What price an A?

An economist at a large state university mentioned to a student that he pays his teaching assistants $5 each if someone gets 90 percent or more correct on the final exam. The economist had previously paid off only twice in 29 years of teaching large introductory sections (total enrollment about 15,000 students over the years). The student pointed out very cleverly that any student who does well creates a positive externality (the dollars paid to the teaching assistants), so students in the class should be subsidized to give them the proper incentives to study hard. Who should offer the subsidy, the teaching assistant or the teaching economist? Identify and explain the underlying principle at work here.

Stock market strategies

You have been collecting data on the behavior of a particular stock over many years. You notice that every Friday the 13th, the stock drops substantially, only to come back up over the next few weeks. Your conclusion is that superstitious stockholders sell their stock in anticipation of bad luck. What can you do to make use of this information? What effect does your action have? Suppose more people notice the behavior of the stock and react accordingly--what is the effect?

Congratulations to Kaitlin Gossard for providing a reasoned explanation of the likely consequences of the above problem.

Damaged Goods: Another Guessing Game

Jackie and Greg, returning from a Las Vegas, find that the airline has damaged the identical antiques that each had purchased. An airline manager says that he is happy to compensate them but is handicapped by being clueless about the value of these strange objects. Simply asking the travelers for the price is hopeless, he figures, for they will inflate it.

Instead he devised a more complicated scheme. He asks each of them to write down the price of the antique as any dollar integer between 2 and 100 without conferring together. If both write the same number, he will take that to be the true price, and he will pay each of them that amount. But if they write different numbers, he will assume that the lower one is the actual price and that the person writing the higher number is cheating. In that case, he will pay both of them the lower number along with a bonus and a penalty—the person who wrote the lower number will get $2 more as a reward for honesty and the one who wrote the higher number will get $2 less as a punishment. For instance, if Jackie writes 46 and Greg writes 100, Jackie will get $48, and Greg will get $44.

What numbers will Jackie and Greg write? What number would you write?

Can you identify this (not so) famous economist?

Every economics student knows that graphs are a big part of how economists tell "their stories." Indeed, a picture can be worth a 1000 words. Arguably the bible of modern economics, Adam Smith's Wealth of Nations did not contain a single graph or chart. Who is credited with introducing the use of charts to convey economic information?

Congratulations to David Graham for correctly identifying William Playfair as the first economist to incorporate charts in his writings in order to convey difficult to understand concepts. Playfair is credited with inventing the line, bar, and pie charts.

And the winning bidder is . . .?

You want to sell at auction an antique dining-room suite. There are five people who want it, and they're willing to pay $8,000, $9,500, $6,500, $11,000, and $7,500, respectively. Your reservation price (the price above which the bidding must go before you sell it) is $7,000. No one in the room has any information about the value of the suite to anyone else. At about what price will the suite be sold and to whom? Explain.

Congratulations to Yang Di on his back-to-back wins (and third overall). Di was the first to correctly deduce that the winning price will be approximately equal to the value of the second highest bidder. Though auctions can be organized in many different fashions, the most commonly used mechanism is known as the English Auction.

Can you identify this famous economist?

Trained as an engineer, this Italian economist made contributions to general equilibrium theory and developed a well-known efficiency criterion. Can you identify the famous economist pictured here and briefly describe his version of an efficient allocation of resources?

Congratulations to Yang Di, our first two-time winner this semester. Di was the first to correctly identify Vilfredo Pareto. According to the Pareto Criterion, an allocation of resources is not optimal if there exists a reallocation that makes at least one person better off without making any other person worse off. Can you imagine if Congress was forced to make policy changes on this basis? Essentially, it would require a unanimous vote to pass any legislation.

Can you guess x?

Suppose that there are 10 people playing a guessing game. Each of the 10 people choose a number between 0 and 100. The average of these numbers is computed, and this average is multiplied by p = 2/3. We call the resulting number x. The person whose number is closest to x wins a big prize, while all others receive nothing. If everybody selects the same number, then the prize is split equally. What number would you select if your objective is to maximize the chance that you win the prize? Explain your strategy choice and then suggest an economic situation that illustrates the essence of this game.

Congratulations to Josh Busser for submitting a correct answer to this week's question. According to Josh, the dominant strategy in this guessing game is to submit the number 0 (zero). Read the comments to see Josh's explanation. This question comes from Andrew Schotter's Microeconomics (3e) and is a description of a class of games known among economists as "beauty contests."