day11pr - PADP 6950: Founda1ons of Policy Analysis Welfare...

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Unformatted text preview: PADP 6950: Founda1ons of Policy Analysis Welfare PRACTICE Angela Fer1g, PhD Market Exchange & Wealth Distribu1on Experiment Divide into 3 groups of 10 economic agents I will give each of you ini1al endowments of exchangeable items (M&Ms) I will give you the values of each of the items Your goal is to trade these items with anyone in the class to maximize your points 1 Values If all of the items have the same value for all par1cipants, then each of you will have the same MRS between any 2 colors and therefore, there will be no way to have mutually beneficial trade So, I have set up the situa1on to insure that at least some of you will have different point values for each item and therefore different marginal rates of subs1tu1on Endowments Because I want to illustrate something about the impact of compe11ve exchange when people have different ini1al endowments: Group 1: poor Group 2: middle class Group 3: rich Each of you will have a different ini1al endowment 2 Values & Endowments M&M Color Brown Yellow Orange Red Green Value 1 2 4 7 10 Poor 5 2 2 1 0 Middle Class 5 5 2 2 1 Rich 4 5 5 2 2 Bonus Points In order to get individuals to have different values, you will get points not only for each M&M you have of a par1cular color, but you will also get bonus points for each triad (group of 3 of a given color). Furthermore, you will get larger and larger amounts of bonus points for every extra triad that you get, up to 5 triads of a par1cular color. Formula for each color: (n+t)*value where n=num of same color M&Ms t=num of triads 3 Example 1: Yellow (value=2) # of yellow M&Ms 1 2 3 4 5 6 7 8 9 10 11 12 AddiEonal points 2 2 2 2 2 2 2 2 2 2 2 2 AddiEonal bonus points 0 0 1*2 0 0 2*2 0 0 3*2 0 0 4*2 CumulaEve points 2 4 8 10 12 18 20 22 30 32 34 44 Marginal value 2 2 4 2 2 6 2 2 8 2 2 10 Example 2: Green (value=10) # of green M&Ms 1 2 3 4 5 6 7 8 9 10 11 12 AddiEonal points 10 10 10 10 10 10 10 10 10 10 10 10 AddiEonal bonus points 0 0 1*10 0 0 2*10 0 0 3*10 0 0 4*10 CumulaEve points 10 20 40 50 60 90 100 110 150 160 170 220 Marginal value 10 10 20 10 10 30 10 10 40 10 10 50 4 Beneficial Trades If you have 2 of a color and the person with whom you are trading does not, you have an opportunity for a mutually beneficial trade. If you think you know someone who wants what you could get cheap, you could then make a trade that would benefit you. You will get 2 opportuniEes for trading, each of which will last about 5-7 minutes. Record Sheets 1. Fill in your ini1al endowment 2. Calculate how many points your endowment is worth Check: what is your endowment if you are poor? middle class? rich? 5 Records during game On back of record sheet, record each trade e.g. 1 G for 2 Os + 1 Y (Vernon) TRADING ROUND 1 Calculate value of holdings ader 1st trading round Calculate gains TRADING ROUND 2 Calculate value of holdings ader 2nd trading round Calculate gains and sum of 2 gains Results Go to excel file 6 Discussion We should observe that self-interested trade led to total social welfare gains Was there gain for every person? Were all of the trades Pareto improving? (Check backs of sheets) If not, what happened? Were the gains from trade shared equally in every case? Why or why not? Was there varia1on within each income group? Why might this happen? More discussion Compare the average gains by income group How would you rank, by order of importance, the various factors that affected what people individually gained over the course of the game? Skills Ini1al endowment Effort Crea1vity Anything else? 7 More discussion Everyone had the opportunity to gain from trade. There was no coercion. There was no despera1on on the part of the "poor" causing them to be forced to accept a bad bargain. Why might the rich have gained more from trade? Did the poor engage in fewer trades? Why? More discussion What might the different colors of M&Ms correspond to in real life? Was the bonus system bogus? What might it represent? 8 ...
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This note was uploaded on 01/18/2012 for the course PADP 6950 taught by Professor Fergi during the Spring '11 term at University of Georgia Athens.

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