quinta-feira, 7 de abril de 2011

What's wrong with this picture?

Author: Lori Alden
Audience: High school and college students
Time required: About 5 minutes per photo
Summary: This is a series of photos depicting scenes we'll likely never see in the real world. Ask your students to explain why. The photos can be used to introduce new concepts or to review definitions.

Photo #1:

Concept: Public good. What's wrong with this picture? Sunsets are a non-excludable good, in that non-payers can't be prevented from enjoying them. Other examples of non-excludable goods are national defense, fireworks, and lighthouses. Private firms tend to underproduce non-excludable goods because customers have little incentive to pay for them. Public goods are both non-excludable and non-rival.

Photo #2:

Concept: Opportunity cost What's wrong with this picture? Most of the homes on this lakefront are expensive and built close to each other, so it's likely that the lakefront lots are highly valued. This, in turn, suggests that the opportunity cost of living in the shack is high. We rarely see shacks on expensive lots because the owners usually conclude that they'd do better by selling their property and buying a nicer house on a less desirable lot.

Photo #3:

Concept: Economies of scale What's wrong with this picture? It's hard to imagine that Mark and Sally will make a profit with their business. Suppose a customer asks them to deliver a small package to a city 200 miles away. Unless they have many other packages going to the same city, they'd have to charge a lot just to cover their variable costs--labor, gas, and depreciation. They wouldn't be able to compete against companies like UPS and FedEx, which can keep their costs down by handling a huge volume of parcels.

Photo #4:

Concepts: Equilibrium, law of one price. What's wrong with this picture? The more expensive gas station probably won't get many customers and will be forced to lower its prices. The Law of One Price says that identical goods in efficient markets must have only one price in equilibrium.

Photo #5:

Concept: Equilibrium. What's wrong with this picture? This is too good to be true. Since a business can get all the inexperienced home typists it wants at a much lower wage, it makes no sense for it to offer $40-$100 an hour.

Photo #6:

Concepts: Incentives, adverse selection and moral hazard. What's Wrong with this Picture? Adverse selection suggests that speeders will be more likely to sign up for this kind of insurance, while moral hazard suggests they'll have little incentive to slow down once they're insured. Both of these problems mean that the insurance company would have to pay out a lot of claims. The problems of adverse selection and moral hazard plague many insurance markets.

Photo #7:

Concept: Opportunity cost, comparative advantage What's wrong with this picture? It's nice of Superman to rescue a kitten, but has he considered the opportunity cost of doing so? Rescuing kittens is so easy that children often do it. With all the accidents, crimes, and natural disasters that occur in the world, surely he could spend his time more productively. The concept of comparative advantage suggests that Superman should focus on tasks that others can't do well, like stopping runaway trains or transporting nuclear weapons into deep space so they can detonate safely.

Photo #8:

Concepts: elasticity, price discrimination What's wrong with this picture? You'd think that movie theaters would charge students and children more than adults, since kids are more likely to spill popcorn and make noise. But theater owners know they can earn more revenue by charging students and children less. The reason is that kids are more price sensitive (in economic terms, they have a higher price elasticity of demand), and therefore less likely to come to the movies if the prices are high. The practice of charging price sensitive customers less is called price discrimination.

Photo #9:

Concept: Law of diminishing marginal utility (or benefit) What's wrong with this picture? It's not just the calories--a Big Mac with supersized fries has more. The law of diminishing marginal utility says that as a person increases consumption of a good, holding consumption of other goods constant, the marginal utility he or she gets from each additional unit of that good declines. This suggests that the marginal utility of the second egg will be smaller than that of the first, and the marginal utility of the third will be smaller still. For most people, the marginal utility of the tenth egg would likely be negative.

Photo #10:

Concept: comparative advantage, absolute advantage What's wrong with this picture? The man and the boy would probably get done more quickly if they switched chores. This isn't because the father can mow the lawn faster, since it's likely that he can mow AND sweep faster (i.e., he has an absolute advantage in both chores). They should switch since the boy likely has a comparative advantage in sweeping the driveway, while the man has one in mowing the lawn.

Photo #11:

Concept: Opportunity cost What's wrong with this picture? The opportunity cost of getting the rebate includes the cost of the stamp and envelope, plus the time it takes to fill out the form, cut out the UPC code, get a copy of the receipt, address an envelope, and mail it off. For most of us, that cost is greater than $1.

Photo #12:

Concepts: incentives, equilibrium, efficiency What's wrong with this picture? Equilibrium is defined as a state in which there is no tendency to change. In economics, this usually occurs when everyone is doing the best he or she can. The lanes in this picture aren't in equilibrium because some drivers could do better by moving into the relatively empty lane. Note that achieving equilibrium -- with cars distributed more evenly among the lanes -- would promote efficiency in that it would help all drivers reach their destinations faster. In a similar way, the efforts of producers and consumers to promote their interests can result in an efficient market outcome.

Photo #13:

Concepts: risk, opportunity cost What's wrong with this picture? People often profess outrage when corporations put profits ahead of safety, as evidenced by a jury's $4.9 billion verdict against General Motors after a design economy led to a fiery crash. But ordinary people cut corners on safety, too. We could make ourselves safer, for example, by wearing helmets when we drive. But almost nobody takes this precaution except for race car drivers. It appears that most of us are quite willing to sacrifice safety in order to keep our hair looking nice.

Photo #14:

Concepts: Incentives, externalities, law and economics What's wrong with this picture? We rarely see banana peels on the floor at grocery stores, and it's not because of government regulation. It's because stores understand that they could be sued for damages if anyone were injured on their property. Lawsuits can improve economic efficiency by causing firms to internalize some of their external costs.

Photo #15:

Concepts: opportunity cost, substitutes, demand What's wrong with this picture? People offer this service in less developed countries, but they don't in richer countries. Most Americans have scales at home (a substitute for public scales), so the demand for this service is small. It's unlikely that this man would get enough customers to cover the opportunity cost of his time.

Photo #16:

Concepts: There's no such thing as a free lunch, incentives, equilibrium. What's Wrong with this Picture? According to a popular economist joke, two economists are walking down the street when one sees a dollar on the sidewalk and says so. "Obviously not," says the other. "If there were, someone would have picked it up!" Though the joke intends to mock economists, it's rare to find dollars on the ground because, well, other people have already picked them up.

Photo #17:

Concepts: Externalities, opportunity cost What's wrong with this picture? Freeway accidents, even if they're off on the side of the road, usually cause traffic jams. These jams occur because drivers don't take the external cost of their actions into account when they slow down to take a look. For example, if a driver slows to take a two-second look at an accident, it costs that driver just two seconds of time. But that one look delays everyone in the lane behind him by two seconds as well. If there are 1,000 people who are held up in the lane behind the driver, the external cost to society of that one driver's look is about 33 minutes.

Agradecemos ao colega Arthur Farache de Paiva pelo envio do mateiral.

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