April 30 2012 I Economics a Oligopoly 1 Characteristics a Few firms b Imperfect barrier to entry 1 Resource monopolies 2 Large start up costs 2 Example a 2 firm oligopoly 1 Duopoly b Team profit is maximized at PM QM c Individual profit grows with cheating while joint profit decreases 3 Gain theory a The study of strategic interaction b Prisoner s dilemma 1 Model for the 2 firm oligopoly game 2 Example a Finding equilibrium 1 Options a If B confesses A confesses b If B denies A confesses c If A confesses B confesses d If A denies B confesses 2 Confessing box is dominant strategy equilibrium a Best strategy for each player regardless of what the other player does 1 A and B Confess 3 Denying box is group optimal outcome a Best strategy for both players b Firm concentration 1 Ratio percent of industry sales by the largest 4 firms c Individual retirement accounts IRAs 1 Up to 6 000 per year 2 Not through employer 3 Types a Roth b Traditional 4 Deferred compensation plans a 401K b 403B c Through employer d Up to 165 000 per year e Benefits 1 Money is invested pre tax 2 Money grows tax free f Take out at age 59 1 10 penalty g Taxed as income on withdrawal h Rules 1 Start early a Example 1 Save 2 000 per year for 10 years 2 8 return 3 Start at age 25 a At age 65 accumulate 314 870 4 Start at age 35 a At age 65 accumulate 145 845 2 Use a tax deferred vehicle a Why to use an IRA 401K 1 2 000 one time contribution 2 8 return 3 15 tax bracket 4 Example a In IRA 2 000 1 0835 29 570 b Outside IRA 1 700 1 06835 d Stocks and bonds 1 Example a Stocks 1 8 10 b Bonds 1 5 6 2 Target date funds a Manage stock bond allocation b Moving to bonds as retirement nears 1 One is not a hedge fund a No market timing b No stock picking 1 Use index funds c Do not use actively managed funds d Pay attention to fees 1 Annual management fee is 1 2 Example a Vanguard S P has 0 3 fee e Asymmetrical information 1 Either the buyer or seller has private information about the good 2 Examples a Used cars b Health insurance 3 Key problems a Moral hazard 1 A person that is imperfectly monitored may engage in undesirable behavior a Shrinking 1 Too big to fail banks a Taking excessive risks due to government guarantee b Adverse selection 1 If a good has unobservable properties the mix of un observables for market participants may be different than in the general population 2 Examples a Dental insurance b Pooled mortgage security c Market for used cars 1 Market for lemons 2 Example a Good car 20 000 value and 50 probability b Bad car 10 000 value and 50 probability c Expected value is 0 5 20 000 0 5 10 000 15 000 d The percentage of bad cars on the market is 50 e Expected value is 15 000 4 Asymmetrical information causes market failure a Owners of good cars cannot sell for the value of the car b People with unhealthy teeth cannot afford to buy dental insurance 1 More informed party tries to communicate to less informed party 5 Fixes a Signaling a Examples 1 Car inspections 2 Education b Screening 1 Less informed party incentivizes more informed party to provide information 2 Example Deductable A 100 B 1 000 Covers all expenses 100 Covers all expenses 1 000 Attracts unhealthy people Attracts healthy people a Low deductable insurance policies identify high claim population
View Full Document
Unlocking...