Review Exam 2 Coase Theorem can lead to efficient outcomes without gov involvement can solve problem of an externality through private negotiations between neighbors for example only works under special conditions must be costless for the private parties to negotiate internalization of externality Public goods not excludable not rival Common resources not excludable but rival leads to tragedy of the commons Trading leads to more efficient solutions PPF Opportunity cost key to understand gains from trade Absolute vs comparative advantage opportunity costs arise due to comparative advantage Everyone better off if ppl specialize in comparative advantage Consumers have to decide what they are going to consume depending on what they can afford budget constraint Intercept related to consumers income and price of good Income change parallel shift in or out Price change rotation of the budget constraint Consumption space pepsi vs apples Demand curve for apples price vs apples Sunk costs rational consumers when thinking about consuming an additional unit of a good should not think about sunk costs what was already purchased and cant be changed Expected value probabilities and outcomes in different cases average value you could imagine if you faced that situation over and over Insurance can take away uncertainty risk of an outcome Fair insurance leaves you with same EV if you do or don t purchase insurance Risk aversion don t like uncertainty Reduce exposure to risk by diversifying Uncertainty isn t happening to you they know but you don t know Somebody else has characteristics that affect economic transactions but you don t know the characteristics lemons problem Car warranties signaling principal agent relationship Behavioral economics Ppl deviating from a purely rational view Eliciting effort There are ways to get ppl to work harder
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