Naked Economics

Topics: Economics, Market failure, Information asymmetry Pages: 2 (606 words) Published: September 15, 2013
Katherine Piedra
Chapter 1: The Power of Markets
1. What are the two basic assumptions that economists make about individuals and firms? First, we assume that all of these entities have unlimited wants. This assumption forms the basis of economics. It is the study of how entities try to fulfill these unlimited wants when confronted with limited resources. Second, we assume that all of these entities are rational actors. We assume that they typically act in ways that will help to achieve their goals. This allows us to understand their actions which we would not be able to do if we assumed that they constantly acted on the basis of whims. 2. What is the role and significance of prices in the market economy? What’s so great about a market economy anyway? Prices in the market economy are extremely useful because they help gauge what consumers want and how badly they want it. High prices indicate strong consumer desire for that product while low ones indicate little interest. A market economy is so good because it corresponds with normal human behavior and allows for optimum allocation of resources. It may not be completely fair, but it is the most stable and best option compared to a communist system.

Chapter 2: Incentives Matter
3. Explain how each of the following relates to efficient outcomes in a market economy: Adverse selection, “perverse incentives”, principal-agent problem, and the prisoner’s dilemma. 4. So what’s the issue with the black rhinoceros and how can economics point to a possible solution? Chapter 3: Government and the Economy

5. In your own words, explain the meaning of an externality. 6. Besides addressing externalities, what other important and beneficial roles does government play in our market economy? Chapter 4: Government and the Economy II

7. What are the main reasons why government should only take a limited role in a market economy? Chapter 5: Economics of Information
8. Whelan explains that basic...
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