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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
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PRINCIPLES OF ECONOMICS JEFF HOLT S
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Principles of Economics, 6th Editio
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16. Study Guide for Chapter 7 17. C
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11. Appendix: Book Review - “The
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20. Appendix: The NCAA Cartel 21. S
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Introduction: A Brief History of U.
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In the twentieth century, per capit
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Appendix: The 35 Largest National E
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Multiple Choice: ___ 1. The Jamesto
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2. Describe the economic cost of th
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Chapter 1 Scarcity and Choices The
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Example 5B: At the end of 1982, the
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Example 11: When Cindy quits her jo
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consequences may result in failure
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An upward sloping curve (as in Exam
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In making decisions, humans tend to
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5. ______________________ _________
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___ 13. If the value of one variabl
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Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7
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Chapter 2 Trade and Economic System
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Example 4B: The following quantitie
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1. An increase in the quantity of r
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3. For whom to produce? This is det
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The graph below illustrates the shi
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The two primary economic systems ar
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___ 12. The capitalist vision sees
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___ 25. According to the book “Ca
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Chapter 3 Demand, Supply, and Equil
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. For inferior goods, income and de
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The same information can be placed
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Not only does a free market elimina
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$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
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Example 17: The graph below illustr
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Questions for Chapter 3 Fill-in-the
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___ 12. Assuming a market originall
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$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
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Chapter 4 Inflation and Unemploymen
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Computing the Rate of Inflation The
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Full Employment Though unemployment
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3. Cyclical unemployment - due to d
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During the Great Depression, the ec
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Appendix: Think Like an Economist -
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Answer questions 8. and 9. based on
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___ 25. The extension of unemployme
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Chapter 5 Measuring Total Output: G
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5. Leisure. Leisure time is by defi
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The U.S. is a high per capita GDP c
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Example 17: In “An International
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The simple circular flow diagram be
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___ 3. Which of the following would
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2. Explain what nonproduction trans
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Chapter 6 The Aggregate Market The
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Example 2C: Assume the same facts a
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Example 5B: The price of crude oil
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Price Level Real GDP SRAS AD 2 AD 1
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Appendix: Why the Aggregate Demand
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___ 3. DEF Company can invest in ne
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2. List and explain the two factors
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Chapter 7 Classical Economic Theory
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Notice that the investment demand c
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Long-Run Equilibrium If Real GDP is
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Example 6B: When the economy is in
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Laissez-faire If the economy is sel
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___ 5. According to Say’s Law: a.
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3. On the graph below, draw an aggr
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Chapter 8 Keynesian Economic Theory
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Example 2B: The graph below illustr
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Example 5: Assume that the table be
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Notice on the graph on the previous
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According to Keynesian theory, a ch
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“The General Theory” also inclu
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___ 8. If the consumption function
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3. If the MPC is .667, and investme
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Chapter 9 Fiscal Policy The basic e
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Keynesian Fiscal Policy Theory and
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Example 5A: The federal government
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The Laffer Curve What will happen t
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Appendix: The Importance of Incenti
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___ 4. A decrease in government exp
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2. Explain what automatic stabilize
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Chapter 10 Money, Money Creation, a
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Example 4B: The castaways on Gillig
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Looking at the balance sheet below,
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Demand-side One-shot Inflation Exam
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4. Inflation increases uncertainty
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life; it came into existence not by
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calculated by using the potential d
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___ 12. If the required-reserve rat
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4. Referring to the balance sheet f
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Chapter 11 The Federal Reserve Syst
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5. After Bank X sells the $300,000
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Low Mortgage Interest Rates Mortgag
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Relaxed Standards for Mortgage Loan
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The Bursting of the Housing Bubble
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On February 17, 2009, the federal g
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Fed policies caused short-term inte
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___ 10. The Fed’s most important
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___ 25. In response to the recessio
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Chapter 12 Monetary Policy The basi
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2. A change in aggregate demand (AD
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Monetarist Transmission Mechanism C
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3. Borrowers do not have to seek ou
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Appendix: Book Review - “The Age
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Questions for Chapter 12 Fill-in-th
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___ 16. The primary source of incom
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7. According to Alan Greenspan, wha
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Chapter 13 Taxes, Deficits, and the
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Example 5: In 2015, Taxpayer A had
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of $5 and a quantity of 10 units. T
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The complexity of the tax law also
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the current government spending and
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cut of 1964. The top rate was lower
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___ 6. Federal excise taxes: a. are
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3. How would eliminating the loopho
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Chapter 14 Economic Growth The basi
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2. Labor. Labor can contribute to e
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estricting international trade (e.g
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An improvement in technology (e.g.
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The table below shows the economic
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will increase both Real GDP and per
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___ 8. Which of the following is co
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___ 26. The opinion that economic g
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Chapter 15 Less Developed Countries
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Example 8: Countries A, B, C, and D
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Obstacles to Economic Development f
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c. Restrictions on international tr
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Appendix: Book Review - “The Powe
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Example 25: In Brazil, about half t
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Study Guide for Chapter 15 Chapter
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___ 13. Among the counterproductive
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4. List four ways that governments
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Chapter 16 International Trade The
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Other Benefits of Free Internationa
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Example 6: The graph below illustra
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competitive disadvantage. But dumpi
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is only 25% as productive as before
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Smith was skeptical of government a
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___ 4. For Country X, what is the o
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___ 18. Frédéric Bastiat’s “P
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4. On the graph below: (1) What is
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Chapter 17 Elasticity We are often
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Example 4A: What is price elasticit
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Example 5A: Gertie’s Gas and Go i
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Example 10A: When the price of Good
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Example 13B: On the graph below, su
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$7 - 6 - 5 - Price 4 - 3 - 2 - 1 -
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In the long run, would the deadweig
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___ 7. The factors that determine w
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3. a. Which price (or prices) from
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Chapter 18 Utility The basic econom
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Nonetheless, society generally assu
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Example 9: Capital City operates a
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Marginal rate of substitution - the
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The diamond-water paradox is the ob
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Complete the table below to answer
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4. The graph below shows indifferen
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Chapter 19 The Firm The basic econo
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than contributing to team productio
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1. Difficulty in raising large amou
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Corporations also use self-financin
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Example 24: A blacksmith who produc
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For financing needs, proprietorship
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___ 13. Corporations: a. are comple
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5. List two things that the absence
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Chapter 20 Production and Costs The
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In Example 5B, Birdwell finds that
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variable cost initially decreases,
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Quantity TC MC AFC AVC ATC 0 240 X
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If the scale of operation is increa
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average total cost. Average fixed c
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___ 11. Concerning the cost curves:
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5. Complete the following cost tabl
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Chapter 21 Perfect Competition The
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Even though a perfect competitor ca
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Example 6C: This example builds on
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At what price will there be neither
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Appendix: Perfect Competition in th
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Multiple Choice: ___ 1. A perfect c
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___ 17. Perfect competition: a. req
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Answers for Chapter 21 Fill-in-the-
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Chapter 22 Monopoly Of the four mar
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3. Exclusive ownership of an essent
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maximizing quantity (4 units) creat
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$22 - 20 - 18 - 16 - 14 - Deadweigh
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2. Negotiating, beginning at a high
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Legal barriers are created by gover
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___ 8. The slope of the demand curv
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Price Quantity 3. List some of the
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Chapter 23 Monopolistic Competition
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For Percomp (the perfect competitor
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Page 385 and 386: Example 12 illustrates the dilemma
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Page 389 and 390: ___ 14. Game theory: a. is a method
Page 391 and 392: Answers for Chapter 23 Fill-in-the-
Page 393 and 394: Chapter 24 Factor Markets The basic
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Page 397 and 398: Since producers will attempt to equ
Page 399 and 400: 2. Differences in nonmoney aspects
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Page 409 and 410: Chapter 25 Labor Unions The primary
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Page 421 and 422: ___ 10. For a monopsony: a. there i
Page 423 and 424: 3. The graph below represents a lab
Page 425 and 426: Chapter 26 Interest, Present Value,
Page 427 and 428: An increase in expected rates of re
Page 429 and 430: An asset is valuable because we exp
Page 431: Example 13B: General Ordnance prove
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Page 437 and 438: Problems: 1. List and explain the t
Page 439 and 440: Chapter 27 Market Failure The basic
Page 441 and 442: External Benefit If a market genera
Page 443 and 444: Example 2: To encourage the consump
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Page 447 and 448: A common good is nonexcludable. Non
Page 449 and 450: Study Guide for Chapter 27 Chapter
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Page 453 and 454: 4. Based on the information on the
Page 455 and 456: Chapter 28 Public Choice and Govern
Page 457 and 458: Candidates and the Median Voter Mod
Page 459 and 460: Example 8: According to State and F
Page 461 and 462: Example 10: When Elvis Presley was
Page 463 and 464: 4. Pessimistic bias. This is the te
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Page 467 and 468: 2. If a certain policy will yield s
Page 469 and 470: Chapter 29 Government Regulation of
Page 471 and 472: underproduction is the amount that
Page 473 and 474: micromanagement results in business
Page 475 and 476: market. They may agree with their c
Page 477 and 478: Questions for Chapter 29 Fill-in-th
Page 479 and 480: ___ 10. The public interest theory
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Chapter 30 Agriculture and Health C
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weather may cause bumper crops. Bad
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Security and Rural Investment Act o
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Example 12: From 1960 to 2013, the
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1. NHI would provide universal heal
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d. Insurance providers are not allo
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Study Guide for Chapter 30 Chapter
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Answer questions 7. through 10. by
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___ 21. If there were no individual
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Chapter 31 Income Distribution and
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Income is more equally distributed
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over a typical career is the accumu
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Ideal Income Redistribution The ide
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Poverty - a family whose income fal
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Appendix: Income Inequality around
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How is this story an analogy for th
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___ 2. In 2013, the Lowest Income 6
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Problems: 1. Explain the two primar
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Absolute advantage - when one natio
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Fiat money - money by government de
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Nonrivalrous good - a good for whic
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Absolute advantage, 16-9 Absolute e
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“Company town”, 25-6 Comparativ
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Eli Lilly and Company, 22-1 Emergen
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Houston, Texas, 15-10 Human capital
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Market, 3-1, 3-8-9 Market basket, 4
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Political bias, 9-4, 12-7 Political
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Short run production, 20-2-3 Short-
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Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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