What role do incentives play in understanding economic decisions? Provide an example to make your point.
What role do incentives play in understanding economic decisions? Provide an example to make your point.
Assume you are the owner of a donut shop that is about to have its grand opening. Your total investment so far has been $50,000. Then you read in the Tribune a special health report that donuts are linked to reduced life expectancy and this report has the public scared. To open they requires that you invest another $10,000 and then you can begin selling donuts. Which of the following do you take into account when making the decision as to whether or not to proceed with the business: the $50,000 already invested? The $10,000 you need yet to invest? The revenue from the future sale of donuts? Why or why not for each?
Take a look at the lesson of Henry Hazlitt. One part of his economic lesson is this: what is true in the short run may not be true in the long run. Provide one example, with a brief description, that illustrates Hazlitt’s lesson regarding time in economics.
Assume you have found a substantial inverse correlation between movements in the price of palladium and the movement in the Japanese stock market over the two months you have been investing. Explain how such a correlation could mislead you and result in substantial loses if applied in the next two months.
Assume, hypothetically, that we read in the paper that “the European Central Bank lowered it official deposit interest rate from 0.5% to 0.25%. It is expected that this change will lead to favorable liquidity conditions and increases in consumer spending”. Is there a “direct” signal in this report, and if so, what is (are) the (those) signal(s)? Is/are there indirect signal(s) in this report? If so, what is/are those signal(s)?
Macro economists spend a lot of time following indicators such as GDP, inflation, employment, orders for and sales of durable goods such as cars and furniture, and corporate inventories of goods to be sold. Why do they do this?
Assume that is was reported in today’s newspaper that the rate of inflation in the country of Atlantis over the past year has been 7.6%. Explain, using simple numerical examples, what this could mean for the real wages of the country’s workers.
Often times the business press will report an economic indicator whose movement in the past month was substantial and use it to draw dramatic conclusions. For example, there could be a movement in consumer prices in September of 1.0%, implying an annual rate of 12%! Should every period-to-period change in an economic variable be given the same importance and emphasis? Why or why not?
Let’s say that you want to compare, quarter over quarter, the increase in the number of new jobs in the US to the number of new jobs in the tiny Kingdom of Bahrain. In that comparison you find that the rise in new jobs last quarter was 20,000 in Bahrain but 400,000 in the US. May we conclude from these data without further consideration that the performance of the job market is much stronger in the US than it is in Bahrain? What is the lesson here?
Assume that you are trying to determine whether or not to buy a new HR software package for your firm and the boss has asked you to do the analysis: should we buy it or not? In response you let her know that you will and that you will be sure to be disinterested in the outcome. She doesn’t understand what you mean and asks you to tell her. Explain what is meant by disinterested in this context, and why such a lack of interest could be just the right thing in this analysis.
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