Unit 5 - Property and Power: Mutual Gains and Conflict

Question 1

Two forms of power in economics

Answer 1

• It can set the terms of an exchange - i.e the ultimatum game
• It can impose or threaten to impose heavy costs - unless the other party acts in a way that benefits the person with power

Question 2

Bargaining power

Answer 2

• in economics the bargaining power is definitely not held by anyone
• Example - in the labor market, the power to set the terms of the exchange lies with the business

Question 3

The dictator game

Answer 3

one party has all the bargaining power - there are many examples of economic institutions that act as in the dictator game

Question 4

Allocation

Answer 4

the outcome of an economic interaction

Question 5

The Pareto Criterion

Answer 5

• The allocation of resources under which at least one party would be better off than before, with no party being worse off than before
• According to the Pareto criterion, allocation A dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off.
• We say that A Pareto dominates B
  From (T,T) to (I,I) - what is socially desirable - Pareto efficient
• However, the Pareto criterion can be of limited help in comparing allocations
• An allocation that is not Pareto dominated by any other allocation is described as Pareto efficient

Question 6

Pareto efficient

Answer 6

there is no alternative allocation in which at least one party would be better off and nobody worse off

Question 7

Limitations of Pareto Efficiency

Answer 7

• There are often more than one Pareto efficient allocations - the pareto criterion does not help us choose among these allocations
• Pareto efficiency is unrelated to fairness - many allocations that could be unfair are Pareto efficient

Question 8

Substantive Judgements

Answer 8

• outcomes
• based on inequality in one of these aspects of the allocation
• Income (the reward in money of the individuals command over the valued goods and services)
• Happiness: economists have developed indicators by which subjective well-being can be measured
• Freedom; the extent that one can do what one chooses without socially imposed limits

Question 9

Procedural judgments

Answer 9

• process & can be evaluated according to these aspects:

1. Voluntary exchange of private property acquired by legitimate means
   I.e was fraud or force involved?
2. Equal opportunity for economic advantage
   I.e were people subject to some kind of discrimination
3. Deservingness
   I.e did the rules of the game take into account how much work the individuals put in?

Question 10

Rawls Principles

Answer 10

• to establish a common ground of values rawls proposed three steps
• Adopting the principle that fairness applies to all people
• Imagining a veil of ignorance when making decisions
• Making our judgements from behind the veil of ignorance

Question 11

Technically feasible allocations

Answer 11

• The feasible frontier shows all the technically feasible outcomes (limited by technology)
• The biological survival constraint shows all the biologically feasible outcomes (limited by survival)
• Feasible allocations are given by the intersection of these constraints
• The shaded area - the technically possible outcomes

Question 12

Economic rent

Answer 12

the amount one earns over the amount one earns if one did not have certain productive advancements (i.e technological advancements)

Question 13

Sum of economic rents

Answer 13

joint surplus

Question 14

private property

Answer 14

the right to use and exclude others from the use of something, and the right to sell it

Question 15

revenue

Answer 15

quantitiy times price

Revenue describes income generated through business operations

Question 16

profit

Answer 16

profit describes net income after deducting expenses from earnings

Question 17

reservation option

Answer 17

• the allocation in which Angela does not work and gets only survival rations from the government
• Reservation indifference curve - all the allocations that have the same value for her as the reservation option

Question 18

economically feasible set

Answer 18

• All the economically feasible allocations - area between reservation IC and PPC of Angela and Bruno combined
• All of the allocations which represent mutual gains can be seen in the economically feasible set
• Pareto improvement (these allocations Pareto dominate the ones without a deal)

Question 19

Pareto efficiency curve

Answer 19

• A Pareto-efficient allocation has the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off.
• The set of all such allocations is the Pareto efficiency curve (or contract curve)
• On the Pareto efficiency curve - at all the points MRS = MRT

Question 20

Pareto improvement

Answer 20

Pareto improvement (these allocations Pareto dominate the ones without a deal)

Question 21

The Lorenz Curve

Answer 21

• indicated how much disparity there is in income across the population
• X-axis - the entire population from the poorest to the richest
• Y-axis - the fraction of total income received by the fraction of the population given by the point on the x-axis
• It allows us to see how far a distribution departs from the line of perfect equality (45 degrees)
• More unequal distribution have a greater area between the Lorenz curve and the 45-degree line

Question 22

The Gini Coefficient

Answer 22

• calculated as the ratio of this area to the area of the whole of the triangle under the 45-degree line
• Gini = 0 - perfect equality
• Gini = 1 - perfect inequality
• The Gini is more precisely defined as a measure of the average difference in income between every pair of individuals in the population

Question 23

Disposable Income vs Market Income

Answer 23

Disposable income better captures living standards - what a household can spend after paying tax and receiving transfers
The Gini for disposable income is lower than the The Gini for market income (this is because of governmental policies to reduce income inequality)

Question 24

inequity aversion

Answer 24

Inequity aversion is a concept in behavioral economics that refers to the tendency of individuals to avoid situations where they perceive that there is an unfair distribution of resources or benefits.

Question 25

Profit in terms of Price, Quantity and MC

Answer 25

Profit = (P-MC) x Q

Question 26

What happens to the isoprofit line if prices are raised?

Answer 26

• Vertical shift up
• tangency will shift to the left with the demand curve
  => firm will set a higher price with lower quantities