Economics Discussion

1. What are some of the tools economists use to analyze consumer decisions on what to buy?

2. On the demand side, what are some exceptions to the rule that when Price falls, Demand rises?

3. How do interest rates affect Household savings? On mortgage interest rates, let us revisit adjustable and fixed rate mortgages. Which of these types you want to recommend to the home buyer. Please explain from the viewpoint of the home buyer/consumer preferences.

4. Choose one of the following, explain/define the concept and give it a real world application:

a. marginal rate of substitution

b. substitution effect

c. perfect substitution

d. income effect

e. budget constraint

5. In a democracy like ours, what is your understanding of the general rule of political economy? What are some of the problems associated with political economy? Please cite some real world examples.

6. What is your understanding of Behavioral Economics, Experimental Economics, and Applied Economics?

7. What is your recollection from previous discussions about asymmetric information? In one of the author’s applications of this concept. the city is considering two ways to help the needy: 1. giving them cash or 2. giving them free meals. Give your argument for doing no. 1. Give your argument based on asymmetric information as to why no. 2 is better in doing than no.1 ? Please explain.

8. What is your understanding of a shadow price? How does this differ from a normal price? Please cite some real world applications of the concepts.

Solution Preview

Economists use different tools to analyze consumer decisions on what to buy. First, price elasticity is a critical consideration of a service or product pricing, and it indicates how demand is responsive to the change of price of a given good. Consumers are much less likely to purchase a good that is that is highly elastic when prices are at increase but much likely to purchase when the prices go down.

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