...May 20, 2013 Eco/561 Market Equilibration Process Paper When we are shopping for items we always want to make sure that we are getting the best deal for the money that we are spending. At the end of the day when making a major purchase that is going to have a major effect on my financial situation there are many things that I must consider, but more than anything I want to make sure that I am satisfied with my purchase. When both the supplier and consumer are satisfied with the price of the product, market equilibrium occurs. According to businessdictionary.com market equilibrium occurs when the supply of an item is exactly equal to its demand. Changes in the determinants of demand, such as consumer expectations can affect the equilibrium of a market. Supply determinants, such as producer expectations can cause a specific market to decrease or increase in supply, resulting in changes of equilibrium quantity. When market equilibrium occurs, both the buyer and seller get what they want. For example, when I was in the market to purchase a new vehicle there were a lot thins that I took into consideration. I previously purchased Kia spectra and put one hundred dollars down and just walked out the door with my new car. I was so excited about having my own car I didn’t really care or think about the specifics concerning my payments or my interest rates. This time around I wanted to make sure I was satisfied with my car purchase. I wanted a Volkswagen Jetta. After looking at...
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...Risk in Housing Markets: An Equilibrium Approach⇤ Aurel Hizmo† NYU Stern January 30, 2012 Abstract Homeowners are overexposed to city-specific house price risk and income risks, which may be very di cult to insure against using standard financial instruments. This paper develops a micro-founded equilibrium model that transparently shows how this local uninsurable risk a↵ects individual location decisions and portfolio choices, and ultimately how it a↵ects prices in equilibrium. I estimate a version of this model using house price and wage data and provide estimates for risk premia for di↵erent cities, which imply that homes are on average about $20000 cheaper than they would be if owners were risk-neutral. This estimate is over $100000 for volatile coastal cities. Next, I simulate the model to study the e↵ects of financial innovation on equilibrium outcomes. Creating assets that hedge city-specific risks increases house prices by about 20% and productivity by about 10%. The average willingness to pay for completing the market per homeowner is between $10000 and $20000. Welfare gains come both from better risk-sharing and from more e cient sorting of households across cities. ⇤ I am deeply grateful to Patrick Bayer, Andrew Patton, and Peter Arcidiacono for their encouragement and support. I also thank Robert McMillan, Tim Bollerslev, Vish Viswanathan, Chris Timmins, Jimmy Roberts and the seminar participants at Duke Finance, the ERID Conference at Duke, Fed Board, NYU Stern...
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...Tournaments and Piece Rates Revisited: A Theoretical and Experimental Study of Premium Incentives Werner Guth Rene Levnsky Kerstin Pully Ori Weiselz June 22, 2010 Abstract Tournaments represent an increasingly important component of organizational compensation systems. While prior research focused on xed-prize tournaments, i.e., on tournaments where the prize or prize sum to be awarded is set in advance, we introduce a new type of tournament into the literature: premium incentives. While premium incentives, just like xed-prize tournaments, are based on relative performance, the prize to be awarded is not set in advance but is a function of the rm's success: the prize is high if the rm is successful and low if it is not successful. Relying on a simple model of cost minimization, we are able to show that premium incentives outperform xed-prize tournaments as well as piece rates. Our theoretical result is qualitatively con rmed by a controlled laboratory experiment and has important practical implications for the design of organizational incentive systems. JEL Classi cation: C72, C91, J33 Keywords: Tournaments, Incentives, Economic experiments Max Planck Institute for Economics, Kahlaische Strasse 10, 07745 Jena, Germany. yEberhard Karls Universitat Tubingen, Faculty of Economics and Business Administration, Nauklerstrasse 47, 72074 Tubingen, Germany. zThe Hebrew University, Center for the Study of Rationality, Giv'at Ram, Jerusalem 91904, Israel...
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...list of Frequently Used Symbols and Notation A text such as Intermediate Financial Theory is, by nature, relatively notation intensive. We have adopted a strategy to minimize the notational burden within each individual chapter at the cost of being, at times, inconsistent in our use of symbols across chapters. We list here a set of symbols regularly used with their specific meaning. At times, however, we have found it more practical to use some of the listed symbols to represent a different concept. In other instances, clarity required making the symbolic representation more precise (e.g., by being more specific as to the time dimension of an interest rate). Roman Alphabet a Amount invested in the risky asset; in Chapter 14, fraction of wealth invested in the risky asset or portfolio AT Transpose of the matrix (or vector)A c Consumption; in Chapter 14 only, consumption is represented by C, while c represents ln C ck Consumption of agent k in state of nature θ θ CE Certainty equivalent CA Price of an American call option CE Price of a European call option d Dividend rate or amount ∆ Number of shares in the replicating portfolio (Chapter xx E The expectations operator ek Endowment of agent k in state of nature θ θ f Futures position (Chapter 16); pf Price of a futures contract (Chapter 16) F, G Cumulative distribution functions associated with densities: f, g Probability density functions K The strike or exercise price of an option K(˜) Kurtosis of the random variable x x ˜ L A lottery...
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...Market Equilibrium Process Paper ECO/561 January 15, 2013 Paul Andoh Market Equilibrium Process Market equilibrium process is defined as the matching process of supply and demand of the consumers. The law of demand is simply the pricing of items as it relates to the demand of item. McConnell, Brue, & Flynn (2009), “states that consumers preferences along with marketing of goods; expectation of consumers; level of income from consumers purchasing products; and cost of goods determines how the level of demand will be affected” (Chapter 3). Consumers are drawn to items for many reasons (i.e., looks, style, and latest design) however; the items may or may not be readily available. For instance, during the holidays many consumers searched for the latest and greatest game devices and other electronic devices. But what we have discovered is that during that specific time of year, the demand for such items are extremely high and he supply of demand seems to fall short. When an individual is seeking a specific item that cannot be found in stores, the internet is the next big source to finding what cannot be kept on shelves in stores. In most cases the prices online may be higher because of shipping but consumers find that it is a price they are willing to pay for peace of mind and to have the product of demand at the time. When a consumers desire to purchase a product that is not readily...
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...Questions 1 As seen from the excel sheet we conclude that the NVP for Project 1 results in negative amounts, as a result we do not choose project 1. As for project 2 amongst the two options we will choose Project two with DR at 10% as it yields a higher NVP value. Question 2 a) What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market? 6 tons per day b) What is the efficient quantity of fertilizer? 4 tons per day c) Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by consumers and the equilibrium quantity after implementation of the tax? Consumers will pay $1,200 per ton, and the efficient level of output at 4 tons per day will be achieved. d) At the output level in part (6), how much is the tax per one ton? $1200 - $800 = $400 e) How much tax revenue does government collect? $400 per ton x 4 tons per day = $1,600 per day f) What is the deadweight loss borne by society if the externality is left uncorrected? (6-4)x(1,600-1,000)/2 = $600 Question 3 a) According to Coase theorem it doesn’t matter who builds the fence as long as it is less than the cost of the crop damage. However, to answer the question; the rancher builds the fence, because the cost of the fence ($100) is less than the cost of compensating the farmer for crop damage. Together, the rancher and the farmer are $200 better off ($300 crop damage less $100...
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...Market Equilibration Process Jeremiah D. Wood ECO/561 April 19, 2014 Professor John Lindvall Market Equilibration Process Economic equilibrium is defined as a condition or state in which the economic forces are at a balance. In this particular discussion, one will discuss equilibration, the process of moving between two different points that is affected by a change in demand or supply. One will cover how a specific world event, Hurricane Katrina, caused home prices in Baton Rouge, Louisiana to fluctuate between two equilibrium states. Also to be covered is how the process of said movement occurred using the behaviors of both supply firms and consumers. In the late summer of 2005, Hurricane Katrina bared down on the City of New Orleans and the surrounding areas. This storm caused a surge that caused the storm levees to break that in turn, flooded the City of New Orleans and took most of the city’s housing with it. Because of the destruction, about two hundred and fifty thousand people were relocated to nearby Baton Rouge, making it the largest city in Louisiana. Let us start the discussion by stating that the average price of a single-family home in Baton Rouge before Katrina was one hundred thirty thousand dollars, shown by point A on the graph (O'Sullivan & Sheffrin, 2002). With the explosion of the population, the average price jumped to one hundred and fifty six thousand dollars within six months, point B, and the market shrunk from three thousand six...
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...Market Equilibrating Process Student Name ECO/561 Date Peter Oburu Market Equilibrating Process Market equilibrium is defined as a state where the quantity supplied matches the quantity demanded (McConnell, Brue, & Flynn, 2009). In case where there is lack of equilibrium a business can be have a surplus or the buyers could face a shortage. The process in which the market adjust to the demands of market buyers and supply of market sellers is know n as the market equilibrating process. If the market price of a good or service is set above market equilibrium price, the demand will be less than the supply and the net effect will be a surplus. On the other hand, the market price of a good or service is set below the market equilibrium price, the demand will be greater than the quantity supplied and the net effect will be a shortage. For a business either of these scenarios can be detrimental, therefore it is very important that a business owner set their price at the market equilibrium, which is the ideal price for both business (suppliers) and the consumers. This paper provides an example of how the market equilibrating process works for a martini lounge. The paper proceeds as follows; first we describe ... then we highlight ... and finally we conclude that ... As the owner of a restaurant, I have to pay very close attention to pricing in an effort to ensure a steady flow of customers and to build profitability. The type of restaurant I own can be classified and...
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...The theory of market equilibrium states that market forces tend toward a balance, or equilibrium, of price and quantity, unless an outside source intervenes to disrupt the balance (University of Phoenix, 2010). The product I will be discussing is the Apple iPhone and how it reaches its market equilibrium. Apple goes through three phases when releasing inventory to stores (through personal experience.) The first phase is to release a lot of inventory on the day of release. The second phase is slowly release inventory to keep demand up. The third phase is release enough inventory so that all stores have supplies readily available. By being strategic with the quantity of iPhones released Apple set their own market equilibrium. Demand is a schedule that shows the various amounts of a product that consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period (McConnell, Brue, & Flynn, 2009). This demand on a product is greatly affected by supply, which is a schedule that shows amounts of a product a producer is willing and able to produce and sell at each specific price in a series of possible prices during a specified time period (McConnell, Brue, & Flynn, 2009). When the iPhone first releases every Apple and AT&T store receive very large amounts of inventory. Most of the customers waiting at the stores will get an iPhone, however, those that did not wait before stores hourse usually will not get a phone. The reason...
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...contended, however, that the management scientists were proposing changes with insufficient regard for relevance, timeliness, acceptance, or implementation (Zand, 1975). Identifying the Characteristics of Effective Organizational Change Psychologist Kurt Lewin theory on organizational change conceptualized the present condition or level of activity of a system as a dynamic social equilibrium, that is a state of balance maintained by active driving and resisting social forces. Change then consisted of altering the driving and resisting forces thereby facilitating the movement of the system to a new level of equilibrium (Zand, 1975). Lewin conceptualized change as a process with three phases: (1) unfreezing—behavior that increases the receptivity of the client system to a possible change in the distribution and balance of social forces; (2) moving—altering the magnitude, direction, or number of driving and resisting forces, consequently shifting the equilibrium to a new level; and (3) refreezing—reinforcing the new distribution of forces, thereby maintaining and stabilizing the new social equilibrium. Lewin also suggested that although common sense might lean toward increasing driving forces to induce change, in many instances this might arouse an equal and opposite increase in resisting forces, the net effect being no change and greater tension than before (Spector, 2010). The Situation at Asda...
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...A Nash equilibrium is a pair of strategies, one for each player, in which each strategy is a best response to other. These represent the likely outcome of the game. According to Roger B. Myerson, “If we can predict the behavior of all the players in such a game, then our prediction must be a Nash equilibrium, or else it would violate this assumption of intelligent rational individual behavior. That is, if our predicted behavior does not satisfy the conditions for Nash equilibrium, then there must be at least one individual whose expected welfare could be improved simply by re-educating him to more effectively pursue his own best interests, without any other social change.” The above argument does not prove that Nash equilibrium should be the only methodological basis for analysis of social institutions. But it does explain why studying Nash equilibria should be a fruitful part of the critical analysis of almost any kind of social institution. The prisoners dilemma is one of the best examples of Nash Equilibrium. | | Jack | | | | C | NC | Tom | C | -10,-10 | 0,-20 | | NC | -20,0 | -5,-5 | | | | | *Numbers represent years in prison If every player in a game plays his dominant pure strategy (assuming every player has a dominant pure strategy), then the outcome will be a Nash equilibrium.According to the above game both players know that 10 years is better than 20 and 0 years is better than 5; therefore, C is their dominant strategy and they will both...
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...is a brilliant mathematician and also a paranoid schizophrenic. Even though Nash struggled with paranoid schizophrenia he was still able to revolutionize a concept called game theory. This work that he did with game theory greatly improved what was already established as well as created the Nash equilibrium. Game theory is the mathematical study of strategies used to win games. It began with games like tic-tac-toe and chess since they are easy to analyze because they are known as games of complete information. Complete information is when your opponent’s positions are in clear site. Game theory then went on to analyze card games where player’s cards aren’t seen, which is known as incomplete information. In card games there are elements such as bluffing that can become a variable in the analysis. Mathematicians continued to analyze more critical games such as economics, biology, philosophy, and even which girl to go after. This is around the time that John Nash developed a principle for mutual consistency of player’s strategies which is known as the Nash equilibrium. The Nash equilibrium can be applied to a wider variety of games than the original game theory. This equilibrium proposes that all players have a perfect strategy that becomes stable and if they stray it will make all positions worse off. In the games there are two or more people competing over money, ideas, and even for just a few examples. Each person comes up with an approach based on their objectives...
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...Model Paper of Experimental Economics Game Theory: Battle of Sexes: 1. Use backward recursion to find the optimal strategy for wife? 2. Suppose Wife loves Husband more than her own self. Then what would be the optimal strategy? Does Utility Maximization allow for this possibility? 3. Suppose Husband ALSO loves Husband more than wife. What strategy can He play that will create a favorable outcome for him. REMEMBER that a strategy is a specification in advance of all the choices at all the nodes. 4. If Husband plays strategy given in Question 3 above, what is optimal strategy for wife? 5. For what possible reasons can Wife DEVIATE from playing her optimal strategy in Question 4? 6. Count total Number of strategies for Husband 7. Count total Number of strategies for Wife. 8. List all strategies for Husband. 9. List all strategies for Wife. 10. Make a Normal Form Game. 11. Identify Weak and Strong Nash Equilibrium. Also give reason. 12. From above Nash Equilibriums, identify subgame perfect equilibrium and explain why? 13. From above Nash Equilibriums, identify subgame imperfect Equilibrium and explain why it is subgame imperfect. Ultimatum Game: In an Ultimatum Game, the proposer must divide a pie worth $30, and shares must be multiples of $10. As usual, the responder gets to accept or reject. 1. Draw the extensive form game tree. 2. Use backwards induction and rollback to solve the game. 3. Is there a dominant strategy for the proposer in this game? 4...
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... | | | | | | | | | | | Price High | 20,10 | 50,0 | | | Price Low | 5, -10 | 10,0 | a) What is the Nash equilibrium of this game? 20,10 is the Nash Equilibrium because when monopolist keeps its price high that is when the game is at the Nash equilibrium. b) Is the monopolist's threat to charge a low price credible? That is, if the entrant has come, would it make sense for the monopolist to charge a low price? Explain. - No, it would not be a creditable decision to charge a lower price as lowering the price results in less profit for monopolist. If decision is made to change the price Entrant and Monopolist would no longer be in Nash equilibrium as a change would lower Monopolist’s profit in result in a loss for...
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...Contemporary Theories Summary of Solow model * Convergence because high returns to capital at low levels of capital * When capital stock is low, huge positive returns to capital but this is not true at very high levels of capital. * Less and less returns at high level of capital * Growth comes naturally from perfect competitive markets * There is no need to do anything. If you are on the left hand side of k*, the economy will grow. * True only for perfect competitive markets meaning * If needed human capital is available at any scale and quantity (no role for human capital in the Solow model though because we always divide everything by population) * There is a possibility of technology transfer * Government provides essential services * No need for development policy * Because again a country grows naturally if it’s on the left of k* and all countries converge to the same point But no evidence of convergence * Regressions: yes, but shaky * There was evidence of regressions, initial wealth was negatively related to GDP growth but we saw that the regressions were subject to many problems like OVB, reverse causality * Historical growth 1960-1990 * World: 1.7% (double after 43 years) * East Asia: 3.3% (double after 23 years) * South Asia: 1.9% (double after 38 years) * Sub-Saharan Africa: 0.2% (double after 348 years) Difference between OECD and rest of the world: * Convergence...
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