What role do incentives play in each of the following situations? You learn that

Question

What role do incentives play in each of the following situations? You learn that you can resell a ticket to next week's homecoming game for twice what you paid. A state government announces a "sales tax holiday" (i.e., sales tax won't be charged for purchases) for back-to-school shopping during one week each August. Suppose that Colombia is good at growing coffee but not very good at making computer software, and that Canada is good at making computer software but not very good at growing coffee. If Colombia decided to grow only coffee and Canada only made computer software, would both countries be better or worse off? Can you think of a similar example from your life? After some consideration, you decide to hire someone to help you move. Wouldn't it be cheaper to move yourself? Do you think this is a rational choice? Explain your response. The website ultrinsic.com has developed an "ulterior motive that causes the person to have an intrinsic love of knowledge." At Ultrinsic, students pay a small entry fee to compete in grades-based contests for cash prizes. Suppose that 20 students from your economics class each pay $20 to enter a grades-based contest. This would create a 8400 prize pool. An equal share of the 8400 pot is awarded at the end of the term to each contestant who earns an A in the course. If four students earn A's, they each receive $100. If only one student earns an A, that person gets the entire 8400 pot. What economic concept is Ultrinsic harnessing in order to encourage participants to learn more?

Explanation / Answer

1)

Incentives play a quintessential role in economics in the sense that it is one of the basic principles of economics. Individuals are believed to respond to incentives when they are placed in a particular economic situation.

a) Here it is learnt that the ticket for the homecoming you purchased has double the resale value. So there is an incentive on your part to resell it and earn double the amount that you paid.

b) This announcement will be effective for the ongoing one week in the month of August every year and it will encourage students to shop since sales tax on purchases will not be charged. So this incentive will increase the amount of shopping done in the ongoing week.

2)

A country that has comparative advantage is believed to gain from trade with other countries. This country should focus on what it can produce more efficiently and it should exchange other products with the rest of the world in return for its products.

In this case, Columbia has absolute advantage in coffee production and Canada has the same advantage in producing software. If Columbia produces only coffee and Canada produces only software, there is a channel of trade through which both countries can be better-off. Columbia can export some of its coffee to Canada and in return it can import software services. In this way, both countries will have a high consumption levels and living standards.

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