Appendix: Book Review – “Nudge” In their 2008 book “Nudge”, Richard Thaler and Cass Sunstein introduce the idea of designing choice architecture to nudge people toward better decision making. According to “Nudge”, we humans often make poor decisions because we are prone to various biases in our thinking. We make many decisions and don’t want to spend large amounts of time carefully analyzing every decision. So we rely on simple rules of thumb for many of our decisions. Unfortunately, our rules of thumb may lead us to make poor decisions, especially when the decisions are complicated, arise infrequently, do not provide prompt feedback, and test our self-control. Well-designed choice architecture can help people to make decisions that will make their lives longer, healthier, and better. Choice architecture is the context in which people make decisions. Example 19: If a school cafeteria places desserts as the first item available, students will eat more dessert (and less of healthier foods) than if the school cafeteria places desserts as the last item available. The book describes the nudging approach as “libertarian paternalism”. It is paternalistic in that it argues for efforts in both the private and the public sector to steer people’s choices in directions that will improve their lives. It is libertarian in that it insists that people should be free to do what they like. The policies of libertarian paternalism are intended to maintain or increase freedom. One area where humans regularly make poor decisions is in saving. Most people fear that they are saving too little, and often make resolutions to increase their savings rate. But then they don’t. A number of biases contribute to the low savings rate. One is “status quo bias”. It is easier to leave things the way they are than to make a change. This is why so many people never change the original ring tone on their cell phone. And why so many people fail to join their company’s 401(k) plan when they become eligible, even if their company offers to match their contributions. One way to overcome the tendency of “status quo bias” to limit savings is to change the choice architecture. Most company 401(k) plans are “opt-in” plans. The employees have to take positive steps to join the plan. Many employees never get around to joining. The default option is to not join. If the choice architecture is changed so that the 401(k) plan is “opt-out” (each employee is automatically enrolled in the plan and must take positive steps to leave the plan), a much higher percentage of employees will be in the plan. Another bias that contributes to the low savings rate is “loss aversion”. People feel the pain of a loss more strongly than they feel the pleasure of a gain. As a result, people have a strong aversion to seeing their paychecks get smaller. But if a person chooses to increase their savings rate from 2% to 10% today, their paycheck will get smaller. One way to overcome “loss aversion” is with a program called Save More Tomorrow. Employees commit today to increase their saving contribution in the future by some percentage of future raises. Example 20: Reluctant Saver is currently contributing nothing to his company’s 401(k) plan. Under a Save More Tomorrow plan, Reluctant commits to contributing half of any future pay raises to his 401(k) plan. If Reluctant receives annual pay increases averaging 4% for the next five years, his saving rate will have increased to 10%. And his paycheck will still increase with each pay raise. If a Save More Tomorrow plan is also made the default option, a high percentage of employees is likely to choose this option (or at least fail to opt-out of it). As a result, savings rates rise. The book suggests that well-designed choice architecture can nudge people toward better decisions in a variety of other areas, including investment strategy, debt management, health insurance, and energy consumption. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Interest, Present Value, Rent, and Profit 26 - 8
Appendix: Present Value Table One factor that affects the present value of future income is the interest rate. The higher the interest rate that could be earned if a person had the money now, the lower the present value of the future income. Another factor that affects the present value of future income is the number of years until the future income is to be received. The longer until the future income is to be received the lower the present value of the future income. The table below shows the present value of $1,000 of future income to be received at different numbers of years in the future and at a variety of interest rates. The table illustrates that if either the length of time until the income is to be received increases or the interest rate increases, the present value of the future income decreases. Present Value of $1,000 to be Received in the Future Years in Interest Rate the Future 3% 5% 7% 10% 15% 1 $970.87 $952.38 $934.58 $909.09 $869.57 2 942.60 907.03 873.44 826.45 756.14 3 915.14 863.84 816.30 751.32 657.52 4 888.49 822.70 762.90 683.01 571.75 5 862.61 783.53 712.99 620.92 497.18 6 837.48 746.22 666.34 564.47 432.33 7 813.09 710.68 622.75 513.16 375.94 8 789.41 676.84 582.01 466.51 326.90 9 766.42 644.61 543.93 424.10 284.26 10 744.09 613.91 508.35 385.54 247.19 15 641.86 481.02 362.45 239.39 122.89 25 477.61 295.30 184.25 92.30 30.38 50 228.11 87.20 33.95 8.52 .92 Study Guide for Chapter 26 Chapter Summary for Chapter 26 Interest is the payment for the use of loanable funds. The interest rate is determined by the supply of and the demand for loanable funds. The supply of loanable funds comes from households that save part of their income in order to accumulate wealth and to earn interest on savings. The quantity of household saving will be directly related to the interest rate. The demand for loanable funds comes from consumers, who have a positive rate of time preference. A positive rate of time preference means that consumers prefer earlier consumption to later consumption. The consumer demand for loanable funds will be inversely related to the interest rate. The demand for loanable funds also comes from business firms, which wish to invest in physical capital. The investment demand for loanable funds will be inversely related to the interest rate. The equilibrium interest rate occurs where the quantity demanded of loanable funds equals the quantity supplied of loanable funds. Investment demand for loanable funds will increase or decrease depending on the expected rates of return from investment in capital. Interest rates vary depending on; (1) risk, (2) term of the loan, and (3) relative cost of making the loan. The real interest rate is the nominal interest rate minus the rate of inflation. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 26 - 9 Interest, Present Value, Rent, and Profit
PRINCIPLES OF ECONOMICS JEFF HOLT S
Principles of Economics, 6th Editio
16. Study Guide for Chapter 7 17. C
11. Appendix: Book Review - “The
20. Appendix: The NCAA Cartel 21. S
Introduction: A Brief History of U.
In the twentieth century, per capit
Appendix: The 35 Largest National E
Multiple Choice: ___ 1. The Jamesto
2. Describe the economic cost of th
Chapter 1 Scarcity and Choices The
Example 5B: At the end of 1982, the
Example 11: When Cindy quits her jo
consequences may result in failure
An upward sloping curve (as in Exam
In making decisions, humans tend to
5. ______________________ _________
___ 13. If the value of one variabl
Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7
Chapter 2 Trade and Economic System
Example 4B: The following quantitie
1. An increase in the quantity of r
3. For whom to produce? This is det
The graph below illustrates the shi
The two primary economic systems ar
___ 12. The capitalist vision sees
___ 25. According to the book “Ca
Chapter 3 Demand, Supply, and Equil
. For inferior goods, income and de
The same information can be placed
Not only does a free market elimina
$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
Example 17: The graph below illustr
Questions for Chapter 3 Fill-in-the
___ 12. Assuming a market originall
$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
Chapter 4 Inflation and Unemploymen
Computing the Rate of Inflation The
Full Employment Though unemployment
3. Cyclical unemployment - due to d
During the Great Depression, the ec
Appendix: Think Like an Economist -
Answer questions 8. and 9. based on
___ 25. The extension of unemployme
Chapter 5 Measuring Total Output: G
5. Leisure. Leisure time is by defi
The U.S. is a high per capita GDP c
Example 17: In “An International
The simple circular flow diagram be
___ 3. Which of the following would
2. Explain what nonproduction trans
Chapter 6 The Aggregate Market The
Example 2C: Assume the same facts a
Example 5B: The price of crude oil
Price Level Real GDP SRAS AD 2 AD 1
Appendix: Why the Aggregate Demand
___ 3. DEF Company can invest in ne
2. List and explain the two factors
Chapter 7 Classical Economic Theory
Notice that the investment demand c
Long-Run Equilibrium If Real GDP is
Example 6B: When the economy is in
Laissez-faire If the economy is sel
___ 5. According to Say’s Law: a.
3. On the graph below, draw an aggr
Chapter 8 Keynesian Economic Theory
Example 2B: The graph below illustr
Example 5: Assume that the table be
Notice on the graph on the previous
According to Keynesian theory, a ch
“The General Theory” also inclu
___ 8. If the consumption function
3. If the MPC is .667, and investme
Chapter 9 Fiscal Policy The basic e
Keynesian Fiscal Policy Theory and
Example 5A: The federal government
The Laffer Curve What will happen t
Appendix: The Importance of Incenti
___ 4. A decrease in government exp
2. Explain what automatic stabilize
Chapter 10 Money, Money Creation, a
Example 4B: The castaways on Gillig
Looking at the balance sheet below,
Demand-side One-shot Inflation Exam
4. Inflation increases uncertainty
life; it came into existence not by
calculated by using the potential d
___ 12. If the required-reserve rat
4. Referring to the balance sheet f
Chapter 11 The Federal Reserve Syst
5. After Bank X sells the $300,000
Low Mortgage Interest Rates Mortgag
Relaxed Standards for Mortgage Loan
The Bursting of the Housing Bubble
On February 17, 2009, the federal g
Fed policies caused short-term inte
___ 10. The Fed’s most important
___ 25. In response to the recessio
Chapter 12 Monetary Policy The basi
2. A change in aggregate demand (AD
Monetarist Transmission Mechanism C
3. Borrowers do not have to seek ou
Appendix: Book Review - “The Age
Questions for Chapter 12 Fill-in-th
___ 16. The primary source of incom
7. According to Alan Greenspan, wha
Chapter 13 Taxes, Deficits, and the
Example 5: In 2015, Taxpayer A had
of $5 and a quantity of 10 units. T
The complexity of the tax law also
the current government spending and
cut of 1964. The top rate was lower
___ 6. Federal excise taxes: a. are
3. How would eliminating the loopho
Chapter 14 Economic Growth The basi
2. Labor. Labor can contribute to e
estricting international trade (e.g
An improvement in technology (e.g.
The table below shows the economic
will increase both Real GDP and per
___ 8. Which of the following is co
___ 26. The opinion that economic g
Chapter 15 Less Developed Countries
Example 8: Countries A, B, C, and D
Obstacles to Economic Development f
c. Restrictions on international tr
Appendix: Book Review - “The Powe
Example 25: In Brazil, about half t
Study Guide for Chapter 15 Chapter
___ 13. Among the counterproductive
4. List four ways that governments
Chapter 16 International Trade The
Other Benefits of Free Internationa
Example 6: The graph below illustra
competitive disadvantage. But dumpi
is only 25% as productive as before
Smith was skeptical of government a
___ 4. For Country X, what is the o
___ 18. Frédéric Bastiat’s “P
4. On the graph below: (1) What is
Chapter 17 Elasticity We are often
Example 4A: What is price elasticit
Example 5A: Gertie’s Gas and Go i
Example 10A: When the price of Good
Example 13B: On the graph below, su
$7 - 6 - 5 - Price 4 - 3 - 2 - 1 -
In the long run, would the deadweig
___ 7. The factors that determine w
3. a. Which price (or prices) from
Chapter 18 Utility The basic econom
Nonetheless, society generally assu
Example 9: Capital City operates a
Marginal rate of substitution - the
The diamond-water paradox is the ob
Complete the table below to answer
4. The graph below shows indifferen
Chapter 19 The Firm The basic econo
than contributing to team productio
1. Difficulty in raising large amou
Corporations also use self-financin
Example 24: A blacksmith who produc
For financing needs, proprietorship
___ 13. Corporations: a. are comple
5. List two things that the absence
Chapter 20 Production and Costs The
In Example 5B, Birdwell finds that
variable cost initially decreases,
Quantity TC MC AFC AVC ATC 0 240 X
If the scale of operation is increa
average total cost. Average fixed c
___ 11. Concerning the cost curves:
5. Complete the following cost tabl
Chapter 21 Perfect Competition The
Even though a perfect competitor ca
Example 6C: This example builds on
At what price will there be neither
Appendix: Perfect Competition in th
Multiple Choice: ___ 1. A perfect c
___ 17. Perfect competition: a. req
Answers for Chapter 21 Fill-in-the-
Chapter 22 Monopoly Of the four mar
3. Exclusive ownership of an essent
maximizing quantity (4 units) creat
$22 - 20 - 18 - 16 - 14 - Deadweigh
2. Negotiating, beginning at a high
Legal barriers are created by gover
___ 8. The slope of the demand curv
Price Quantity 3. List some of the
Chapter 23 Monopolistic Competition
For Percomp (the perfect competitor
Chapter 30 Agriculture and Health C
weather may cause bumper crops. Bad
Security and Rural Investment Act o
Example 12: From 1960 to 2013, the
1. NHI would provide universal heal
d. Insurance providers are not allo
Study Guide for Chapter 30 Chapter
Answer questions 7. through 10. by
___ 21. If there were no individual
Chapter 31 Income Distribution and
Income is more equally distributed
over a typical career is the accumu
Ideal Income Redistribution The ide
Poverty - a family whose income fal
Appendix: Income Inequality around
How is this story an analogy for th
___ 2. In 2013, the Lowest Income 6
Problems: 1. Explain the two primar
Absolute advantage - when one natio
Fiat money - money by government de
Nonrivalrous good - a good for whic
Absolute advantage, 16-9 Absolute e
“Company town”, 25-6 Comparativ
Eli Lilly and Company, 22-1 Emergen
Houston, Texas, 15-10 Human capital
Market, 3-1, 3-8-9 Market basket, 4
Political bias, 9-4, 12-7 Political
Short run production, 20-2-3 Short-
Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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