if he selects the location that Messi kicked the ball, and 0 otherwise.
(A) Draw a bimatrix (a two-by-two box) for their problem with Messi as the row player and Neuer as the column player, being sure to label their actions and associated payoffs. (B) Does Messi have a dominant strategy here? If so, what is it? What about Neuer? Is there a dominant strategy equilibrium and if so, what is it? (C) Does this game have one or more Nash equilibria? If so, what are they? Do any of the Nash equilibrium outcomes Pareto-dominate others?3 (D) Looking over your previous answers, would you describe this game as analogous to the Invisible Hand game(where self-interest leads to Pareto-optimal outcomes), a social dilemma (where self-interest leads to Pareto-dominated outcomes), a coordination game (where there is more than one pure-strategy Nash equilibrium)or an anti-coordination game (where there is no pure-strategy Nash equilibrium)? (E) If we change the game so that one player moves first and then the other follows, is there a unique equilibrium? Is it different from the simultaneous case? Draw a game tree assuming that Messi moves first and Neuer follows (suppose that Neuer's reflexes are fast enough that he can see what Messi did before choosing which way to jump). Would Neuer prefer to go first instead? (F) Why was your answer to who prefers to go first different in this problem, compared to your answer in theBattle of the Sexes problem faced by Chuck and Delilah?
Chapter 3 Practice Problem 1: Imagine a society that produces military goods (which we will call "guns" for short) and consumer goods (which we will call "butter" for short).
(A) Draw a bowed-out production possibilities frontier (PPF) for guns and butter. Explain (using the concept of opportunity cost) what feature of reality this shape is meant to capture (as opposed to, say, the linear PPFswe saw in the Ricardian model) . (B) Mark three points on your diagram, indicating bundles of guns and butter: one that is impossible for the society to achieve (i.e. is infeasible), one that is feasible but inefficient (i.e. in the sense that it leaves resources unused), and one that is feasible and efficient.(C) Imagine that this society has two political parties, the Hawks (who want a bigger military) and the Doves (who want a smaller military). Mark two points on your PPF, one showing a bundle of guns and butter that Hawks might prefer, and one showing a bundle that Doves might prefer. (D) Imagine that an aggressive neighboring country reduces the size of its military. As a result, both Hawks and Doves reduce their desired production of guns by the same quantity. Which party would get the bigger "peace dividend" (measured by the increase in butter resulting from lowered military spending)? Explain.
Chapter 3 practice problem 4: Families face trade-offs when deciding how many children to have, because raising children takes scarce resources (time, money) away from other uses. In the 1960s, the US Total Fertility Rate (TFR) was around3.5 (i.e. the expected number of children a woman would expect to have given patterns of age-specific fertility at the time). Today, the US TFR is around 1.8. This consumer-choice model will help us think through what role economic forces may have played in shaping the size of the modern family.
(A) Draw a graph of a budget constraint for the family Jones, where Mr. Jones works at the Sanitation Depart-ment and his wife Mrs Jones stays at home. The Jones' monthly income is $5000. Let the y-axis good is the consumption of goods (measured in $) and the x-axis good is children (measured in kids). Suppose that the cost per child per month is $1000 and that they are a normal good (that is, that higher incomes increase the desired number of children ceteris paribus). Provide an equation for this budget constraint and interpret its slope. (B) Let's suppose that the optimal choice for the Jones family is having three children. How much consumption of other goods can they enjoy? Draw an indifference curve that goes through this point, assuming that it takes the usual shape we've seen in class (downward-sloping, smooth, and with a flattening slope). What can you tell me about the Jones' Marginal Rate of Substitution at this point? (C) Suppose that Mr. Jones gets a raise at work, earning an extra $3000. How does this change the family's budget constraint? Use a new graph with the old and new budget constraint to show (qualitatively) might this change the optimal choice of number of kids vs other consumption the Jones choose. Can you be sure they will have more, fewer, or the same number of kids. Be sure to distinguish between the income effect vs substitution effect, if relevant. (D) Now suppose that Mr Jones had never gotten the raise but that Mrs. Jones is offered a job at the local library, earning an extra $3000 for the family. However, if she is away during the day, they must also pay for $1000per month in childcare, so that the total cost per child is now $2000 per child per month. How does this change the family's budget constraint? Use a new graph with the old and new budget constraint to show(qualitatively) change the optimal choice of number of kids vs other consumption the Jones choose? Can you be sure they will have more, fewer, or the same number of kids? Be sure to distinguish between the income effect vs substitution effect, if relevant. (E) What do your answers here suggest about the role of rising women's labor-force participation since the 1960sin understanding the shrinking size of the American family? (F) The Biden Administration's American Rescue Plan included a temporary Child Tax Credit of $300 per month per child, paid to every family in the US last year (2021). How would this affect the shape of the Jones' budget constraint and choice of optimal size, assuming it had been made permanent? Be sure to distinguish between the income effect vs substitution effect, if relevant.
Chapter 5 Practice Problem 4: Suppose that Marjorie is a manager of a widget factory and William is a worker there who makes widgets. His best response function of effort given a wage w of $5 or above is e(w ) =pw −5. Suppose that e is the number of widgets he makes each hour.
(A) How much effort does William apply when he is paid a wage of $5? $9? $14? $30? Sketch his best response function: what is the economic interpretation of the slope? What assumption are we making about the marginal productivity of William's effort? (B) How many widgets does William make in an hour if his effort is 0? What about if his effort is 1? What about 2or 3? (C) What is William's reservation wage (that is, the wage at which he would apply no effort because he would be indifferent between having the job or not?) Why would Marjorie never offer that wage to William? (D) Using your answers to the previous questions, how many widgets will William make an hour at a wage of $5,$9, $14, and $30? (E) Marjorie only cares about the number of widgets Williams makes per hour she pays him: what is the cost per widget if she pays him a wage of $9 per hour? What about if she pays him $14 per hour or $30 an hour? (F) Draw three isocosts for Marjorie, corresponding to 1, 3 and 5 dollars per widget. Are any of these feasible?Are any of these efficient? Which of them would she prefer if she could be on any of the three? 2 (G) Let's find Marjorie's optimal choice of wage to offer to William. The slope of William's best-response function(i.e. the MRT) is 12pw −5 .3 The slope of each isocost (i.e. the MRS) is e/w =pw −5w . Set these equal to one another (M RS =M RT ) to solve for w ∗, which corresponds to the highest effort-per-dollar (or lowest dollar-for-effort) wage that Marjorie can feasibly reach. What is that wage? (H) Suppose that, due to the pandemic, the government offered an unemployment benefit of $3 per hour: this shifts William's best-response function to e(w ) =pw −8, with corresponding MRT 12pw −8 . What wage willMarjorie now offer to William? Will he work as hard as before at this wage, harder, or less hard? (I) Suppose that, due to the pandemic, the disutility of work has risen for William: that is, because he risks getting sick if he comes to work, his disutility of working rises and his best-response function is e(w ) =p(w −8). What wage will Marjorie now offer to William? Will he work as hard as before at this wage, harder or less hard? (J) Now let's think qualitatively instead: if William's best-response curve had the same shape but was steeper, would he be paid a higher wage or lower? Interpret what this change means in economic terms. (K) If Marjorie could invest in monitoring technology such that she could perfectly observe any worker's level of effort, would this be good for Marjorie, William, or both? Explain. (L) If Marjorie instead paid a piece rate ($ per widget), would this be good for Marjorie, William, or both? Explain. (M) What does the fact that piece rates have declined in importance and hourly wages have grown tell you about the nature of work over the long run in the US? Has this been a good thing for workers or a bad thing?
Chapter 3 practice problem 3: Weihuang finds that the relationship between his daily work hours (h) as a professional juggler on Beale St and his output (Q) is described by the function Q(h) =21h −h2 . In this problem, let's interpret the output as the cumulative number of spectators over a given number of hours who stop to watch Weihuang juggle. Suppose that each spectator donates $1, so that Weihuang's output is the same as his revenue.
(A) Make a table with the following columns: hours of work, total output, average output per hour, and marginal output. Fill in these values assuming Weihuang can choose to work any integer number of hours between 0and 10. (B) Draw a graph of Weihuang's total output (on the y-axis) against his work-hours (on the x-axis). (C) What is Weihuang's total, average and marginal product if he works 4 hours a day? What about 8 hours a day? How can you visualize these on the graph you drew for (b)? (D) Does this graph featuring diminishing marginal product of labor? Is this a realistic assumption for a professional juggler? (E) Suppose that each hour of leisure is worth $16 to Weihuang (so that his MRS is always $16). How many hours should he work each day? [Hint: remember that each spectator who sees him perform pays $1 to watch him juggle, so total revenue is the same as total output).(F) After a year's practice, Weihuang's juggling has improved and he now attracts twice as many spectators for each hour of work (who still donate $1 each to see him juggle). Assuming he still values his free time at$16 per hour, how many hours will he work now? Provide some economic intuition for the direction of the change.
Chapter 3 practice problem 2: Relative prices play a key role in a wide variety of models: recall that both in the Ricardian model and the factor-price & technology-choice model of Chapters 1 and 2, the relative price of one good (or factor) was essential to determining comparative advantage and the cost-minimizing choice of technology, respectively. Let's practice with some simple consumer budget constraints, and use the opportunity to remind ourselves how relative prices appeared in Chapters 1 and 2 to help cement the commonality.
(A) Suppose I found myself at a bar that offered $10 glasses of wine and $5 pints of beer. What is the price of wine in terms of glasses per pint of beer? Draw my budget constraint assuming I have $20 in my pocket, putting beer on the y-axis. Interpret the slope. (B) In three hours, you can watch 1 Marvel movie or read 3 Marvel comic-books. What is the price of a Marvel movie in terms of Marvel comic books? Draw your budget constraint if you have 9 hours free on a Saturday, putting comic-books on the x-axis. Interpret the slope. (C) Revisit the Ricardian PPFs from our first problem set: to be concrete, Farmer Jane owns a 100 acre farm, on which she can grow wheat or corn. On each acre, planting corn will yield 15 tons of corn and planting wheat will yield 20 tons of wheat. What is the price of a ton of corn in terms of tons of wheat? Draw Farmer Jane'sPPF, putting wheat on the y-axis. Interpret the slope, and compare to your previous answers for consumers' budget constraints (D) Revisit the Ricardian PPFs from our first problem set: to be concrete, consider the choice faced by FishermanPablo who can catch 50 crabs per hour or 20 tuna per hour. What is the price of a tuna in terms of crabs? Assuming Pablo works eight hours per day, draw his PPF putting crabs on the y-axis. Interpret the slope, and compare to your previous answers for consumers' budget constraints. (E) Revisit the isocost lines from the last problem set: to be concrete, consider the cost of a pizza restaurant that produces output with ovens which are rented for $20 a day and workers who cost $100 per day. What is the isocost corresponding to a $500? What is the relative price of a worker in terms of ovens? Draw the iso-cost, putting ovens on the y-axis. Interpret the slope, and compare to your previous answers for consumers'budget constraints.
Chapter 5 Practice Problem 3: Suppose that Adam works at Starbucks as a barista for a fixed hourly wage. He knows he can go across the street to Kroger and get a job that pays $10 an hour.
(A) Suppose that Starbucks and Kroger are identical in terms of the utility they offer in terms of amenities as well as the disutility of effort, and that both jobs require Adam to exert costly effort that is unobservable to his manager at either location. Why does Starbucks have to pay him more than $10 an hour to get him to work there? (B) Suppose instead that working at Starbucks offers more utility than Kroger: it is a pleasant environment to work in, has fun co-workers and plays pleasant music. Does that raise or lower the employment rents Adam would receive from working there? What does that imply for the wage that he will be offered by Starbucks -will it be higher or lower than the wage implied in the previous part of the question? (C) Suppose that working at Starbucks requires effort that is harder to monitor than at Kroger (for example,Kroger might monitor workers more closely with supervisors than Starbucks does): what does this imply for the optimal wage that Starbucks will offer Adam, all else equal? (D) During the Covid-19 pandemic, working in-person carried greater risk to individuals than it did before: what does this imply for the optimal wage that Starbucks will offer Adam, all else equal? If Starbucks required a mask mandate for its customers and workers and Kroger did not, how would that affect Adam's potential employment rents from working at Starbucks? (E) If the government offers more generous assistance to the unemployed, what does this imply for the optimal
Chapter 5 Practice Problem 1: Let's through how the hold-up problem helps us understand some features of the institution of marriage. You will find the Ricardian model we developed in Chapter 1 useful for guiding your thinking. (I remind you here that we are undertaking a positive analysis of marriage here, not a normative one!)
(A) Suppose that partners can have specialize in two different activities: let's call them "market production" (i.e.working outside the home for wages) and "home production" (e.g. cooking, cleaning, childcare etc.) When individuals live alone, they must do both activities (work and clean). Why might two individuals be better off if they live together than if they live separately? (B) Let's think about two individuals in particular: Chris and Morgan. Suppose that Chris has a comparative advantage in market work and Morgan has a comparative advantage in home work. If they marry, can we be sure both will be better off? On what does the distribution of the benefits of specialization depend? (We could call these "marriage rents" or the "joint surplus created by marriage"). (C) Are marriage contracts complete or incomplete? Are there things that spouses do that are not observable to the other? Are there things that spouses do that may be observable to each other but unverifiable to an outsider? (D) Suppose that it is pretty easy for Chris to find another partner (perhaps Chris is a Rhodes graduate, and men and women all over the Mid-South line up waiting to marry Rhodes grads), but that it is hard for Morgan to find another partner (perhaps Morgan went to Sewanee - enough said!). How do you think that would affect the division of marriage rents between the two? (E) Now suppose that both parties must face the possibility of living alone if they divorce: that is, let's abstract from the issue of their alma maters and how quickly they could find a new spouse. Who will be better off: Chris (who has specialized in market production) or Morgan (who has specialized in home production)? 1 Why do you think that? How does that affect the division of marriage rents between the two parties? (F) Young people like Chris and Morgan need to make some important decisions before they get married: how much to invest in skills that will make them better market workers (e.g. going to college, learning skills valued by employers) versus skills that make them better home workers (e.g. learning to cook, clean, decorate, look after children etc.). Are marriage rents larger when Chris and Morgan invested in different skills when young(market vs home) or similar skills (both market, or both home)? Why? (G) As good ECON100 students, Chris and Morgan practice backward induction before deciding what skills to invest in. That is, they consider what share of marriage rents they would get if they learned to excel at markets home production. Which type of skill is going to be under-invested in (relative to the optimum), and why? Does this raise or lower the overall returns to marriage? What does this have to do with the "hold-up" problem we studied in class? (H) If it were impossible to divorce (that is, marriage were truly "till death do us apart"), would that raise or lower joint surplus from marriage. Why? (I) If it were costless for either party to dissolve a marriage (that is, it was as simple as either party saying "I'm done" with no financial or legal costs, or even social stigma, from ending a marriage), would that raise or lower the joint surplus from marriage? Why? (J) If marriage contracts were complete, would that raise or lower the joint surplus from marriage? (K) What does your analysis suggest here is the trade-off we face as a society when we make divorce marginally more or less costly?
Chapter 3 practice problem 5: Robinson Crusoe, stranded on a desert island, can spend his time collecting coconuts (C) or catching quail (Q). The table below provides the absolute values of his Marginal Rate of Substitution (MRS) and his MarginalRate of Transformation (MRT), as they vary with the number of coconuts he collects. Recall that the MRS is the slope of an indifference curve, and the MRT the slope of the PPF. # of Coconuts: 1 2 3 4 5 6 MRS: 30 20 15 10 8 7 MRT: 1 3 5 6 8 10
(A) What is the Marginal Rate of Substitution measuring here? Why is it falling the more coconuts that Robinson collects? What does this tell you about Robinson's preferences? (B) What is the Marginal Rate of Transformation measuring here? Why is it rising the more coconuts that Robin-son collects? What does this tell you about Robinson's production function for collecting coconuts? (C) What level of coconut collection maximizes Robinson's utility? Draw a (rough) sketch of a PPF with quails on the y-axis and the x-axis, and show the indifference curve that goes through Robinson's optimal amount. [Note: you do not know how many quails he consumes at that point, but you should be able to label clearly how many coconuts he consumes!] (D) Suppose that Robinson collects 2 coconuts and spends the rest of his time catching quail. Can you tell me whether he would get more or less utility from collecting 1 more coconut and catching fewer quail? How do you know? [Hint: draw an indifference curve through this point. Is it higher or lower than that of the optimum? Examine the MRT and MRS at this point, both in the table above and graphically. What does the fact that M RT <M RS imply?] (E) Suppose that Robinson collects 6 coconuts and spends the rest of his time catching quail. Can you tell me whether he would get more or less utility from collecting 1 less coconut and catching more quail? How do you know? [Hint: draw an indifference curve through this point. Is it higher or lower than that of the optimum?Examine the MRT and MRS at this point, both in the table above and graphically. What does the fact thatM RT <M RS imply?] (F) How would Robinson's PPF change if he got better at catching quail? Sketch how the shape would change qualitatively, and draw a new indifference curve going through a new optimum. Does this increase in pro-ductivity get him to a higher indifference curve? Can you "see" that depending on the shape of the indiffer-ence curve, he might end up consuming either more quail, more coconuts or some of both, relative to his old optimum?
Chapter 4 Practice Problem 4: Suppose Paulie and Chris are mafia members who have been picked up by the police on a minor drug possession charge. The police officer questioning them also suspects them of involvement in a more serious murder but has no evidence with which to convict them. She has a bright idea and separates them into two rooms, telling each the same thing: "If you both confess to the murder, you'll serve a five-year prison sentence. However, if you don't confess and your partner does, you'll serve 8 years while your partner goes free. If neither of you confess, we'll have no problem imprisoning you for a year on drug charges." You can think of the payoffs to the players here as being a (negative) function of the years served in jail: for example, Paulie's payoffs from serving 1 or 5 years is -1and -5.
(a) Draw a bimatrix (a two-by-two box) for their problem with Paulie as the row player and Chris as the column player, being sure to label their actions and associated payoffs. (B) Does Paulie have a dominant strategy here? If so, what is it? What about Chris? Is there a dominant strategy equilibrium and if so, what is it? (C) Does this game have one or more Nash equilibria? If so, what are they? Do any of the Nash equilibrium outcomes Pareto-dominate others? (D) Looking over your previous answers, would you describe this game as analogous to the Invisible Hand game(where self-interest leads to Pareto-optimal outcomes), a social dilemma (where self-interest leads to Pareto-dominated outcomes), a coordination game (where there is more than one pure-strategy Nash equilibrium)or an anti-coordination game (where there is no pure-strategy Nash equilibrium)? (E) If we change the game so that one player moves first and then the other follows, is there a unique equilibrium? Is it different from the simultaneous case? Draw a game tree assuming that Paulie moves first andChris follows (suppose that the police officer lets Chris watch a video of Paulie's response to their question before asking him). Would Chris prefer to go first? (F) Suppose that Paulie and Chris really care about each other: that is, they are altruistic and feel bad when the other goes to prison. How might you change their payoffs to reflect this fact, assuming that for each the new payoff is the same of his own utility and his friend's? (If Paulie walked free and Chris served 10 years, Paulie's payoff would be -10, and his payoff if they both went to jail for a year would be -2.) What is the Nash equilibrium of the new game? (G) Suppose that they are not altruistic, but they both know that if their boss Tony finds out that who confessed to the police, that he'd have that person killed for disloyalty. How might you change their payoffs from their actions, assuming that confessing is associated with guaranteed death tomorrow (and a payoff of, say, -100)?What is the Nash equilibrium of the new game?(h) Suppose that Paulie and Chris find themselves in this situation repeatedly - every month they get picked up on some minor charge and threatened with prison time in the same way. Explain (in words) how the following strategy might be sufficient to arrive at the Pareto-optimal outcome for the game - Chris says to Paulie "Listen, buddy, if you ever confess even once, I swear I'll rat you out every time we find ourselves inhere until I die." Would this strategy be as effective if Paulie had a diagnosis of terminal brain cancer? Why or why not?
Pareto improvement:
A change that benefits at least one person without making anyone else worse off.
incomplete contract
A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).
Allocation:
A description of who does what, the consequences of their actions, and who gets what as a result.
inequality aversion
A dislike of outcomes in which some individuals receive more than others
sequential game
A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game
zero-sum game
A game in which the payoff gains and losses of the individuals sum to zero, for all combinations of strategies they might pursue.
Prisoner's Dilemma
A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy
coordination game
A game in which there are two Nash equilibria, of which one may be Pareto superior to the other
invisible hand game
A game in which there is a single Nash equilibrium and where there is no other outcome in which both players would be better off or at least one better off and the other not worse off and is Pareto efficient
public good
A good for which use by one person does not reduce its availability to others
consumption good
A good or service that satisfies the needs of consumers over a short period.
Scarcity
A good that is valued, and for which there is an opportunity cost of acquiring more.
Lorenz curve
A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one. The extent to which the curve falls below this perfect equality line is a measure of inequality
Gini coefficient:
A measure of inequality of any quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it).
game
A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs
Economic rent (compared to land rent)
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option)
economic rent
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option)
Reciprocity
A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind
social dilemma
A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals
Chapter 4 Practice Problem 5: Which of the following statements are normative (or prescriptive)? Which statements are positive (or descriptive)?
A.)The government should take care of the elderly. (B) If the real wage rises, all else equal, we expect firms to look for innovation rents by creating labor-saving innovations. C) When incomes decrease, people consume less caviar because caviar is a normal good. D) To protect the environment, we ought to recycle more. E) People should get the Covid vaccine because it benefits not only them but also protects others around them. F) People should be more altruistic owe can avoid social dilemmas. G) If people were more altruistic, some social dilemmas could be avoided.
Pareto criterion:
According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto-efficient.
feasible set
All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces.
Pareto Domination:
Allocation A Pareto dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off.
Pareto efficiency
An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off.
budget constraint
An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one's budgetary resources.
procedural concepts of fairness
An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is).
dominant strategy equilibrium
An outcome of a game in which every player plays his or her dominant strategy
firm
Economic organization in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit.
best response
In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select
verifiable information
Information that can be used to enforce a contract.
asymmetric information
Information that is relevant to the parties in an economic interaction, but is known by some but not by others. See also: adverse selection, moral hazard.
Substantive concept of fairness
Judgements are based on the characteristics of the allocation itself, not how it was determined.
MRT = MRS
Optimal Option ( this is where we want to be at because we want to pay little and have more)
average product
Output per worker Total output/ number of workers
firm-specific asset
Something that a person owns or can do that has more value in the individual's current firm than in their next best alternative.
Power:
The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions.
separation of ownership and control
The attribute of some firms by which managers are a separate group from the owners.
employment rent
The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed). Also known as: cost of job loss.
institution effect
The effect that is only due to changes in the price or opportunity cost, given the new level of utility.
income effect
The effect that the additional income would have if there were no change in the price or opportunity cost.
Bargaining Power:
The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction.
Institution
The laws and informal rules that regulate social interactions among people and between people and the biosphere, sometimes also termed the rules of the game.
worker's best response function (to wage)
The optimal amount of work that a worker chooses to perform for each wage that the employer may offer.
marginal rate of transformation (MRT)
The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier.
Pareto efficiency curve:
The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term.
division of labor
The specialization of producers to carry out different tasks in the production process( aka specialization)
unemployment, involuntary
The state of being out of work, but preferring to have a job at the wages and working conditions that otherwise identical employed workers have. See also: unemployment.
Joint surplus
The sum of the economic rents of all involved in an interaction. Also known as: total gains from exchange or trade.
marginal rate of substitution (MRS)
The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve.
altruism
The willingness to bear a cost in order to benefit somebody else
constrained choice problem
This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.
principal-agent relationship
This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. See also: incomplete contract. Also known as: principal-agent problem.
reservation wage
What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job.
free rider
a person who receives the benefit of a good but avoids paying for it
Nash Equilibrium
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
marginal product
extra output due to the addition of one more unit of input
indifference curve
shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred)
The feasible frontier
shows the maximum output that can be achieved with a given amount of input.
diminishing returns
stage of production where output increases at a decreasing rate as more units of variable input are added
production function
the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
economic cost
the value of all resources used to produce a good or service + opportunity cost
opportunity cost
whatever must be given up to obtain some item
anti-coordination game
your best response is to take a different action than the other player