THE ECONOMY’S INCOME AND EXPENDITURE

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THE ECONOMY’S INCOME AND EXPENDITURE If you were to judge how a person is doing economically, you might first look at his or her income. A person with a high income can more easily afford life’s necessities and luxuries. It is no surprise that people with higher incomes enjoy higher standards of living-better housing, better healthcare, fancier cars, […]

PROBLEMS AND APPLICATIONS

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PROBLEMS AND APPLICATIONS I. Each of the following situations involves moral hazard. In each case, identify the principal and the agent, and explain why there is asymmetric information. How does the action described reduce the problem of moral hazard? a. Landlords require tenants to pay security deposits. b. Firms compensate top executives with options to buy company […]

The Psychology of Saving

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The Psychology of Saving Economists interested in behavioral economics have devoted much energy to studying why people don’t save more. A Quick Way to Build a Nation of Savers Americans seem to hate saving. In October, the nation’s households saved just 0.2 percent of their income. And despite the tax advantages conferred by 401(k),s, individual retirement accounts […]

CONCLUSION

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CONCLUSION This chapter has examined the frontier of microeconomics. You may have noticed that we have sketched out ideas rather than fully developing them. This is no accident. One reason is that you might study these topics in more detail in advanced courses. Another reason is that these topics remain active areas of research and, therefore, are still […]

PEOPLE ARE INCONSISTENT OVER TIME

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PEOPLE ARE INCONSISTENT OVER TIME Imagine some dreary task, such as doing your laundry, shoveling snow off your driveway, or filling out your income tax forms. Now consider the following questions. 1. Would you prefer (A) to spend 50 minutes doing the task right now or (B) to spend 60 minutes doing the task tomorrow. 2. Would […]

PEOPLE CARE ABOUT FAIRNESS

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PEOPLE CARE ABOUT FAIRNESS Another insight about human behavior is best illustrated with an experiment called the ultimatum game. The game works like this: Two volunteers (who are otherwise strangers to each other) are told that they are going to play a game and could win a total of $100. Before they play, they learn the rules. […]

PEOPLE ARENT ALWAYS RATIONAL

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PEOPLE ARENT ALWAYS RATIONAL  Economic theory is populated by a particular species of organism, sometimes called Home economicus Members of this species are always rational. A3 firm managers, they maximize profits. As consumers, they maximize utility (or equivalently, pick the point on the highest indifference curve). Given the constraints they face, they rationally high all the costs and […]

BEHAVIORAL ECONOMICS

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BEHAVIORAL ECONOMICS Economics is a study of human behavior, but it is not the only field that can make that claim. The social science of psychology also sheds light on the ch~ice” that people make in their lives. The fields of economics and cytology usually proceed independently, in part because they address a different range of questions. But […]

POLITICIANS ARE PEOPLE TOO

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POLITICIANS ARE PEOPLE TOO When economists study consumer behavior, they assume that consumers buy the bundle of goods and services that gives them the greatest level of satisfaction. When economists study firm behavior they assume that firms produce the quantity of goods and services that yields the greatest level of profits What should they assume when they study […]