What is a nudge policy?

True or false? For a ma Show more In the Book ECON 121 Santa Ana College Volume 2. Answer the question: 1 > True or false? For a market to have a coordination mechanism money must be exchanged. Explain. a. False. Some markets dont have explicit prices. They have what are called shadow pricesprices paid under the table to avoid taxes. b. True. Although there are other ways to distribute goods and services such as barter only markets with money have coordination mechanisms. c. True. The coordination mechanism that economists recognize is the invisible hand. For the invisible hand to work there must be an exchange of money. Other mechanisms do not truly coordinate desires and wants. d. False. Some markets dont have explicit prices. They have what are called shadow prices. Economists have developed a way to convert opportunity costs into shadow prices regardless of whether money is exchanged. 2 > True or false? Only money prices affect incentives; shadow prices do not. Explain. a. False. Both money prices and shadow prices affect incentives. The shadow price measures the opportunity cost. b. False. All money prices are shadow prices. Because money prices affect incentives then shadow prices also affect incentives. c. True. Because shadow prices are not actually paid they do not affect incentives. Only money prices affect incentives. d. True. Only money prices affect incentives. Shadow prices have no real opportunity cost. 3> What is the incentive compatibility problem? Give an example. a. A problem that arises when the incentive facing a decision maker (marginal benefit) does not equal the effort (marginal cost). An example is when government places a greater cap on CO2 than is efficient (the costs of reducing emissions exceed the benefits). b. A problem in which the incentive facing the decision maker does not match the incentive needed for the mechanism to achieve its desired end. An example is the salary of managers. While it is in the interest of the corporation to keep costs down (keep salaries as low as possible) it is in the interest of the manager to boost his own salary. c. A problem that arises when government intervention does not improve the well being of society. An example is when a government employee hires friends to do contract work instead of bidding contracts out and choosing the lowest bid. d. A problem in which the incentive to engage in an activity is realized now while the costs are realized later. This separation of incentives and costs creates a problem because people tend to discount future costs and benefits. An example is someone who chooses not to exercise but later regrets the weight gain. 4>What is the primary task of a mechanism design economist? a. To inform consumers about the role of prices as a coordinating mechanism in the market. b. To identify a goal and design a mechanism to achieve that goal. c. To design mechanisms that overcome the problems associated with the economic decision rule. d. To analyze mechanisms in the economy and identify the goals they achieve. 5> How did mechanism design lead to behavioral economics? a. Mechanism design economists realized that the price mechanism in the market could be improved by increasing the amount of information available about products. They turned to behavioral economists to determine how people process information so they could provide it in an efficient manner. b. Mechanism design economists realized that many of the current models of individual behavior did not fit institutional realities. These economists needed to understand peoples predictable irrationalities so that they could take them into account in designing real-world mechanisms. c. Mechanism design economists realized that the mechanism by which people make decisions resulted in suboptimal decisions. So that they could improve peoples decisions they developed the field of behavioral economics to explore peoples decision-making process. d. Mechanism design economists realized that markets coordinated wants and desires through more mechanisms than price. They launched the field of behavioral economics to study the behavior of these newly discovered mechanisms. 6> Can a model that includes just money price miss relevant prices? Why or why not? a. Yes. Such a model might ignore the possibility that government could implement programs such as price ceilings quantity restrictions and taxation as ways to achieve its goals. An example is the quota that the United States imposes on imported sugar as mentioned in the text. b. No. Models that include money prices will include all the relevant incentive effects that people face. All modern market economies have money prices. c. No. Markets rely on money and prices as the coordinating mechanism. Other factors should not affect decisions; it is the job of economists to help people realize that costs and benefits are stated in terms of prices. d. Yes. Such a model might fail to take into account social and moral incentives faced by decision makers. An example is the late pick-up at day care centers cited in the text. By replacing the moral incentive to pick up ones child on time with a market price late pick-ups unexpectedly rose. 7> How is choice architecture related to behavioral economics and mechanism design? a. Choice architecture describes the structure of peoples decision-making process. Behavioral economics has developed experiments to reveal these structures and mechanism design is an attempt by economists to change that structure. b. Choice architecture is the context in which decisions are made. Behavioral economists have discovered that choice architecture affects peoples choices. Mechanism design economists take this into account when designing mechanisms to achieve particular goals. c. Choice architecture considers the choices that people face and whether people make choices within the marginal benefit and marginal cost framework. Behavioral economists have developed studies to test this question and mechanism design is a deliberate structuring of those costs and benefits to help people make the best choices. d. Choice architecture describes the pricing structure embodied in modern markets. It is related to behavioral economics because people respond differently to different pricing structures. Once economists understand how people respond to different pricing structures they can use mechanism design to design structures that will maximize profits for the firm. 8> Behavioral economics is a new field in economics. Are nudges new too? a. Nudges are a recommended policy of Thaler and Sunnstein; they have yet to be fully explored and implemented by the government. b. Nudges are not new. Governments have been requiring firms to present information in ways that result in people making the best choices ever since markets have existed. c. Nudges are not new. Firms have been presenting choices to people in intentional ways to affect their choices for many years. d. Nudges are so new that not even all economists believe they are effective. While some firms have begun to implement nudges most are uncomfortable doing so because of the bad association consumers have with nudges. 9>What is a nudge policy? Give an example. a. A policy in which choices are structured in a way that people are free to make the choice they want but are more likely to choose in the way that meets predetermined goals of policy makers. Presenting participation in a retirement plan as the norm is an example. b. A policy in which government requires firms to structure choices people face so that they are free to make the choice they want but are more likely to choose in the way that meets predetermined goals of policy makers. Rent control is an example. c. A policy in which government uses taxes subsidies price controls and quantity restrictions to nudge people to reach a public policy goal. A gasoline tax is an example. d. A policy in which government subsidizes activities as a way of nudging people to take on an activity but not requiring it. Subsidizing education is an example. Show less

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