TAMU online Econ 202 Wiggins/Meer Exam 3

MODULE 9

"hidden actions"

- when one party can do something that is relevant for the transaction but is unobserved to the other party

- people will take on more risk, when they don't bear the full costs of their actions.

-insurance

-MORAL HAZARD

Asymmetric information

- when one party in a transaction knows something that the other party doesn't, but would like to.

-

Information asymmetry in a market can lead to ________.

a market failure

"hidden characteristics"

- when one party knows something about the goods and services that the other one doesnt

- (market for used cars) the seller knows much more about the car than the buyer does.

-

moral hazard

- changing behavior because your actions aren't observed by the others

- It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.

principal-agent problem

- hiring someone to do something for you.

- you are the principal and the person you hire is the agent.

- It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them.

- happens because of moral hazard

- your incentives as the principal aren't aligned with the incentives of the agent

adverse selection

when one agent in the transaction knows about a hidden characteristic of the good and they can decide whether or not to participate in the market on the basis of that private information.

copayments

fees that you pay each time you use a service

deductibles

portion you have to pay your self

coinsurance

where the cost of the services are split between the insurance company and the policy holder.

________ discourage low-risk individuals from seeking health insurance.

high premium

third-party payer

- type of moral hazard

- causes issues because it is a typical principal-agent problem

- the problem arises from the misaligned incentives

-the person that is footing the bill, the principal, is not the one that is actually making the decisions, the agent.

adverse selection death spiral

from the healiest to the sickest

underwriting

- an approach on how you can deal with an adverse selection death spiral

- an insurance company term that means evaluting the risk of a prospective client

mandate

to purchase health insurance enforced by the government through fines

signaling

where the party with private information undertakes some action to convince others that they or their products are high quality.

Which of the following is a market-based solution to the problem of adverse selection?

signaling

In order to be useful as a signal in a market with information asymmetry, the signal must be ________.

difficult to obtain

human capital model

the more education you get, the more productive you are so your wages are higher, you accumulate human capital.

firms use labor as input into their production

marginal product of labor (MPL)

how much does each additional worker produce?

law of diminishing returns

used to refer to a point at which the level of profits or benefits gained is less than the amount of money or energy invested.

the demand for labor is a...

derived demand

marginal revenue product of labor

-value of the labor of each worker,

-how much is the produce that each worker makes actually worth?

-depends on the price of the final good, the output

marginal benefit =

marginal cost

marginal revenue product of labor =

wages

the marginal revenue product curve is ...

the demand curve for labor

-tells the firm how many workers it should hire

reasons why the demand for labor might change

1. human capital

2. changes in technology

3. changes in price of the output good

4. change in the number of firms

human capital

education, on the job training, experience

-the stock of skills that each person has that helps determine their productivity.

labor-saving

-can reduce the demand for labor

ex: self-service kiosks in fast food restaurants (the kiosks are a substitute for cashiers, so the demand for labor falls)

labor-complimentary

makes workers more productive and can increase demand for them

ex: advances in surgical robotics makes surgery safer and more effective, so the demand for surgeons increases.

opportunity costs

how much is each hour of our leisure worth?

substitution effect

when wages go up, leisure has become more expensive.

income effect

an increase in wages makes us richer. our purchasing power has gone up because our wage rate has gone up.

-so the higher our wages get, the more leisure we'll buy and the less we'll work

backward bending labor supply curve

- you'll set your marginal benefit of leisure equal to the wage rate.

what causes shifts in the labor supply curves?

1. changes in population: if the population increases there are more people willing to supply labor at each wage (right)

2. changes in alternatives: when there are better opportunities else where

labor market equilibrium

this is where the willingness to pay for labor equals the willingness of the labor to accept wages

what do the public assistance programs do to the labor supply?

they reduce the labor supply

b/c at every wage level, fewer people are willing to work

-they increase the wages that employers have to pay, and decrease the amount of labor

why do people get paid more in a certain profession than in a different profession?

because their marginal revenue product of labor is higher

why do peoples wages might differ?

1. human capital

2. compensating differentials

3. discrimination

compensating wage differentials

differences in wages that offset differences in working conditions

- riskier jobs and less pleasant jobs have to pay more.

-

statistical discrimination

using information about a group to draw conclusions about an individual

- stereotyping

- firms might use this as a shortcuts to evaluate the likelihood of someone being a good employee

taste-based discrimination

motivated by bigotry and direct dislike for a particular group

1. employers: a racist, sexist boss

2. customers: customer do not want to interact with the workers of other races

3. workers: workers are the ones that do not want to interact with people that are different (men not wanting to work with women at a law firm)

nearly the entire average wage difference between men and women can be explained by...

1. compensating differentials

2. differences in experience

3. preferences

differences in experiences

women are more likely to leave the workforce after having a child and if they return they will have less experience than men.

preferences

for more flexible jobs, for studying fields that tend to lead to less lucrative jobs, for types of jobs that tend to be lower paying, for fewer hours

ban the box

where employees are legally forbidden from asking about criminal records until much later in the hiring process.

Game

how you can analyze an interaction between two people whose payoffs depends on each others actions.

3 elements:

1. players

2.strategies

3. payoffs

Players

Strategies

the complete plan of action for what each player will do

Game Theory

the study of decision-making when your outcomes are driven by the actions of others.

Payoffs

- There are payoffs for each combination of strategies

- includes everything involved in the game

utility

how happy someone is

MODULE 11

dominant strategy

a persons best response is the same, for all of the other persons choices.

Simultaneous move game

- making choices simultaneously

-players choose their strategies at the same time

dominant stragey equilibrium

when each person has an obvious choice on what to do, no matter what the other person does.

-might not be the best choice

the prisoners dilemma

2 criminals trying to decide if they should rat the other one out or stay silent

- both players have a dominant strategy in not cooperating

payoff matrix

- 2x2 box

chart used in basic game theory situations to analyze and evaluate a situation in which two parties have a decision to make.

does not have a dominant strategy in the game, your best response depends on what the other person does

Nash equilibrium

is a set of strategies in which no player has an incentive to change.

-its the best response to the other persons best response.

extensive form game/sequential move game

-involves sequential decision making by the players

-when someone goes first and the other person makes their decision only after seeing what the first person did

game tree

when you draw out a game

node

a decision point in the game tree

backward induction

valuable method for problem-solving decisions in real life

-looking at the last movers decision first to see what they will do and then move back to the first node and decide based on what you now know about the last movers choices

first-mover advantage

by making your choice first, you can force the other player to respond to your actions which benefits you.

repeated games

where you play the decision game over and over and over again

most exchanges involve some degree of...

trust

social distance

closely related to communication

-the degree of closeness to another person.

social norms

the rules of behavior that are considered acceptable in society

the ultimatum game

2 player experiment: one player is given a certain amount of money and he can offer the other player a split of that some anything between 0 and the amount he was given . If player 2 accepts thy split the money that way, if player 2 rejects they both get $0

behavioral economics

new form of economics that uses variations on traditional assumptions about rationality and optimization to explain behavior

loss aversion

turns out people are much more unhappy about a loss than they are about a gain of a similar size

anchoring

in which people rely to much on a reference point

ex: stores with sales. stores love to put the original price up next to the sale price knowing people will anchor on the original price, thinking that it is a bargain making them more likely to buy it.

principles of behavioral economics

1. people try to choose their best feasible option, but sometimes they fail in predictable ways

2. people care (in part) about how their circumstances compare to reference points

3. people have self-control problems

4. limiting peoples choices could make them better off but in practice the results are mixed

present bias (myopia)

(nearsightedness) they allow for difference between plans and actions

default choice

choice by default that you can opt out of if you don't want that choice