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 • 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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DUM 1.0 å = + = T t t t T r c u c c U NPV 0 0 ) 1 ( ) ( ) ... ( Key assumptions: People are characterized by a single discount rate r. They (act as if to) use this discount rate consistently over time– note there is no t subscript on the r. They (act as if they) use this discount rate consistently across choice situations and types of consumption.
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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…(why might it want to do this?) One option would be to offer a rebate redeemable at the point of sale. If discount rate was 5% instead of 10%, would we need a larger or smaller subsidy to get more people into cleaner cars? Another option would be to tax gas! What are we actually doing?
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How does this compare to how you actually make these trade offs between present/future costs/benefits?
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DUM 1.0 Model assumes that people have stable preferences and a stable discount rate. Model can be used to calculate the overall utility associated with options whose benefits and/or costs accrue over time and predict choices. If people actually made inter-temporal decisions consistent with this model, the model would be very powerful.
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DUM 1.0 DUM 1.0 is sometimes portrayed as rational choice behavior, particularly by non-economists.
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  • Spring '16
  • Meredith Fowlie
  • Economics

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