Econ 1 - Inputting Perm Number

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Econ 1 - Inputting Perm Number

• Power on your Clicker
• When Autoscan begins, press to stop it
• Press to display Setup Menu
• Scroll ? or ? to display the ID menu option
• Press green key with arrow (?) to select it
• Input your perm number
• Press green key with arrow (?) to save

2
Joining

• Power on clicker
• Clicker scans classes
• Hit D to direct clicker to this class
• When you see EC1Camp, press green key with arrow
  to join

3
Clicker Practice

• I have a clicker and it is working.
• I have a clicker and I hope it works.
• I dont have a clicker, but when I pull my left
  ear

4
Do You Expect to Score Above Average on the Final?

• A. Yes
• B. No

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Will Your Neighbor (to the Right) Score Above
Average on the Final?

• A. Yes
• B. No

6
Which of the following is true?

• I hope to major in economics or business
  economics
• I am majoring in a different subject and am
  required to take an economics course
• I am majoring in a different subject. I am not
  required to take economics but decided to try it.
  
• I dont know what I will major in.

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This year I am a

• Freshman
• Sophomore
• Junior
• Senior
• Other

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Where did you go to high school?

1. In California, North of Santa Barbara
2. In California, Santa Barbara or South of Santa
   Barbara
3. In U.S., outside of California
4. Outside of U.S.

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Thinking like an economist

• People trained in economics think differently
  about some things.
• Avoiding percentage confusion
• Distinguishing average from marginal
• Accounting for Opportunity Cost
• Thinking clearly about Sunk Costs

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Percentages and absolutes

• A piece of software costs 40 at the bookstore.
  You can get it at a 25 discount in downtown
  Santa Barbara.
• A laptop computer costs 1000 at the bookstore.
  You can get it for 990 in downtown Santa
  Barbara.
• Would you drive downtown for the software?
• For the computer?

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Same saving either way

• Rational answer is either Yes for both or No for
  both.
• Same as the answer to Would you drive downtown
  to save 10.
• Many people are fooled by the framing of a
  problem. Economists try to see through to the
  essentials.

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More percentages

• A publisher raises his textbook price from
• 90 to 120, a 30 increase.
• A spokesperson explains that the reason they had
  to do this is because printing costs increased by
  50 when he moved to four-color printing.

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What is wrong with this argument?

• Price of book went up by 30.
• Total printing cost of book is less than 10. A
  50 increase in printing costs is less than 5
  per book.
• Lesson when people start flinging around
  percentages, ask Percent of what?, then convert
  to absolute numbers to see what is really going
  on.

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Opportunity Cost

• Opportunity cost of a resource is the value of
  its next best use.
• You were given a free frequent flyer ticket that
  you could use to fly to Paris over spring break.
• Roundtrip airfare to Paris is 1000.
• If you dont use the ticket to fly to Paris, you
  would use it to fly home. Roundtrip fare home is
  600
• What is the opportunity cost of flying to Paris?

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Answer

• Opportunity cost is 600. This is the value of
  the next best use of your frequent flyer ticket.
• It is unrelated to what you paid for the
  ticket--0
• It is unrelated to price of flying to Paris so
  long as that is more than 600.
• Fly to Paris if and only if it is worth more than
  600 to you to do so.

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Average and Marginal

• NASA supporter estimates gains from current space
  shuttle are 24 billion per year from 4 flights.
  
• Total costs are 20 billion per year.
• Does this imply that more flights would be
  justified?

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Not necessarily

• We know that average benefit is 24/46
• And that average cost is 20/45.
• But what would be the gain from an additional
  flight and what would be the cost?
• Relevant comparison is marginal benefit and
  marginal cost.

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Basketball example

• Player A makes 60 of the shots that he attempts.
• The team average is only 40.
• Does this imply that Player A should be
  encouraged to shoot more often?

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Not necessarily

• If Player A takes more shots, these will be at
  times when he is better guarded. It may be that
  his success percentage would be much lower on
  these shots.
• The relevant comparison is whether a marginal
  shot by A is more likely to be made than a
  marginal shot by B.
• Extra consideration. If A takes more shots he
  will probably be guarded more carefully and have
  fewer easy shots.

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Sunk Costs

• You have spent 500 on a nonrefundable
• airline ticket to a vacation spot over spring
  break. As the time arrives, you are not feeling
  well and you have a lot of work to do. You
  reluctantly decide to go
• because otherwise the 500 would be wasted.
• Is this a mistake?

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It depends

• You regret having bought the ticket, given how
  you feel now. You ask yourself the following
  question
• Suppose I had not bought the nonrefundable
  ticket, but was offered a free ticket to that
  destination today. Would I go?
• A) What if the answer is yes?
• B) What if the answer is no?

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Rational answer

• If you regret buying the nonrefundable ticket but
  would use a free ticket, then you should go.
• If you wouldnt use a free ticket, you shouldnt
  go.

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Housing Slump

• When the housing market slumps, houses sell much
  more slowly than in boom times.
• Why is that? Sellers dont want to accept the
  reality that their house is not worth as much as
  it was a year ago.
• But value a year ago is not relevant if you want
  to sell in the future.
• See New York Times column by Goolsbee on class
  website. Also see Mankiw blog.

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Another situation

• You are a middle manager. You approved a costly
  project whose prospects seemed good when you
  started.
• Half of the money has been spent when bad news
  arrives about the project.
• The probability is 2/3 that any more money plowed
  into the project will be wasted and 1/3 that the
  project will pay back further investment.

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Rational decision-maker

• If you had not spent the first half of the money,
  you would not choose to assume the risk of the
  second half.
• Should you cancel the project after having spent
  half the money.
• Rationality says Yes.

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Face-saving tactics

• Suppose that if you cancel the project, you will
  be fired for having started a failing project.
• If you stay the course, there is a chance of
  1/3 that the project will succeed and you will be
  praised and a chance of 2/3 that the project will
  fail and you are fired.
• What will a self-interested manager do?

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Agency problem

• Manager in this example is acting rationally in
  his own behalf, but not rationally on behalf of
  owners interests.
• Owners interest is for him to cancel the project.

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Stay the course vs Cut and run

• Does sunk cost reasoning help us to reason about
  the Iraq War controversy?
• Recognize fallacious arguments
• A) We should stay in Iraq because otherwise
  4000 U.S. soldiers will have died in vain.
• B) Iraq was a terrible mistake. Therefore we
  should get out now.

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Forward-looking planning

• Relevant questions are of this kind
• Do the benefits from a surge in troops in Iraq
  exceed the costs?
• Regardless of whether we should have invaded
  Iraq, do the benefits from keeping troops there
  exceed the costs?

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Analogy to middle-manager example

• Is President Bush caught in the dilemma of the
  middle manager in our earlier example?
• Is he advocating increased investment in a bad
  project, just to avoid admitting failure while
  hoping for some very unlikely good luck?

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See you next time