Econ 1 - Inputting Perm Number

1. 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 don’t 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

5. 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 don’t know what I will major in.

7. This year I am a • Freshman • Sophomore • Junior • Senior • Other

8. Where did you go to high school? • In California, North of Santa Barbara • In California, Santa Barbara or South of Santa Barbara • In U.S., outside of California • Outside of U.S.

9. 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

10. 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?

11. 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.

12. 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.

13. 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.

14. 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 don’t 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?

15. 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.

16. 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?

17. Not necessarily • We know that average benefit is $24/4=$6 And that average cost is $20/4=$5. But what would be the gain from an additional flight and what would be the cost? Relevant comparison is marginal benefit and marginal cost.

18. 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?

19. 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.

20. 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?

21. 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?

22. Rational answer • If you regret buying the nonrefundable ticket but would use a free ticket, then you should go. • If you wouldn’t use a free ticket, you shouldn’t go.

23. Housing Slump • When the housing market slumps, houses sell much more slowly than in boom times. • Why is that? Sellers don’t 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.

24. 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.

25. 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.

26. 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?

27. 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.

28. “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.

29. 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?

30. 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?

31. See you next time…