Lec10_Intertemporal_2019.pdf - Announcements \u2022 Problem set due this Thursday*in class or electronically by email before class \u2022 Midterm exam is a

Lec10_Intertemporal_2019.pdf - Announcements u2022 Problem...

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Announcements Problem set due this Thursday *in class* or electronically by email before class. Midterm exam is a week from Thursday. Study guide and practice midterm are posted. Midterm covers material through economic regulation. Coffee hour next week (optional!!) Mid-semester survey posted on Friday
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Outline Finish our discussion of DUM1.0 Summarize results from our in-class experiment Conclude our theoretical overview of market failures Theory of Economic Regulation Application 1: Regulating a natural monopoly Readings: ( VHV) Economics of Regulation and Antitrust Chapters 10, 11 . Available as a free online resource through the UCB library (using a UCB IP address): .
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The conventional Civic (option I) costs $16,000 and gets 30 miles per gallon. Simple DUM 1.0 application
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Simple DUM 1.0 application The Civic Hybrid (option 2) costs $20,000 gets 45 miles per gallon.
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Simple DUM 1.0 application Assume gas prices of $3/gallon. Assume 15,000 miles per year Assume you will sell the hybrid Honda Civic for $1000 at the end of 5 years. Assume you will sell the conventionaI Honda Civic for $600 at the end of 5 years. Assume a nominal discount rate of 10 percent. Assume all costs are in nominal terms (discount nominal future values with a nominal interest rate). Assume we pay cash for the car in time period 0 and incur operating (fuel costs) in time periods (years) 1 through 5. Civic gets 30 mpg. Hybrid gets 45 mpg.
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Policy implications?Suppose that the government wants to incentivize the hybrid…(whymight it want to do this?)
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How does this compare to how you actually make thesetrade offs between present/future costs/benefits?
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DUM 1.0
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DUM 1.0 DUM 1.0 is sometimes portrayed as rational choice behavior, particularly by non-economists. It is a foundation of cost benefit analysis and routinely incorporated into policy design, implementation, evaluation. BUT it does not perform well in explaining the intertemporal decisions people actually make!
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Beyond DUM 1.0 Economists and psychologists use this model as a benchmark to identify ways in which people conformed to or deviated from this simple framework.
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