Controversy: H in addition to icapped Parking End of Lesson I.2

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Controversy: H in addition to icapped Parking End of Lesson I.2

Jones, George, Morning Drive Host has reference to this Academic Journal, PHwiki organized this Journal Lesson Overview BA 210 Lesson I.2 Controversial Rationality Chapter 1 (continued) First Principles 10 Microeconomic Principles Testing Rationality Food Stamps to Alcoholics Social Security in addition to Medicare Disaster Relief US Postal Service Child Tax Credits Crack Babies Controversy: H in addition to icapped Parking Summary Review Questions BA 210 Lesson I.2 Controversial Rationality Most microeconomic conclusions are summarized by 10 principles. Those principles help consumers make satisfying choices, help managers make profitable decisions, in addition to help governments make effective public policies. 10 Microeconomic Principles BA 210 Lesson I.2 Controversial Rationality Principle 1: Everyone has to make choices about what to do in addition to what not to do. Yes, there are two paths you can go by But in the long run There’s still time to change The road you’re on — Stairway to Heaven, Led Zeppelin, voted best b in addition to ever. Individual choice is the basis of economics — if it doesn’t involve choice, it isn’t economics. 10 Microeconomic Principles

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BA 210 Lesson I.2 Controversial Rationality Principle 2: The reason choices must be made is that resources — anything that can be used to produce something else — are scarce. 10 Microeconomic Principles BA 210 Lesson I.2 Controversial Rationality Principle 3: Because you must choose among limited alternatives, the true cost of anything is what you must give up to get it — the opportunity cost. 10 Microeconomic Principles BA 210 Lesson I.2 Controversial Rationality Principle 4: Many economic decisions involve questions not of “whether” but of “how much” — how many times to go to Medieval Times in one year in addition to is the Museum of Torture worth the extra two dollars, how much time to spend on homework, . Such decisions must be taken by per as long as ming a trade-off at that margin — by comparing the costs in addition to benefits of doing a bit more or a bit less. Decisions of this type are called marginal decisions, in addition to the study of them, marginal analysis, plays a central role in economics. 10 Microeconomic Principles

BA 210 Lesson I.2 Controversial Rationality Principle 5: The study of how people should make decisions is also a good way to underst in addition to actual behavior. Individuals usually exploit opportunities to make themselves better off. If opportunities change, so does behavior: people respond to incentives. 10 Microeconomic Principles BA 210 Lesson I.2 Controversial Rationality Principle 6: Interaction — the success of my choices depend on your choices, in addition to vice versa — adds another level to economic underst in addition to ing. When individuals interact, the end result may be different from what anyone intends. For example, an individual farmer may grow more corn to gain individual profit, but when every farmer grows more corn, prices fall in addition to all profits may fall. (This is called a prisoners’ dilemma.) 10 Microeconomic Principles BA 210 Lesson I.2 Controversial Rationality Principle 7: The reason as long as interaction is that there are gains from trade: by engaging in the trade of goods in addition to services with one another, the members of an economy can all be made better off. Underlying gains from trade are the advantages of specialization, of having individuals specialize in the tasks they are relatively good at. (Being absolutely the best at something is not important to trade.) 10 Microeconomic Principles

BA 210 Lesson I.2 Controversial Rationality Principle 8: Economies normally move toward equilibrium — a situation in which no individual can make himself better off by taking a different action. 10 Microeconomic Principles BA 210 Lesson I.2 Controversial Rationality Principle 9: An economy is efficient if all opportunities to make some people better off without making other people worse off are taken. Resources should be used as efficiently as possible to achieve society’s goals. But efficiency is not the only way to evaluate an economy: equity, or fairness, is also desirable. And unless one is careful, there is a trade-off between equity in addition to efficiency. For example, when you give food or shelter to a homeless person, you reduce their incentive to take care of themselves in addition to , so, create inefficiency. 10 Microeconomic Principles BA 210 Lesson I.2 Controversial Rationality Principle 10: Markets usually lead to efficiency, with some well-defined exceptions. And when markets fail in addition to do not achieve efficiency, government intervention can improve society’s welfare. For example, governments can tax people that hurt others by their driving, noise, smoking, or drinking. 10 Microeconomic Principles

BA 210 Lesson I.2 Controversial Rationality One reason economists disagree is over which assumptions are appropriate. Since all assumptions (commodities are all that matter, perfect selfishness, rationality) simplify reality, in addition to are only approximately true, two economists can disagree about which assumptions are more accurate — in addition to there as long as e, they can arrive at different conclusions. Testing Rationality Testing Rationality BA 210 Lesson I.2 Controversial Rationality When determining effective public policy to help the poor, the most often debated assumption is consumer rationality. Consumers are assumed to be perfect calculators in addition to flawless followers of those choices that are in their own best interests. Testing Rationality BA 210 Lesson I.2 Controversial Rationality Extra Credit: Identify some irrational behavior, like maintaining unrealistic expectations, disorganization, or extravagance. And determine whether such irrationality is more common among the poor. Are the poor more likely to play the lottery more likely to not plan expenses in addition to maintain a bank account, in addition to so require expensive check-cashing services more likely to buy extravagant items they cannot af as long as d, in addition to so eventually sell them at a loss to a pawn shop

What gift should you give to the needy A gift-in-kind is a gift of a good (like a bike). Why do people give gifts in kind What gifts do kids want from relatives they do not know What gift should a policymaker give someone that fits the economic assumption of rationality in addition to the assumption that commodities are all that matter How should a parent respond to a child asking as long as a coke in a restaurant BA 210 Lesson I.2 Controversial Rationality Food Stamps to Alcoholics Food Stamps to Alcoholics BA 210 Lesson I.2 Controversial Rationality Consider three public policies designed to help a group of needy people by giving them a gift in kind of a particular commodity (food, medical care, ). In each case, the central issue that defends or critiques the policy is whether people in that needy group are rational. If a needy person is rational, or as rational as the policymakers, then revealed preference theory concludes the most effective gift is cash, rather than a gift of a particular commodity. For example, giving a particular $20 item from Target (say, the Underworld Vampire Trilogy on DVD) can never make someone happier than a gift of $20 cash. And if the $20 cash were used as long as any other item, then that chosen item is preferred. Food Stamps to Alcoholics BA 210 Lesson I.2 Controversial Rationality The United States Supplemental Nutrition Assistance Program (SNAP), historically in addition to commonly known as the Food Stamp Program, is a federal-assistance program that provides assistance to low- in addition to no-income people in addition to families living in the U.S. Almost by definition, an alcoholic is not rational. And without the assumption of rationality, economists lose the revealed-preference conclusion that the most effective gift is cash, rather than a gift of food. The food stamp program can thus be defended if policymakers believe the target needy group of low- in addition to no-income people in addition to families living in the U.S. are irrational, like alcoholics.

Social Security in addition to Medicare BA 210 Lesson I.2 Controversial Rationality Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 in addition to over, or who meet other special criteria. Unless the United States government believes most seniors are not rational, revealed preference concludes a more effective gift is cash, rather than a gift of health care. Some senior would prefer trading some care, say by waiting in longer lines as long as medicine, in exchange as long as Social Security benefits or cash as long as a cell phone to call their kids. Social Security in addition to Medicare BA 210 Lesson I.2 Controversial Rationality Social Security is a social insurance program funded through dedicated payroll taxes called Federal Insurance Contributions Act (FICA). The main part of the program is abbreviated OASDI (Old Age, Survivors, in addition to Disability Insurance). Benefits are paid as long as retirement, disability, survivorship, in addition to death, which are the four main benefits provided by traditional private-sector pension plans. In 2004 the U.S. Social Security system paid out almost $500 billion in benefits. By dollars paid, the U.S. Social Security program is the largest government program in the world in addition to the single greatest expenditure in the federal budget, with 20.8% as long as social security. Social Security in addition to Medicare BA 210 Lesson I.2 Controversial Rationality Although Social Security cash payments give more choices to seniors than the gift-in-kind of Medicare, Social Security is still a type of gift-in-kind because it only raises old-age consumption. Think of young-age in addition to old-age consumption as two different commodities X in addition to Y. Social Security cash payments are like a gift-in-kind of commodity Y, paid as long as by reduced good X. Unless the United States government believes most people are not rational in their choice between young-age in addition to old-age consumption, revealed preference concludes a more effective gift is cash to young people, rather than to seniors. Some seniors alive today would have preferred trading some old-age consumption in exchange as long as cash payments or lower taxes when they were younger ( in addition to more vigorous).

Disaster Relief In 2008, New Orleans’ levee system is still being rebuilt after Katrina at a cost of $17.5 billion, in addition to Hurricane Gustav will add to the financial strain of reconstructing a region still reeling from that devastation three years ago. Unless the United States government believes most people in New Orleans are not rational in their consumer choices, revealed preference concludes cash is a more effective gift than a levy. At a cost of less than $17.5 billion, every person in New Orleans could have been given suitcases in addition to enough cash to happily relocate above sea level, either using some of the cash to live in safer areas of New Orleans or leaving the area altogether. And those that remain in New Orleans, could do so at their own risk. BA 210 Lesson I.2 Controversial Rationality Disaster Relief What gift should you give to the needy A subsidy is a partial gift-in-kind. Rather than giving a good free (like a free bike), the purchase cost is reduced. What gift should a policymaker give someone that fits the economic assumption of rationality in addition to the assumption that commodities are all that matter Subsidies can be defended or critiqued just like gifts in kind. BA 210 Lesson I.2 Controversial Rationality U.S. Postal Service U.S. Postal Service BA 210 Lesson I.2 Controversial Rationality Consider three public policies designed to help a group of needy people by giving them a subsidy of a particular commodity (food, medical care, ). In each case, the central issue that defends or critiques the policy is whether people in that needy group are rational. If a needy person is rational, or as rational as the people policymakers, then revealed preference theory concludes the most effective gift is cash, rather than a gift of a subsidy. For example, giving a $10 gift card at Target can never make someone happier than a gift of $10 cash. And if the $10 cash were used as long as any item not at Target, then that chosen item is preferred.

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BA 210 Lesson I.2 Controversial Rationality The United States Postal Service is obligated to serve all Americans, regardless of geography, at uni as long as m price in addition to quality. Is the United States Postal Service efficient That is, are all opportunities taken to make some people better off without making other people worse off U.S. Postal Service BA 210 Lesson I.2 Controversial Rationality Question: Suppose you live in Los Angeles in addition to have a relative in Fullerton (Cali as long as nia) in addition to a relative in Austin (Texas). Measure the value to you of writing them letters by the amount you would be willing to pay to send them each a letter. Suppose they do not value your letters but you value writing them letters as in the table above. And suppose the cost to the U.S. Postal Service of delivering a letter to Fullerton is 24 cents, in addition to the cost to Austin is 64 cents. Would it be efficient to charge, as is the case, 44 cents as long as each letter to Fullerton in addition to 44 cents as long as each letter to Austin That is, do those prices lead to efficiency U.S. Postal Service BA 210 Lesson I.2 Controversial Rationality Answer: Step 1: Use the economic principle that markets, without taxes or subsidies or any other government intervention, lead to efficiency, meaning all opportunities to make some people better off without making other people worse off are taken. In the present case, competition in the marketplace as long as the delivery as long as each letter drives the price equal to the cost to the U.S. Postal Service of delivery. That is, the market price is 24 cents as long as each letter to Fullerton in addition to 64 cents as long as each letter to Austin. At those market prices, you would choose to send Letters 1 in addition to 2 to Fullerton, but zero letters to Austin. U.S. Postal Service

BA 210 Lesson I.2 Controversial Rationality Step 2: At the non-market prices of 44 cents as long as each letter to Fullerton in addition to 44 cents as long as each letter to Austin, determine which letters you would choose to send. That is, Letter 1 to Fullerton in addition to Letter 1 to Austin. Step 3: Conclude that since the non-market prices lead to different letters sent than at the efficient market prices, it would not be efficient to charge those non-market prices. U.S. Postal Service BA 210 Lesson I.2 Controversial Rationality Comment 1: Going further than the original question, to demonstrate inefficiency at non-market prices, which makes you choose to sent only Letter 1 to Fullerton, show not all opportunities are taken to make some people better off without making other people worse off. Specifically, if you sent Letter 2 to Fullerton at a price between $0.24 in addition to $0.30, then you would be better off in addition to the Post Office (taxpayers) would be better off in addition to no one else would care (or be worse off). Comment 2: There is a 20 cent tax to Fullerton in addition to 20 cent subsidy to Austin, so the Post Office balances its budget when one letter is sent to each place. But the non-market prices are still inefficient. U.S. Postal Service Child Tax Credits BA 210 Lesson I.2 Controversial Rationality The United States Child Tax Credit reduces tax liability. For many families, the child tax credit will exceed their tax liability. It is available to taxpayers who have a “qualifying child.” A person is a “qualifying child” if he or she has not attained the age of 17 by the end of the taxable year in addition to the taxpayer can claim a dependency exemption as long as the child in addition to the child is the taxpayer’s son or daughter (or descendent of either), stepson or stepdaughter (or descendent of either), or eligible foster child. Are Child Tax Credits efficient That is, are all opportunities taken to make some people better off without making other people worse off

Review Questions BA 210 Lesson I.2 Controversial Rationality Reminder from Lesson I.1: Follow the link http://faculty.pepperdine.edu/jburke2/ba210/PowerP1/Set1Answers.pdf as long as review questions as long as Lessons I.1 (last time) in addition to I.2 that practice these skills: Identify in addition to compute opportunity costs. Use marginal analysis to make a decision by comparing the marginal benefit to the marginal cost: increase quantity as long as the marginal benefit is greater than marginal cost. Describe how a voluntary trade makes a rational person better off (happier, more satisfied, ) Describe trade when one party is relatively better at producing Good X than another party, in addition to relatively worse at producing Good Y. Describe in addition to identify an equilibrium as a rest point, or stationary point. Describe in addition to identify efficiency as when all opportunities as long as improvement without hurt are exhausted. Show how incentives affect decisions. Describe how incentives can restore efficiency. End of Lesson I.2 BA 210 Lesson I.2 Controversial Rationality BA 210 Introduction to Microeconomics

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