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 theycan 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
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