How could you overcome the problems of asymmetric information associated with goods or services you purchase?

Why might demand curves be upward sloping? (Professor) (100 words)

Hello, Everyone – The Week 5 assignment asks you “why might demand curves be upward sloping?”  According to Mankiw (2015):

 

Normally, when the price of a good rises, people buy less of it. This usual behavior, called the law of demand, is reflected in the downward slope of the demand curve.

 

As a matter of economic theory, however, demand curves can sometimes slope upward. In other words, consumers can sometimes violate the law of demand and buy more of a good when the price rises. (p. 449)

 

Class – How will you respond to the question of “why might demand curves be upward sloping?”  What real-world examples do you have of upward sloping demand curves?

 

Reference

Mankiw, N.G. (2015). Brief principles of macroeconomics,7e (7th ed.). Stamford, CT: Cengage Learning.

#2 When should you expect the unexpected? (Professor) (100 words)

Hello, Everyone – The Week 5 report asks you to:

 

Discuss three unexpected situations explained by the theory of consumer choice including:  (1) demand curves could be upward sloping, (2) an increase in wages could reduce the supply of labor, and (3) higher interest rates could reduce savings.  Explain why each of these three unexpected situations could occur.

 

Also, according to Mankiw (2015):

 

One of the Ten Principles of Economics discussed in Chapter 1 is that people face trade-offs. The theory of consumer choice examines the trade-offs that people face in their role as consumers. . . . [and] how consumers facing these trade-offs make decisions and how they respond to changes in their environment.  (p. 436)

 

As we wrap-up this class, lets discuss the above listed unexpected situations, which, initially, seem to defy logic.  For example, “an increase in wages can actually reduce hours worked” because, at some point, workers will value their leisure time more than their time spent working.  This concept is known as the backward bending supply curve of labor and is explained by the substitution effect and the income effect.  On one hand, if your hourly wage rose, then the time you spend working would be more valuable, so you might work more and play less (you would substitute work for play).  On the other hand, if your hourly wage rose, then your income would increase and you would have more money to spend on your leisure activities, so you might work less and play more.

 

For me, the substitution effect is currently very “strong” because I have relatively high expenses with two of my kids in college, which I am financing.

 

Class — How many hours per week would you work before the income effect would set in and compel you to reduce your hours of work?  Given your present hourly wages/salary level, how many hours per week would you choose to work if you had the choice (assume you would be paid overtime)?  Would you work more hours per week or fewer hours per week?

 

References

Mankiw, N.G. (2015). Brief principles of macroeconomics,7e (7th ed.). Stamford, CT: Cengage Learning.

#3 What you dont know can hurt you! (Professor) (100 words)

Hello, Everyone – The Week 5 report asks you to “include a real-world example of when you were, or your workplace was, affected by asymmetric information.”  According to Mankiw (2015) “A difference in access to knowledge that is relevant to an interaction is called an information asymmetry” (p. 461).  Mankiw also discusses several issues related to asymmetric information including:

Hidden Actions.

Hidden Characteristics.

Signaling.

Screening.

Public Policy.

 

In addition, there are several ways to overcome the problem of asymmetric information.  For example, when I make a purchase on Amazon.com, I peruse the customer reviews of the products and the resellers (if the product is not shipped by Amazon).

 

Class – What real-world examples do you have of asymmetric information (hint: see above bulleted list)?  How can asymmetric information hurt you?  How could you overcome the problems of asymmetric information associated with goods or services you purchase?

 

References

Mankiw, N.G. (2015). Brief principles of macroeconomics,7e (7th ed.). Stamford, CT: Cengage Learning.

 

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