Exam terms 2

Question 1

Goods Rivalry

Answer 1

In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it.

Includes private goods/non-public: Cinema

Question 2

Goods exclusion

Answer 2

Can prevent others from consuming the good.

Private/non-public goods: Cinema

Question 3

Main features Bertrand Duopoly + Example

Answer 3

In general: you have BD if 1) the goods are perfect substitutes; 2) consumers can costlessly switch between products.

Bertrand duopoly. 2 firms compete for the whole market by choosing prices. Example of BD: Pepsi and Coke standing on the shelf in the store next to each other.

Question 4

Expected Value

Answer 4

We take expectation over monetary values themselves: this is as if we had
linear utility of money

Question 5

Expected utility

Answer 5

We take expectation over some function of money, which can be non-linear, namely concave or convex.

Question 6

Certainty effect

Answer 6

Dhar et al (1995) show that the certainty effect might be re-
sponsible for the difference in customers’ responses to brand promotions (dis-
count offers). Customers go for discount offers that are certain much more than
for the high-probability lottery-like offers.

In an empirical study, Botzen (2013) suggests that people in the
Netherlands tend to pay an additional premium for the elevation of their new house, so that
to decrease the probability of flooding to nearly zero, as compared with paying flooding
insurance

Question 7

Low probability event

Answer 7

Taleb and Martin (2007) point out that many investment decisions
under-estimate the risks of bad low probability events. In the gain domain, individuals tend
to over-estimate the risk of low probability events

Question 8

Prospect theory

Answer 8

This is the most used model of decision-making in social sciences as well
as in applied work. It takes into account people’s loss aversion, probability weighting,
diminishing sensitivity, and evaluation of outcomes with respect to a reference point.

Question 9

4 Biases that people have when making decisions under uncertainty

Answer 9

Gambler’s fallacy
Hot Hand fallacy
Overconfidence
Low probability events

Question 10

Positive and negative externalities

Answer 10

Positive
Businesses face higher demand
Inhabitants not related also get the benefits of shows and events
Host cities get positive publicity if an event succeeds

Negative
Saturation of transportation facilities
Produce of noise and trash
Increased police presence

Question 11

Spence model of education –> Pooling and seperating

Answer 11

A pooling equilibrium is an equilibrium in which dissimilar people (here: high-ability
and low-ability) behave and are treated alike (here: choose same education level and
are paid alike)

A separating equilibrium is an equilibrium in which one type of people (here: highability workers) takes actions (such as sending a signal; here: get education) that
allows them to be differentiated from other types of people (here: low-ability workers)
and be treated (here: paid) differently