After reading the book, please complete the following questions for discussion. Your responses must be typed, and they will be collected on the first day of class.
Chapter 1: The Power of Markets
• What are the two basic assumptions that economists make about individuals and firms?
• What is the role and significance of prices in the market economy? • What’s so great about a market economy anyway?
Market allocation 3 / Assume rational utility-maximizers 6 / Opportunity costs 9 / Profit max 11 / Prices allocate resources 12 / Barriers to entry 14 / Market price, pricing decision & price discrimination 15 / Lessons of markets 18
Chapter 2: Incentives Matter
• Explain how each of the following relates to efficient outcomes in a market economy: - adverse selection
- “perverse incentives”
- principal-agent problem,
- the prisoner’s dilemma.
Wrong incentives lead to undesirable outcomes 23 / Creative destruction 36 / Tax & govt program disincentives 38
Chapter 3: Government and the Economy
• In your own words, explain what an externality is. • Besides addressing externalities, what other important and beneficial roles does government play in our market economy?
Externalities 43 / Govt solutions to externalities 48 / Govt makes market economy possible – rights, laws / regulations 51 / Public goods 57 / Redistribution 59
Chapter 4: Government and the Economy II
• What are the main reasons why government should only take a limited role in a market economy?
Govt inefficiency 63 / Govt allocation vs private allocation 67 / Effects of regulation 69 / Effects of taxation 74 / Summary 78
Chapter 5: Economics of Information
Wheelan explains that basic economic models assume that all parties have “perfect information.” How does “informational asymmetry” undermine our market economy?...