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Chapter 1

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Mark Monsky

on 28 August 2018

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Transcript of Chapter 1

Solman Video on Rational Behavior
or Ultimatum Game??

Economic Detective?

Incentive on splitting check at
Blind Shopping
Bag Exercise?

Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.

As a result, prices guide individuals to reach outcomes that tend to maximize the welfare of society as a whole.
20th Century Economics Laboratory
Market vs. Planned Economies

George has spent $600 purchasing, patching and painting an
old fishing boat, which he expects to sell for $900. George discovers a problem with the engine and he needs to make an additional repair which will cost another $400 in order to make the boat usable and worth $900. He can sell the boat now as is (without repairing the engine) for $400. Should he repair the boat engine?
Principle 3: Rational People Think at the
Margin. If benefits > costs, do it!
Gregory Mankiw comments:

I was raised in a middle-class family; neither of my parents were college graduates. My own children are being raised by parents with both more money and more education. Yet I do not see my children as having significantly better opportunities than I had at their age.

The same logic of social insurance that justifies income redistribution similarly justifies government-mandated kidney donation.
Who earned more as President?

John Kennedy 1962 $100,000
Barack Obama 2012 $400,000
Weight of prices in 1962 was 30.2
Weight of prices in 2012 was 229.6
What is the Opportunity Cost of the Following Decisions?
Buying a gift for a friend.
Working at a job in the afternoon.
Waiting on-line for an hour to buy a new cell phone
Playing on an X-Box for 2 hours after dinner
Did your group have the same answers? Why?

Moral Hazard

Principal Agent Problem
Rationality Assumption Redefined
by Behavioral Economics

But sometimes markets
don't deliver what we want:
- they don't deliver at all
- we're not happy with
what is delivered
Sometimes Government Can Make a Situation
Worse with a Government Policy Because of Rent-Seek
-When benefits concentrated and costs
shared widely, special interests push for policy
-When costs concentrated and benefits
shared widely, special interests resist policy
Both are "rent seeking" responses

A group of researchers, led by Stanford University economist Raj Chetty, analyzed income data for the US population from 1.4 billion tax records between 1999 and 2014. They then compared it with mortality data from Social Security Administration death records. They found that, from 2001 to 2014, the richest Americans gained about five years of longevity, while life expectancy for the poor didn’t budge.


Trends Across Time and Place

Back to 1980 90% would own 44% more.
If we had similar ownership to Japan the 90% would have almost twice as much wealth.

What's behind the decline of wealth?
Full transcript