Economics_Ch08

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Unformatted text preview: if the price of gold rises, so you do. Next week, the price of gold rises. Soon after, you get another letter from the investment advisor. He reminds you that he wrote you last week and predicted a rise in the price of gold. He reminds you that things happened as he said they would. Just to prove to you, once again, that he can predict increases and decreases in the price of gold, he tells you that next week the price of gold will fall. Sure enough, the price of gold does fall the next week. Again, you get a letter from the advisor. Again he reminds you that he correctly predicted the change in the price of gold in two consecutive weeks. He makes a third prediction. He predicts that next week the price of gold will rise again. Sure enough, he is right a third time. The Hook The final letter you get from the advisor reminds you that he predicted the change in gold in three consecutive weeks. He asks whether you are convinced that he can pre- dict what will and will not be good investments. He also asks you for $1,000, after which he promises to send you a weekly update of his investment advice. He says that if you only follow his “crystal-ball advice” you can turn a little money into a lot. Don’t Be Fooled Now if you are thinking that you should go along and send in the $1,000, think again. What the investment advisor has just done is make a promise to you that he cannot possibly keep. He can’t really predict the good investments time after time. But he’s done it, you say. You saw him do it with your own two eyes. He didn’t just say he could predict the change in the price of gold, he did it. Be skeptical of any get-rich offers you receive in the mail. If it sounds too good to be true, it probably is. 204 Chapter 8 Competition and Markets 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 205 gold. To the other half he predicted a rise in the price of gold. When the price of gold rose, he then wrote the people who got the “price-is-goingup” letter—one of whom was you— and told you how he had predicted things correctly three times in a row. Then came the request for money— he urged you to pay him $1,000 for his investment advice. Even reputable newspapers and magazines contain ads for questionable business ventures. Investigate the company before giving them your money if you have any doubts. How It Works Here is how he did it. Before you got your first letter from the investment advisor, he wrote 10,000 letters. Half of the letters predicted an increase in the price of gold next week, and half predicted a decrease. The investment advisor kept a record of the people to whom he sent each letter. When the price of gold went up the next week, he then wrote the people who got the “price-is-goingup” letter again. He did not write to the “price-going-down” people. In the second round of letters he predicted a rise in price to half the people and a decline in price to the other half. When the price of gold went down, he then wrote the people who got the “price-is-goingdown” letter again, but did not write again to the “price-going-up” people. He repeated this process one more time. To half of the people receiving the third round of letters he predicted another fall in the price of So, you see, the investment advisor never really predicted anything. He just wrote a lot of letters, predicting a higher price of gold in half of the letters and predicting a lower price of gold in the other half. To the people who received the “correct prediction,” he wrote again. He wasn’t predicting the future, he was covering all bases. He was running a scam. ction Plan Economics A l My Persona me consider and so ant to ints you may w ere are some po H practice: ant to put into es you might w guidelin true,” it s “too good to be n something look ❑ 1. Often, whe isn’t true. further anyand investigate elf to question I promise mys true.” s “too good to be thing that seem some were as easy as ght investment the ri million❑ 2. If predictiyng is, then they should easily be multineed to people sa it Why do they n investments. res from their ow ss? ai t advice busine to the investmen go in I will try true” situation, a “too good to be e offer. When I confront rson making th otives of the pe em to determine th e anteed “to mak me that I’m guar lls ask ❑ 3. If someoneI te st take that person’s advice, I will my refund money” if ju on is willing to or not that pers whether successful. vestment isn’t money if the in ssible, I will funds aren’t po on says that re nteed.” When the pers vice was “guara isor” that the ad remind the “adv ✔ ✔ ✔ Chapter 8 Competition and Markets 205 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 206 Focus Questions What are the characteristics of monopolistic competition? What are some examples of monopolistic competition? Are monopolistic competitors price takers or price searchers? How do monopolistic competitors answer questions about how much to produce and what price to charge? What are some...
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This document was uploaded on 01/16/2014.

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