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Naked Economics
Naked Economics Assignment
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?

Adverse selection 81 / Firm screening 89 / Branding provides information 90 / Branding versus commodities 92
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