ECON 2 Flashcards
(13 cards)
What is a Nash equilibrium (illustrate on a simple example)?
A situation in which no players can improve their payoffs by changing their strategy
ie in prisoner’s dilemma, the outcome of both choosing to cooperate is better than if one were to defect. However, the nash equilibrium is for both to defect, because each player regardless of the other’s action, will get a better outcome by defecting
Why is it challenging to understand the likely outcomes of policies?
- Policies may influence social preferences
- the success of a policy is dependent on whether the outcome forms a stable nash equilibrium
- establishing cause and affect is not always straightforward
Briefly explain what the ultimatum game is. What does it illustrate?
A game in which a proposer offers a take-it or leave-it offer to a responder, giving the proposer more bargaining power. If refused, no one gains anything
Illustrates how people value fairness, and are willing to sacrifice personal gains to challenge perceived unfairness
State two key characteristics to consider when assessing alternative economic policies.
- Is the allocation fair?
- Is the allocation efficient? Could there be mutual gains from moving to some other allocation
Definition of a Pareto improvement?
Reallocation of resources where no one is disadvantaged. Benefits at least one individual while no others are harmed
Cite 2 reasons to object to economic inequality
What are the 3 steps behind Rawl’s veil of ignorance?
- Fairness applies equally to all
- Imagine yourself behind a veil of ignorance
- From behind the veil of ignorance, make a judgement
What is a substantive judgement about inequality? What are procedural judgements of fairness?
Substantive - judgement based on only the allocation (outcome)
Procedural - judgement based on factors that lead up to decision
What is a model? Name 3 attributes of a good model.
Simplications of reality constructed to answer a specific question
2.1. It is clear
2. it defines important relationships
3. It predicts accurately
Definition of opportunity cost
The opportunity cost of an actions is the net benefit of the next best alternative
What is a production functions
Shows how inputs translate into outputs while keeping other factors constant
Definition of the marginal product? What does diminishing marginal product mean?
Marginal product tells us the change in output per unit change in input
DMG; the marginal product starts to decline the more input is added
ie studying is counter productive
Definition of the feasible production frontier? What is the marginal rate of transformation (MRT)?
Feasible frontier: Maximum output that can be achieved given a specific amount of input
MRT: Slope of the feasible frontier, representing the tradeoffs an individual faces
