texts:
I was thinking about the value of those products and services which are needed to sustain people's lives and to expand people's lives, and how unaware I'm of a metric that measures actually this. I know GDP doesnt measure this. The inclusion in GDP of services which to me doesnt have any value in this sense, and later using GDP as a measure of a country progress doesn't make sense to me. For example, according to this

Rethinking GDP

  Yet as a statistic, it is surprisingly poor as a means of actually
  measuring what it is supposed to measure. It measures a rough
  aggregate of the total number of transactions made within a given
  country. It's used primarily because it is easy to calculate, but it
  does not really matter to this calculation whether the transactions
  involved are used when building new houses or repairing houses after a
  hurricane. Building a bomb, throwing a lavish party, or paying for
  school, it doesn't matter much what the transactions actually do, the
  statistic is only really concerned with the amount of money passed
  between hands.

So if I go to an arcade, and I spend money in it playing videogames, I'm growing GDP?

So I was wondering,

Is there any metric to measure the creation of products and services needed to sustain and expand life?

By sustaining life I mean, food, shelter, electricity, water, health care, etc. and by expanding life I mean development of technology and science in this sense.

I could understand that exporting a service would bring money to a country which later could be used to buy these things. That could make sense to be included in a metric like the one I'm looking for. But services which are pure for entertainment or comestic procedures or things in those lines doesnt make any sense to me to be included in a metric which is used to measure progress.


texts: Price setting firms with cost reduction technology

texts:
As part of my undergraduate studies in Industrial Economics, I am trying to solve the following question:

  Two price-setting firms are competing in a market for a homogeneous product. There are 10,000 people in the population, each of whom is willing to pay at most 10 for one unit of the good. Initially, both firms have a marginal cost of 5. Assume that the firms are not capacity constrained and cannot collude. What is the equilibrium in this market and what are the firms’ profits?

  Suppose now that a new technology becomes available that lowers the marginal cost to 3. The cost to a firm of purchasing this technology is 10,000. The firms must now simultaneously decide whether to adopt the new technology or not, and following this decision, they simultaneously set prices. Each firm can observe whether its rival acquired the new technology or not before setting its price. What is (are) the equilibrium (equilibria) in the market now?

I am struggling with both parts of the question but I think I got the answer to the first part more or less correct. It comes down to a Bertrand equilibrium where both firms get a fraction of the total market share, charge price equal to marginal cost (i.e. 5) and make 0 profit. Thoughts?

Now the second part is more tricky since the per unit cost will depend on the total output of the firm so it can spread the 10,000 investment over the number of units manufactured. Some loose thoughts:

I can see that if both firms decide to invest in the cost reduction technology and they split the market in equal parts, i.e. each produce 5,000 units, then they will need to charge 5 to not incur loses, i.e. there is no point in investing.
I also get that if a firm were to supply all the market, its average cost would be 4.

The above two points make me think that the possible equilibria are:

Both firms invest in the cost reduction technology and upon seeing that the other firm has also invested, decide to split the market into equal parts so as not to incur losses.
One firm decides to invest and the other doesn't, upon seeing that the other has invested, the non-investing firms decides to not compete since it knows the other firm will supply all the market at a cost slightly below its own marginal cost of 5. The investing firm supplies all the market and makes monopoly profit.

Option 2 doesn't look like a Nash equilibrium to me since both firms know they can get monopoly profit if they invest and the other doesn't and 0 profit if they both invest and split the market so they both decide to invest and the only Nash equilibrium is option 1.

Do I make any sense? Help appreciated.


texts: What would monetarists do when interest rates approach zero and become ineffective?

texts: So monetarist economists such as Milton Friedman focus on managing the money supply and lower interest rates as a solution to economic downturn. But what would they do in a recession as the interest rate approaches zero and recognises that monetary policy becomes ineffective? Would they turn to fiscal policy even though they highly oppose government intervention?


texts: Log differentiation of aggregate production function

texts:
Suppose we have an aggregate production function $Y = A F(K, L)$. I'm following some slides which then states that we if log differentiate we get the following:
$\frac{\dot{Y}}{Y} = \frac{\dot{A}}{A} + \frac{F_{K}' \dot{K}}{F K} + \frac{F_{L}' \dot{L}}{F L}$.
Where the dot notation $\dot{Y}$ is the differential of Y wrt. t. I've tried to using eulers theorem about homogen functions so that we can write $Y = F_{k}'K + F_{L}'L$, but I can't see where I would get the $\frac{\dot{K}}{K}$ terms.

Can anyone guide me? Please ask for more information if i'm not clear enough, thanks!

EDIT:
I wrote the formula wrong... its $\frac{\dot{Y}}{Y} = \frac{\dot{A}}{A} + \frac{F_{K}' K \dot{K}}{F K} + \frac{F_{L}' L \dot{L}}{F L}$


texts: Confusions about calculations in Utility Theory Paper

texts:
Recently I was improving my knowledge of Utility Functions in finances. I stumped upon very nice (yet quite old) article: "An Introduction to Utility Theory" by John Norstad (1999).
What drove my attention was charts in section 4. They represent utility functions of wealth:

First chart (figure 2): $- \dfrac{10^6}{w^3}$
Second chart(figure 3): $-\dfrac{10^{10}}{w^5}$

(So basically $-\dfrac{10^{2c}}{w^c}$) with c as chosen constant)

Purely for learning purpose I was trying to recreate his example (by using Excel/R) from section 4 (details on page 7). In same page author stated that expected utility (of 105) will be equal to -0.98. It is also shown under figure 2 in table:

  Wealth   Utility
 $90   -1.37   Bad outcome
 $100   -1.00   Current wealth
 $105   -0.98   Expected outcome
 $120   -0.58   Good outcome

I run test and with those values and for \$105 it does not match. Using $- \frac{10^6}{105^3}$ I get -0.86. What is surprising other stated values are calculated correctly (90, 100, 120). At first I though it is nothing more than some kind of typo, but when I checked the second formula used to draft function in figure 3 the same situation occurred. For table:

Wealth   Utility
 $90   -1.69   Bad outcome
 $100   -1.00   Current wealth
 $105   -1.05   Expected outcome
 $120   -0.40   Good outcome

when I put value 105 to formula ($-\frac{10^{10}}{105^5}$) it seems to be incorrect (should be -0.78) while rest of them are right. This quite undermines my typo theory.  Additionally this contradicts further conclusions (page 9 under the chart) made by author.

So my question is: did I overlooked something? Or did I just find a mistake? Or I am the one who is mistaken?


texts: Is there existing research on predicting the number of house listings based on exogenous data?

texts:
I've been looking for prior research by economists that predict the number of house listings in a particular city (or even, say, the probability that an individual in the city will list his house that year).

So, for example, the former would be something like:

$NumListings=1.5*GDP+ 2*income+3*interestRate+unemployment+.3*population$

and the second could be a logit regression like

$ProbListing=\frac{(GDP+1.1*income)}{population}$

Is there any existing literature on this? The only things I have been able to find is literature on people using the number of listings to predict house prices-- I want to know if anyone has used exogeneous data like unemployment, income, consumption, gdp, interest rate, unsold listings, etc.. to predict the number of listings in the future.


texts: Why isn't National Net Worth of a country used to calculate its economic power, as opposed to GDP?

texts:
From Wikipedia:

GDP

  Gross domestic product (GDP) is a monetary measure of the market value
  of all final goods and services produced in a period (quarterly or
  yearly).

National net wealth

  National net wealth, is the total sum value of monetary assets minus liabilities of a given nation. It refers to the total value of wealth possessed by the citizens of a nation at a set point in time.

Being a super neofite (to say the least) in Economics my very naive question is: why is GDP always used in place of National net wealth to denote the economical superiority of a country versus another?

To put it in the way I interpret it: how a country producing 10 cars per year is economically superior to another country not producing any car at all but holding a giant reserve of gold (that could be employed to build 1000 cars factories the next day) ?


texts: Why does a buyer value a dollar in a small purchase (e.g. TV) differently to a dollar in a large purchase (e.g. car)?

texts:
I am referring to how buyers will haggle over 200 when purchasing an item worth, say, 500 but not bat an eyelid paying an extra 5000 on, say, a house.

I am seeking a very brief explanation of this phenomenon or the official name (if it has one).


texts: Effect of specific tax on demand and supply

texts:
There are intersecting supply and demand curves. A tax is levied on suppliers. Say the tax is a fixed tax (for example, VAT) and not an ad valorem tax.

Why can we not just move along the demand curve by the value of the tax (as producers just increase the price by the value of the tax)? So for any given point on the demand curve, just increase the price by the given value of the tax and that is the new demand - why does it not work like this?

Whilst I agree a parallel shift of the supply curve by the value of the tax makes sense I do not understand where is the flaw in the earlier method?


texts: Has Facebook considered a system of micro payments to pay users for the work they do in improving their Facebook?

texts:
Facebook, notoriously, crowd-sources through the internet to improve their product - Facebook. This without any payment.

Given the vast computing power that is now available and the kind of personal data that they farm it seems plausible that one can set up a system of micro-payments to pay back users for the work that they do to improve Facebook.

Q. Has any of the tech giants - and specifically Facebook - looked into this?

Q. Has there been any academic studies of such a system?

Note: This question should be tagged as digital-economics - but there is no such tag.


texts: Can a bank have deposits at another bank?

texts: Can a bank create an account at another bank and get a loan in the form of deposits at that bank? If so, could these deposits at the other bank be used to satisfy the first bank's reserve/liquidity requirements? Or do only deposits in the central bank (fed) count toward reserve/liquidity requirements?


texts: Is an alternative other than negative interest rate possible?

texts:
Currently there is a lot of talk about negative interest rate and possibly US would be adopting that. Denmark was the first country in the world which has "successfully" applied negative interest rate. How do Danish banks make their money there?

A lot of people in finance in US say that negative interest rate would not work in US and would cause a collapse of the banking sector. Given that we are currently in one of the biggest bond bubble in history, is an alternative other than negative interest rate possible because any rise in interest rate would cause a massive debt sell off. The last time FED tried to raise the interest rate by .25% the markets dropped by 20%. So i am trying to understand if we are in trouble, because if the interest rate is increased, we are looking at a deep recession but if the interest rates go negative we are looking at stagflation. Have I understood this right?


texts: Why are there fewer high schools than elementary schools?

texts:
In nearly every public school district in the U.S., one can observe the following pattern: There are fewer middle schools than elementary schools. And there are fewer high schools than middle schools. (And the count of students per school goes inversely as the count of schools.)

But why is this the case? Is there any explanation for this based on economic principles?

For example, why is the reverse not the case? Why are there not fewer elementary schools than high schools, let's say?


texts:
In Ch 5, Of Wages, Ricardo tosses this gem:

  if the labour of ten men will, on land of a certain quality, obtain 180 quarters of wheat, and its value be £4 per quarter, or £720; and if the labour of ten additional men, will on the same or any other land produce only 170 quarters in addition, wheat would rise from £4 to £4 4s. 8d.; for 170:180::£4:£4 4s. 8d.

That seems like a bold proposition to me, and I'm not sure where to look for the justification of that math.

Is it earlier in Ricardo and I just missed it?  Is it intuitively obvious given some fact I just don't know yet?


texts: Why are there not more competitive nonprofits?

texts:
For example, when I go to the grocery, and peruse the various goods for sale on the shelves, there is at least a 99.9% chance that any given product is produced for-profit.  Even "Newman's Own", which gives all of it's profits to charity, is classified as being for-profit.

Why are there no non-profit brands of, e.g. breakfast cereal, whose goal is to simply provide consumers with a healthy and affordable morning meal, but not to make a profit?


texts: Can a bank use its excess reserves to purchase stocks? If so, does this inflate the cost of borrowing for your average Joe since he has to offer returns (interest payments) that are competitive with stock market returns? Or, on the other hand, maybe a personal loan with collateral is competitive when you consider the low risk?


texts: Publishing in conferences and then journals

texts:
In economics, it is very common for researchers to submit papers to conferences before submitting their papers to journals. Are there any cases in which submitting a paper to a conference makes submitting the same paper (or a similar one) to a journal more difficult? If so, what are the warning signs?

To take a random example, this conference says that they publish submitted papers as peer reviewed conference proceedings. Would that be an issue if one wanted to subsequently publish a paper in a journal?


texts: Extensive Labor Margin and Full Insurance

texts:
Extensive margin models use Rogerson (1988) style lotteries in order to simplify the savings problem under non-full-insurance.

However, one could still write down the model in that style but instead of assuming full insurance (that is, marginal utility of consumption equalized among all individuals in the household, no matter whether working or not), do it with partial insurance, in order to match the data better.

I however have not seen this approach so far. Did I miss something? Or what would be arguments against this approach? Besides the obvious one: If you don't have full insurance but forbid savings at the individual agent level, you are an evil person.


texts: Heating oil more expensive than gasoline?

texts:
I see that "heating oil", which I presume to mean No. 2 fuel oil, is more expensive than gasoline:

My understanding was that fuel oil is much easier to refine than gasoline and more of it is produced per barrel of crude than gasoline is produced. Why then is it more expensive?


texts: Example of a game with no Nash equilibria but at least one correlated equilibrium

texts:
In this answer there is the offhand remark

  Of course, a game with no Nash equilibria may have a correlated
  equilibrium, but I'm not aware of any simple examples where this is
  the case.

Can anyone provide an example of such a game?

The game should allow for mixed strategies, otherwise correlation would be meaningless. Because of this finite games are out, since their mixed extensions always have a Nash equilibrium.


texts:
Suppose we have the following equations for the MRS of a utility function. $$U(x, y)$$
  Which of the following corresponds to a homothetic utility function?

  $$MRS (x, y) = \frac{x^2+y^2}{xy}$$
  $$ MRS(x, y) = 2(x + y)$$

The answer is 1. But why the second equation is not homothetic?


texts: Fixed Effects Estimation and Inconsistency

texts:
Consider estimation of the following population regression function:
$G{Y_{it}} = {\beta _0} + {\beta _1}IN{F_{it}} + {\beta _2}DE{M_i} + {\beta _3}POI{L_t} + {\varepsilon _{it}}$

Where:
$GY_{it}$ = percentage growth in real GDP per capita in country $i$ in year $t$

$INF_{it}$ = percentage rate of inflation in country $i$ in year $t$

$DEM_i$ = 1 if country $i$ is a democracy, 0 otherwise

$POIL_t$ = a price index of crude oil on the world market.

If you were to explore estimation with fixed effects both for countries and for years of observation. Which coefficients in the above model could be estimated?
 Suppose that INF and POIL are correlated over time, and INF is correlated with DEM
across countries. Do the omitted variables in the fixed effects estimate result in
inconsistent estimates? Why?

My guess is that the estimates are biased and consistent but I haven't been able to figure out why.


texts: Reference Request: Primer on Relationship Economic Growth and Science / Technology

texts:
I'm in the early stages of planning a research agenda in this area, which means studying the current literature with an eye for further research opportunities.

The Economics of Science and Technology, Audretsch et al (2002) is one paper which I've found to be valuable.

What are some essential readings on and related to this topic?


texts: How many US Dollars are lost or destroyed annually?

texts:
Are there any estimates on how many US Dollars are lost or destroyed annually? By "lost or destroyed", I mean permanently removed from circulation because the currency is no longer usable

For instance, if I had a briefcase full of $100 bills that I either misplace (any nobody ever finds it) or toss into a fire, that money is no longer usable and cannot circulate within the economy. How much money is lost or destroyed in ways like these annually?

I'm primarily interested in estimates for physical currency, but would be interested in other means of money loss (can this happen electronically?) as supplementary information.


texts:
I ran a regression on 20 assets to estimate their beta with different methods. I would like to see the differences of these estimation differences in terms of mean-variance optimal portfolio. How can I do that?

The problem is that I do not see clearly the role that the estimated beta plays in portfolio optimization empirically. A mean-variance optimization with N assets should be something like

$min_{\textbf{w}}$ $\textbf{w}^{'}\textbf{V}\textbf{w}$

subject to

$\textbf{w}^{'}E(R)=\bar{R}$,$\textbf{w}^{'}\textbf{I}=1$

Where w are the weights of the N assets, our choice variable. $\textbf{V}$ is the covariance matrix of the returns, $\bar{R}$ is the target return, $\textbf{I}$ is just a vector of ones and $E(R)$ is the vector of expected returns of our assets.

The "unknowns" are V and E(R), should I use historical returns to replace them? If yes, then what is the use of the betas in portfolio optimization? none? or maybe should I use the betas to get the values of E(R) and V?

I do not understand, could someone provide a mini-guide to get from betas to the optimizing portfolio?


texts:
A lot of bloggers like to write that the dollar has lost 90+% of its value against a basket of goods since the Fed was created.  Without a comparison to the former dollar, that's a meaningless statement.  Is there data that show the dollar's appreciation/depreciation before the Fed took over?

Example of this assertion.

I am not saying its true, but rather, I don't see this calculators showing what the Dollar did against these same basket of goods before the Fed over time.


texts: Net of Tax Return on Capital: Definition, Proxy and Data

texts:
There is one input factor $k$. The representative firm maximizes profits with respect to employed capital, i.e.
\begin{align}
\max_k{\pi(k) = f(k)-(r+\tau)k}
\end{align}
where $f(\cdot)$ is the production function, $r$ the rent of capital and $\tau$ the tax rate to be paid for a unit of capital.
The FOC reads
\begin{align}
\pi'(k)=0\quad\Longleftrightarrow\quad r = f'(k) - \tau
\end{align}
Now $r$ can be interpreted as a net of tax return on capital for the household (who owns the capital stock).

Is there a standard proxy for $r$?
Can you point to empirical literatur, where $r$ is shown for different countries.

Any suggestion is appreciated.

Edit I

I think I was searching for net national accounts seperated for factor income (firms and workers). I added a picture from the german national stats. I think the last two columns might be appropriate (I hope it's readable).

Edit II

Found the net return on net capital in AMECO. The variable is named APNDK and you can find a description on page 65 of that list. Is this any good? I don't do empirics.


texts: Expected utility theory (Lottery notation)

texts:
A wheel of fortune has outcomes $S=\left \{ 1000,100,50,20,0 \right \}$ as money prices. A consumer has the preferences
$$20\sim \left ( \frac{2}{100}\cdot1000 \oplus \frac{98}{100} \cdot 0 \right )$$
$$50\sim \left ( \frac{15}{100}\cdot1000 \oplus \frac{85}{100} \cdot 0 \right )$$
$$100\sim \left ( \frac{45}{100}\cdot1000 \oplus \frac{55}{100} \cdot 0 \right )$$
What does this notation mean? I figure that the direct sum is just showing that the percentage for winning $1000$ in the first equation is $2/100$ and $98/100$ for $0$. But what does the $20$ denote? Is this some utility and how would that be read with the indifference sign in front of it? Never seen the notation like this before.


texts: Interpretation of dummy variable : Random Effects Model

texts:
I am running a RE regression and I have export similarity index between two countries as the dependent variable and have a dummy variable such as share a border(=1 if countries share border, 0 otherwise). This is, of course, time invariant.

My question is: how do I interpret the coefficient of this dummy variable? For example, if the coefficient is 0.15, how would I interpret it? I have gone through multiple papers but failed to find the interpretation. Please help!

Help will be greatly appreciated!

Thank you!


texts: Supermarket selling seasonal items below cost?

texts:
In a British supermarket, I saw the prices of Christmas chocolate gift boxes being cut dramatically (£1.50 to £0.15, and £7.50 to £0.22). I don't quite understand this behaviour, where the chocolate boxes are sold (presumably) below cost.
I've learned that this sort of strategy could be used to eliminate competitors and strengthen monopoly, but I don't think that's quite relevant for this case. It seems more of a clearance to me. What is the motivation behind such behaviour? Why don't the supermarkets just continue selling them at a low price, but not so low? Is it simply for saving warehouse costs?


texts:
can somebody help me understand how it is possible to log-linearize this equation?
$$\frac{1}{1+i_{t}}=\beta E^i_{t}\left[\frac{P_{t}}{P_{t+1}} \cdot \frac{U_{c}\left(C_{t+1}^{i}, \xi_{t+1}\right)}{U_{c}\left(C_{t}^{i} ; \xi_{t}\right)}\right]$$

The author of the paper (Bruce Preston, 2006) is following Woodford for the microfundations, but is assuming heterogeneous expectations. He says he log-linearizes the equation around the steady state and gets
$$\hat{C}_{t}^{i}=\hat{E}_{t}^{i} \hat{C}_{t+1}^{i}-\sigma\left(\hat{i}_{t}-\hat{E}_{t}^{i} \hat{\pi}_{t+1}\right)+g_{t}-\hat{E}_{t}^{i} g_{t+1}$$
without further explanations.

For a generic variable  $\hat{z}_{t} \equiv \log \left(z_{t} / \bar{z}\right)$ . $\bar{z}$ represents the steady state .

Furthermore he sassumes that in the steady state $\xi_{t}=0$, $Y_{t}=\bar{Y}$  and $\pi_{t}=P_{t} / P_{t-1}=1$. The steady state interest  $\bar{i}_{t}=\beta^{-1}-1$$=\log [(1+i) /(1+\bar{\imath})]$ .

I tried to  linearize the term $U_c(c_t,\xi_t)$ around the steady state:
$$U_c(c_t,\xi_t) \approx log(\frac{c_t}{\bar{c}})* \frac{U_{cc}(\bar{c},\bar{\xi})\bar{c}}{U_{c}(\bar{c},\bar{\xi})}  +log(\frac{\xi_t}{\bar{\xi}})* \frac{U_{c\xi}(\bar{c},\bar{\xi})\bar{\xi}}{U_{c}(\bar{c},\bar{\xi})}=$$

$$=\hat{c}* \frac{U_{cc}(\bar{c},\bar{\xi})\bar{c}}{U_{c}(\bar{c},\bar{\xi})}  +\hat{\xi}* \frac{U_{c\xi}(\bar{c},\bar{\xi})\bar{\xi}}{U_{c}(\bar{c},\bar{\xi})}=$$

$$=\hat{c}* \frac{U_{cc}(\bar{c},\bar{\xi})\bar{c}}{U_{c}(\bar{c},\bar{\xi})}  $$

$\hat{\xi}* \frac{U_{c\xi}(\bar{c},\bar{\xi})\bar{\xi}}{U_{c}(\bar{c},\bar{\xi})}$ is zero because $\bar{\xi}=0$

However substituting back in the original equation and log-linearizing the rest i can't reach the same solution as the author.


texts: Could a bank simply eliminate a loan from its books?

texts:
Assume a bank gives a loan to Mr X. for, say 100. The bank's assets (account "loans") increases by 100, and its liability (account "deposits") also go up by 100 (which is the extra 100 added to the current account of that who asked for the loan).

Say Mr. X does not want to pay the loan+interest. The bank is, by law, entitled to them, so it can perfectly use the law to reclaim the money and interest back (maybe possessing some material wealth like a house or other collateral used to secure the loan in the first place). However, can a bank, in theory, simply erase the loan and deposit? Can it simply eliminate the 100 from both assets and liabilities? Would not this way the bank be exactly the same as in the beginning?

PS: sorry I am asking many questions. I am study economics and banking and cannot understand everything very well. It is great to have a place here to improve my knowledge


texts: Determining whether preferences are rational given a utility function

texts: Alex's preferences: U(x;y)=x-(1/y). Are his preferences rational?


texts:
We have the following super-game:
\begin{array}{cc}
  & a_1 & a_2  \\
a_1 & 0,0 & -1,1 \\
a_2 & 1,-1 & -2,-2
\end{array}
I want to show that both the trigger (or grim) strategy and the mutual punishment, give the cooperative solution $(a_1,a_1)=(0,0)$ for the discount factor $\delta>\dfrac{1}{2}$. In the mutual punishment case, if players have observed $(a_1,a_1)$ or $(a_2,a_2)$ in the preivous round, they choose $a_1$. In case they have observed $(a_1,a_2)$ or $(a_2,a_1)$, they choose $a_2$ for one round and then we asumme that they cooperate again.

My thoughts for the second is (player 1 (p1) is the line player and player 2 the column player (p2)):
Strategy: For as long as we cooperate we both gain a zero payoff, so the value function is:
$$V_1^{C}= 0 + 0 \cdot \delta + 0 \cdot \delta^{2} + ... = 0$$
Suppose that p2, deviates unilaterally from the cooperation strategy in round 1 by playing $a_2$, so both players in the second round play the mutual punishment strategy, that is, $-2$ looses for everyone. From then onward, we assume that they both play according to the cooperative strategy, namely, the value function is:
$$V_2^{NC}=1 - 2 \cdot \delta + 0 \cdot \delta + 0 \cdot \delta^{2} + ... = 1   - 2 \cdot \delta$$
They will cooperate if:
$$V_1^{C}>V_2^{NC}\Rightarrow \delta>\dfrac{1}{2}$$
In the case of grim/trigger strategy, the players stop to cooperate in perpetuity, how does the solution differs?

Note: The game is the hawk-dove type super-game.


texts: Taking time derivative, growth equations

texts:
Can anyone please help with taking the derivative of the following equation with respect to time?

$ln(\frac{\gamma_t+(n+\delta)}{sA}) = (\beta - 1)ln{k_t}+(\alpha+\beta-1)ln{N_t}$

This is not a homework question, just reading a text on economic growth and not sure how the author arrived at the final expression.

Thanks


texts:
I am working currently on EEX energy price data from Germany and so far I couldn't find out, if the prices already include taxes and the German Renewable Energy Act feed-in tarif (EEG-Umlage).

I would appreciate help.


texts: What are good books about financial markets?

texts: I found answers on this question online but people always recommend books for beginner investors who want to become rich. I just want book that is about history and role of financial markets and book that explains how financial markets work.I don't want to read how to become a millionaire by investing.


texts: How to use an instrumental variable to estimate the parameter?

texts:
I have the following linear model of log wages (w) explained using years of schooling (S), years of experience and its square $(E,E^2)$ and 3 dummy variables indicating whether the individual was black (B), lived in the south (Sth), and lived in a metropolitan area (Sm).
$w_i=\alpha+\beta_1S_i+\beta_2E_i+\beta_3E_i^2+\beta_4B_i+\beta_5Sth_i+\beta_6Sm_i+\epsilon_i$ where $\epsilon_i$is an unobserved error term and $i$ indexes individuals.
A reduced form model for schooling is written as
$S_i=\delta+z_i'\pi+v_i$ where $z_i$ is a $L\times 1$vector including the instrument (lived near college) and all the exogenous variables in the first regression equation, $\pi$ is a $L\times 1$vector of unknown parameters, $\delta$ is an unknown scalar parameter, and $v_i$ is an error term.
Assuming that $S_i$ is endogenous, how can I use the reduced form equation in conjunction with the first regression equation to identify the parameter $\beta_1$? How does the use of instrumental variable differ from the use of OLS estimator in this case?


texts: Which economic game theory model is most similar to poker?

texts:
Propeties the model should have:

Well motivated: the game is actually is a plausible model of a real world situation. Maybe with some parameters learnt from data.
Complete: it is a complete game theory model. This will probably using a Harsanyi-style completion to form the imperfect information game.
Asymmetric information is important. Players have private information and deducing the information of other players is important to the strategy of the game.
Complex enough: so that it can't be analysed with pen and paper. But not so complex that coding up a simulation would be difficult.

(Note that poker has all the properties except the first.)

The reason I ask is that there has been a lot of progress on poker by participants in http://www.computerpokercompetition.org/ . (I am a former participant). And there has been discussion of adding to the games played in the competition. So an economics researcher might get some quite sophisticated AI programmers to work out optimal play in their model, if they can frame it as a poker game and get it accepted into the contest.


texts: Amplification Effects: Negative Denominator

texts:
Let $0 < \rho < 1$ be the discount rate, $V$ some option value, and $F$ some fundamental.

$$ \rho V = \beta V + F$$

You have access to some option value $V$ that will always deliver you some fundamental flow value $F$, and you get access to another $\beta$ of the initial option value (some sort of amplification of the initial value/claim). Solving for the value of the option, we get

$$ V = \frac{F}{\rho - \beta}$$

Now that's maybe just me being confused talking, but typically here we only check whether $\rho - \beta$ is not exactly zero.

For $\rho > \beta$, we have that $V$ is valued much more than the original $F$. How can I understand cases where $\rho < \beta$? These are very possible, even for both $\beta$ and $\rho$ between zero and one. In that case, the denominator turns negative, and the value of the option $V$ is negative. What is happening?

Extended Example

Per popular request, here is a more general version of the model (still an abstraction, but hopefully this delivers enough context.

Think about $V$ as the value of a vacancy, in a search-and-matching context. Given market tightness $\theta$, you will find a match at rate $q(\theta)$. Vacancies are associated with flow costs $c$.

Now, once you've matched with an unemployed worker, you can decide to either accept that match ($\beta = 1)$, or to reject him ($\beta = 0$). In fact, the whole line $\beta \in [0, 1]$ is allowed, understanding it as a mixed strategy. In fact, the mixed strategy can be understood as population shares, given that the vacancy is representative.

So, given strategy $\beta$, the value of a vacancy is given by

$$ \rho V(\beta) = -c + q(\theta)[ \beta(V(\beta)-J) + (1-\beta)J]\\
\Leftrightarrow V(\beta) = \frac{-c + q(\theta)(1-2\beta)J}{\rho - q(\theta)\beta}
$$

Note that setting $F\equiv - c+ q(\theta)(1-2\beta)J$ almost recovers the initial equation.

Now, I tried to solve this (or rather, a more complicated setup) using a grid for $\beta$. But sometimes, the solution was given by a $\beta$ such that the denominator was negative (and small), and the numerator, too, was small. I tried wrapping my head around that, but I couldn't intuitively understand what that even means.

Note that while the current answer goes a long way on solving the model for me, it does not actually answer my question - about the meaning of a negative denominator. Hence, at the current state, I will not award that bounty and invite more answers.


texts: How can I draw an edgeworth box with 3 different goods?

texts:
If there are 3 types of goods(x,y,z) and 2 consumers (a,b) how can I draw the Edgeworth box? It must be 3 dimensional, right?

Is there a software or online tool that I can use to draw a 3D Edgeworth box?


texts: Why is trade openness positively correlated with economic prosperity?

texts: Is there any confirmed saying on this problem?


texts: Applications/generalizations of a theorem of Debreu

texts:
I would like to know how the last theorem in Debreu's paper "Neighboring economic agents" (La Decision 171 (1969): 85-90; reprinted in G. Debreu, Mathematical Economics: Twenty Papers of Gerard Debreu (1986), pp. 173-178) has been used:

Theorem. For a topological space $M$ and a metric space $H$, let $\varphi$ be a set-valued mapping from $M$ to $H$ that is compact-valued (i.e. $\varphi(e)$ is compact for every $e \in M$) and continuous. Further, for each $e \in M$ let $\lesssim_e$ be a total preorder on $\varphi(e)$ such that the set $\{(e, x, y) \in M \times H \times H : x \lesssim_e y\}$ is closed. Then the set-valued mapping $\varphi^0$ from $M$ to $H$ where

$\varphi^0(e) = \{z \in \varphi(e) : x \lesssim_e z \ \ \mbox{for all} \ x \in \varphi(e)\}, \quad e \in M,$

is compact-valued and upper hemi-continuous.

Note that the theorem looks similar to the well-known Berge Maximum Theorem. Prior to the statement of the theorem, Debreu writes that special cases of it "have been repeatedly used in the theory of economic equilibrium and in game theory", but doesn't give any references; in the paper itself, it's used to prove the upper hemi-continuity of the demand correspondence for an agent in an exchange economy.

I'm especially interested in whether there have been any recent uses or generalizations of this theorem, e.g. to mappings that are not compact-valued.

Questions: What are some good examples of and/or references for applications of the above theorem? Has it been generalized to mappings that are not compact-valued?


texts: Suppose consumption set $X=R_{+}^N$. According to the definition preferences are continuous if for any $x\in X$ sets $(y\in X:x\succeq y)$ and $(y\in X:y\succeq x)$ are closed. It is clear that preferences represented by utility function $u(k_{1},k_{2})=k_{1}+k_{2}$ are continuous. But now lets take some bundle x=(1,1). Then set $(y\in X:y\succeq (1,1))$ is not closed as it approaches infinity. My question is how to handle with this contradiction?


texts: Symmetric mixed-strategy equilibrium: Entering markets [Solved]

texts:
Question: Suppose three identical, risk-neutral firms must decide simultaneously and irreversibly whether to enter a new market which can accommodate only two of them. If all three firms enter, all get payoff 0; otherwise, entrants get 9 and firms that stay out get 8.

My attempt: Arbitrarily choosing firm A, firm A is deciding whether to enter the market or not. Hence, the Nash equilibrium occurs when $\text{payoff of not entering = entering}$. Let $p$ be the probability of each firm entering the market. Then
$$\text{not entering = P(only firm who enters) + P(second firm to enter) + P(third firm to enter)}\\
8=9(p)(1-p)^2+9(p^2)(1-p)+0(p^3)\\
8=9(p-p^2)
$$

and I get a complex number as the answer. The correct equation should be $8=9(1-p^2)$, but I'm not sure how to get that.

Any help is greatly appreciated!

Edit: Solved it an hour later. I was being silly. I'm leaving my partial answer below for anyone who is curious.


texts:
Im just seeking for confirmation, is it OK to say that :
"A strictly dominant strategy is a weakly dominant strategy too"?
This would be usefull because for IEWDS we can eliminate strictly dominant strategies first.


texts:
If protectionism is injurious to a state, is the success of mercantilist China in spite of its protectionist measures?

Furthermore, if the academic consensus is that most instances of protectionism are akin to using self-harm in retaliation to a perceived offensive measure, why is it still so prevalent (for example the EU Common Agricultural Policy)?

References:

  Protectionism is used for a number of reasons, some of which are
  outlined here, but is generally acknowledged to be ineffective and
  harmful to a country’s economic interests in the longer term. This is
  because it prevents the mutual gains from trade being realised, and,
  by restricting competition, limits the incentives for firms to improve
  their efficiency.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/43315/11-718-protectionism.pdf

  Our main conclusion is that, in all the scenarios we consider,
  protectionism is not an effective tool for macroeconomic stimulus.

https://www.nber.org/papers/w24353


texts: When do firms pursue the cost minimization objective instead of profit maximization? Are there any intuitive/practical examples/reasons?

texts:
I understand that profit maximization implies cost minimization, that is, if a firm is maximizing profits, it will definitely minimize costs.

However, under what conditions does cost minimization become an objective in itself?


texts: Is there such a thing as resonance in economic underliers?

texts:
In physics the occurence of resonance is explained and widely understood in its linear form and subject to research in nonlinear resonance.

Example for instance are resonant frequencies of objects.

Now it is not so much of a stretch of imagination to look for resonance in economic times series.

Correlation is only a linear measure of linking time series and it doesnt explain the mechanism for resonance.

Can we explain selloffs and squeezes by resonant interactions of a complex system and is it possible to detect resonance in stock price time series of multiple stocks?


texts: What is the purpose of interest? Why do most economies permit the charging of interest? Could an economy function without interest at all, or is interest necessary for an economy to function?


texts: What happens when a country's central bank significantly reduces the available currency?

texts:
The central bank of Iraq has significantly reduced the note count from 55 Trillion to 5 trillion.

Logic would dictate that when a supply is reduced the value of the item that has been reduced will go up.

Is this incorrect thinking? And if so, what is the correct way to look at this?


texts:
Explain whether aggregate demand responds more, less, or in the same way to changes in autonomous consumption when taxes depend or do not depend on GDP.

I think the answer is more. As in my understandings, aggregate demand is in the long run the same as GDP compared to autonomous consumption, as it only concerns consumer expenditure and consumption.

Please correct me if it's wrong. It's not an exam question or anything.

Thanks in advance.


texts:
I am having a bunch of dummies variables and some of them when trying to get the scatter plots they are collapsed on the horizontal line. It is hard to see any relation. I know from theory they should show some correlation with the key variables. Winsorizing did not help much. Is it correct to get the log of the dummies only for those specific dummies? What do you people think on this?
I attach an image from stata


texts: How's a levered hedge fund effectively selling a gigantic put option on its ability to finance its own positions?

texts:
I grasp the basics of a put option. John C. Hull. Options, Futures, and Other Derivatives (2017 10 edn).  pp 8-9.

  A put option gives the holder the right to sell the underlying asset by a certain date for a certain price.

Can someone please ELI5 the  bolded quote below?

"The Basis Monster that Ate Wall Street" (PDF). DE Shaw & Co. March 2009. p 3 of 9.

  Of course, the value and even the sign of the cash-synthetic
  basis vary over time. If obliged to guess prior to the present
  financial crisis, most market participants probably would have
  ventured that a basis position that was long the cash
  instrument actually would have outperformed (that is, the
  basis would have become more positive) in a crisis, as
  worried investors would be expected to buy protection in the
  form of CDS, thereby pushing credit spreads on CDS wider
  than those on the underlying cash bonds. A research report
  issued by Lehman Brothers in August 2005, for example,
  noted that "hedging demand amid increased market
  volatility kept CDS spreads wider relative to cash."' But
  events have unfolded very differently in this crisis While the
  long cash/short synthetic bases of a few issuers may have
  outperformed, that's not been the case for the majority of
  issuers during this now protracted financial crisis, and a
  decision to put on long cash/short derivative trades as a rough
  form of crisis insurance would not have worked out very well.

  What's critical here is that the two risk factors most
  responsible for driving cash-synthetic basis—namely, the
  availability of financing and the positioning (long or short
  cash relative to synthetic) of levered players—are quite

p 4 of 9.

  inconveniently also two of the least desirable risk factors for a
  levered investment vehicle like most hedge funds. Those
  factors' combined impact literally describes the terms of a
  classic common-investor liquidation crisis. By incurring heavy
  exposure to financing risk and the portfolios of other levered
  investors, a levered hedge fund is effectively selling a gigantic
  put option on its ability to finance its own positions.
  Moreover, this put option has characteristics that greatly
  increase the probability that the option will move in the
  money at the worst possible moment. If a levered investor
  suddenly finds itself facing heavy losses, it's not a stretch to
  suppose that, at the same time and for largely the same
  reasons, that investor's equity capital base is under pressure
  from redemptions, its financing position is weakening
  because of a credit crunch, and other similarly positioned
  investors are liquidating. Worse still, all of these phenomena
  tend to self-reinforce in pernicious ways. In such
  circumstances, it's imprudent to count on financing and
  trading counterparties to provide help because, as already
  noted, they're likely to be deleveraging at the same time.


texts:
Suppose an agent wants to maximize:

$Max \sum_{t=0}^\infty \beta^t \ln(C_t) $

s.t.

$C_t + I_t = Y_t$

$Y_t = K_t$

$K_{t+1} = K_t^\alpha I_t^\gamma$

where $\alpha, \gamma >0$ and $\alpha + \gamma < 1$.

One can combine the three constraints in: $C_t = K_t - K_{t+1}^{\frac{1}{\gamma}}K_{t}^{\frac{-\alpha}{\gamma}}$

Write the lagrangean as:

${\cal L} = \sum_{t=0}^\infty \beta^t \ln(C_t) - \lambda_t(C_t - K_t +K_{t+1}^{\frac{1}{\gamma}}K_{t}^{\frac{-\alpha}{\gamma}})$

I think the FOC yields:

$\frac{1}{\gamma C_t} K_{t+1}^{\frac{1}{\gamma}-1} K_t^{-\frac{\alpha}{\gamma}} = \frac{1}{\beta C_{t+1}}\left(1 + \frac{\alpha}{\gamma} K_{t+2}^{\frac{1}{\gamma}}K_{t+1}^{-\frac{\alpha+\gamma}{\gamma}}\right)$

If the FOC is correct, how to compute the steady state from here?


texts: Ordinally Separable Utility Representation

texts:
Let $X_i$ be a separable, compact, Banach space.
Definition: A weak order $\succeq$ on $X=\prod_{i=1}^NX_i$ has an ordinally separable representation if there exists $u_i: X\rightarrow \mathbb{R}$ and $W:\prod_{i=1}^Nu_i(X_i)\rightarrow \mathbb{R}$ strictly increasing in each coordinate such that \begin{equation}
U(x_1,...,x_N)=W(u_1(x_1),...,u_N(x_N))
\end{equation}
represents $\succeq$.
Definition: Given a weak order $\succeq$, an index $i\in I$ is separable if for all $x,y,z,z'\in X$, $x_iz\succeq y_iz\iff x_iz'\succeq y_iz'$, where $x_iz$ means $x_i$ in the i-coordinate of a vector $x\in X$ and z otherwise. A weak order satisfies singleton separability if all $i\in I$ are separable.
In Decision Theory by Tomasz Strzalecki chapter 3,, there is the following theorem without proof:
Theorem: Suppose that $\succeq$ is a weak order on $X=\prod_{i=1}^NX_i$. The ordering $\succeq$ satisfies singleton separability and continuity if and only if it is has an ordinally separable representation with continuous functions $u_i$ and $W$.
He claims that the proof is quite hard. Does anyone know how to prove this or have a reference?
Remark: The assumption that $X_i$ is separable, compact and Banach is not essential here, but let's just make the spaces $X_i$ as nice as possible for the time being.


texts: How and on what basis the inflation target is determined?

texts:
I have a question at the intersection of Economics and Politics.

Every country has her own inflation target. But who, how and on what basis is it determined? Of course, we know that too big inflation is bad and deflation is bad, but why it's around 2% (depending on a country) and not around 1% or 3% or any other? Maybe a little deflation (around 1%) would be better?

I am trying to understand why the inflation target is set to some exact value. What is the process of setting this value. Who is responsible for this task and what data does he work with.

Are there any scientific publications explaining the process of determining the inflation target?


texts: Can I use percentage change in CPI to calculate fare rate schedule?

texts:
There was a recent rollback in the fare rate in our city from 9.50 pesos to 6.50 pesos because of the decrease in the price of gasoline. The fare rate here is pegged to the prevailing price of gasoline as stipulated in a city ordinance crafted in 2007. Due to the decrease in the fare rate, public transportation drivers held a strike arguing that 6.50 pesos was too low considering the prices of necessities and rent for their vehicles have not declined.

My question is will it be sufficient to use the percentage change in CPI between 2015 and 2007 multiplied by 2007 fare rate to arrive at a new fare rate for 2015? I'm thinking since CPI already takes oil and gasoline prices into account, we don't have to factor in percent change in gasoline prices.

I plan to pose this problem in my economics class as a practical application of what we learned about inflation and the CPI.

Thank you for taking the time to read this!


texts:
My book says the way we calculate real GDP in a given year is by adding the quantities of all goods and services produced in that year multiplied by their prices in some base year. There are actually two things I can't quite get:

How do we account for goods and services that exist now but weren't
around in the base year? I mean, especially today, with things such
as the market for apps, startups, and the increasing number of new
products that get released on an almost daily basis, wouldn't the
real GPD calculated that way become dated really fast?
This might turn out to be a really silly question, but how do we
take into account quantities of services that are provided in a
given year, such as lawyer services, marketing services etc.? All
examples I've seen of calculating real GDP were of the sort
"consider an economy that produces only apples an orange...".

Thanks very much in advance.


texts: Interaction between productivity growth and interest rates

texts:
Isabel Schnabel, Member of the Executive Board of the European Central Bank point at the interview out "The real interest rate (...) emerges from the economy’s growth potential in the long run.“ https://www.ecb.europa.eu/press/inter/date/2020/html/ecb.in200211~d2b4afb5d3.en.html

Another article also touches upon this question "It is well-known that productivity is a long-term determinant of return on capital and thereby of interest rates, which explains why there is a positive correlation between these two indicators" https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2017-economic-commentaries/ec-201720-productivity-real-interest-rates-long-run.aspx

However, for me it seems counter-intuitive. If productivity is low i.e. growth is week, than the risk to lend is high, meaning the lenders would demand higher premium for the risk -> IR would be higher on average. Can you please come up with an explanation on why slower productivity growth would result in lower interest rates?


texts: From the aggregate supply equation to the definition of inflation rate

texts:
By definition the  inflation rate is $$\pi=\dfrac{P-P_{-1}}{P_{-1}}\cdot100\%$$ or could be defined in terms of the consumer price index CPI, but in this case I think the former is the one to consider.
From the book Macroeconomia by Blanchard, Amighini, and Giavazzi,
the aggregate supply equation is \begin{equation}
P=P^e(1+\mu)F(u^-,z^+)
\end{equation}
From here, and taking a specific $F:$
\begin{align}
    P&=P^e(1+\mu)e^{-\alpha u+z} \nonumber\\
    \ln(P)&=\ln(P^e)+\ln(1+\mu)-\alpha u+z  \nonumber\\
    \ln(P)-\ln(P_{-1})&=\ln(P^e)-\ln(P_{-1})+\ln(1+\mu)-\alpha u+z \nonumber\\
     \ln(P)-\ln(P_{-1})&=\ln(P^e)-\ln(P_{-1})+\mu-\alpha u+z\dots \text{due to $\ln(1+\mu)\approx\mu$ because $\mu$ is close to $0$ } \nonumber
  \end{align}
Thus \begin{align}\pi=\pi^e+(\mu+z)-\alpha u \end{align}
Why? For example how to pass from  $\ln(P)-\ln(P_{-1})$ to $\pi$?
We know that $\ln(P)-\ln(P_{-1})=\ln\dfrac{P}{P_{-1}}\fbox {=?}\dfrac{P}{P_{-1}}-1$
Thank you in advance


texts: Does the property values (or rental price) of a neighborhood/region increase with new residents taking up empty lots or apartments changing residency?

texts:
Does research explore the idea that there is an association of house prices in an area or neighborhood with the influx of new residents? That is, if there are empty spaces in a neighborhood, or currently occupied accommodation that has a change of residents; will that affect the prices of the surrounding properties or the rental values?

Is there any substance to the hypothesis to show that the influx, or change of residents affects a 'region' of property prices or sales/rental values? If so, can a 'radial' function of increase be expected?

The other question is whether there is any effect colloquially similar to the 'magical chairs' game in which the latest resident to move into a region of increased popularity will not reap the rewards obtained by the prior residents?


texts:
Is there any country with dual domestic payment system?

For instance, in the USA there are CHIPS or Fedwire both help wire transfer of USD within the USA. They give services to international organizations but these organizations have an account with an American Financial Institution.

In my case, I ask if country A using currency A as legal tender issued by its own central bank IS ALSO using other countries currencies in domestic wire transfer system? That means that country A will not need to use SWIFT for the other countries currencies.

Your input whether such a case is applicable or not is also appreciated.


texts: Below we have a diagram for a bail-in. According to it, as the big company/bank takes a loss in the asset side, the first to absorb those losses, in the liabilities side, is equity. How is this possible? Do the Resolution Authority take the equity from shareholders and sells it on the market? When a company divulges its results, and the market sees the loss, the equity immediately dives (dis)proportionally... Or is this what's called absorbing the loss? Your equity being valued at zero?


texts: Does there always exist a consumption bundle at which the indirect utility function is the inverse of the expenditure function?

texts:
Two questions:

Given $v(\vec{p},m)$ and $e(\vec{p},\bar{U})$, is there only a single point at which these are inverses of each other?
Does an inverse always exist for a given price vector $\vec{p}$, income $m$ and $\bar{U}$, $v$ and $e$?

These are points my mates and I are arguing about as we prepare for our midterm.

Also, I prefer rigorous answers so if you can, feel free to be as thorough as you want.


texts:
For my exmaple, we have machine A with an initial cost of 15K and O&M of 2k per year for the next 4 years. After 4 years, the O&M rise to $2.7k per year. No salvage value and life span of 20 years. 10% interest. What's the present worth of machine A?

It is easier for me to understand the problem by first stating that all cost out of pocket is negative. Since we do not have any salvage value in this problem, it will all be negative.

Here are my thoughts:

The cost of purchase the machine is out of pocket. 2k per year of O&M for first 4 year, at an uniform rate which is annual. 2.7k after the 4 years.

My equation came out to :

Present (A) = -15k - 2k (P/A, 10%, 4) - 2.7k (P/A, 10%, 16)

However at the solution, they added one more variable that I do not understand why.

Present (A) = 15k + 2k (P/A, 10%, 4) + 2.7k (P/A, 10%, 16) * (P/F,10%,4)

Please explain to me why do we need the last part (P/F,10%,4)? to get the present value of machine A.

thanks


texts: Is it more costly to raise cattle for beef or raise fish in aquacultures?

texts:
I can't find any sources comparing the cost of the two methods.
Specifically, I want to know if its more economically efficient to raise fish as a food source rather than beef - not counting government subsidies.
My intuition says raising fish is cheaper since you can raise thousands of them at a time, but I don't know what costs are associated with maintaining an aquaculture environment (water temperature, chemical/pH balance, etc). I know it costs a lot of money to put a pound of beef on the table (without subsidies helping lower that cost), but i can't find a similar cost for aquacultured fish.
Also i'm not sure if this is the best stackexchange community for this question but i couldn't find a better one that makes sense for this question; if there is a better one please let me know!


texts: Are there import taxes between US states?

texts: In the USA, are there import taxes (or equivalent) between states? Or is it in effect a customs union?


texts: Would Pilots and Air travel be considered complementary?

texts: Now, my economics teacher and I have a disagreement. According to theory, as the price of air travel (airline tickets) increases, the demand for pilots will decrease as well because fewer people will be willing and able to buy the same airline ticket with an increased price, this should result in a fall of quantity demanded of airplanes and thus fewer pilots will be required/demanded. Thus, an increase in the price of air travel results in a decrease of demand for pilots. Thus, pilots and air travel are complimentary. My teacher thinks that pilots and air travel are not complimentary. Can anyone confirm my logic and economic claims?


texts: How does unanticipated fiscal shock, due to increase in government expenditures, the effect on price level and exchange rate. Using equations

texts: There is an increase in fiscal shock- how do I use the IS-LM equations and the overshooting model to help show what happens to price level and exchange rate in the long run and short run?


texts: Determine price and cost of intermediate good

texts:
Consider a world where an intermediate good is produced using a linear production function in a competitive market:

$$ Y = qAL$$

where $q$ is the price of the intermediate good, $A$ is productivity. Due to perfect competition, profits are given by

$$ 0 = \pi = (qA-w)L$$

where $w$ are wages. Due to perfect competition, we have that $w = qA$.

Now consider a final production sector where some market power exists. Why is - I believe - irrelevant to the exposition here. Due to some cost of entry to the final sector, we can determine the measure of firms in the final sector, $S$. Each of these final good firms $i$ then will sell the final good at price $p_i$. That is, we have some non-degenerate price distribution in the final sector.

Now, we have a measure $S$ of final sector firms that require the intermediate good.

Assumption 1 Let's assume for simplicity, that they all will purchase the same quantity (although the quantity is irrelevant due to the linearity of the intermediate good's production function).

How would the price $q$ be determined in this setup, with and without assumption 1?

Can there be market power for the final sector, given that there is a continuum of firms in both sectors?
If so, how does the price-setting work?
In particular, if there is market power on one side, the price should be equal to marginal cost.

However, so far, I was using the FOC $w = qA$: taking the price as given and use that as the wage. Due to linearity of the production function, I feel that I cannot determine both $w$ and $q$ at the same time here. Is that correct? What's the way to go?


texts:
I am analyzing a model in the signaling game, There are three stages of a game. there are two participants in the game, a supplier and a buyer. The supplier has private information about its capacity level. In the first stage, the supplier sets a wholesale price. In the second stage, the buyer gets the wholesale price as a signal and decides on its order quantity and finally, in stage 3 both agents decide on selling quantity to the market.
If the supplier has high capacity, it may have incentive to pretend to be of the low capacity.
The problem that I have is, I get the range of pooling equilibrium, Is there any equilibrium refinement that allows me to choose the best pooling equilibrium?


texts: Cloth, Corn and Gold: James Stuart Mill example

texts:
I don't quite get James Stuart Mill's example of cloth, corn and gold in "Elements of Political Economy".

He supposes that 20 yards of cloth takes the same amount of effort to make as 4 quarters of corn in England, but in Poland the effort to make 4 quarters of corn is the same as that to make 10 yards of cloth.

Now, supposing that in the beginning corn costs 1 pound per quarter in both places, then the resulting cloth price will be 0.2 pounds in England and 0.4 pounds in Poland. Therefore, the Poles will buy cloth and gold will flow from Poland to England while cloth goes the other direction. This will continue until the price is the same in both places (0.27 pounds for a yard of cloth in both places).

However, in that case the corn price will drift out of balance.

Where is the equilibrium?

(This example is in Chapter III, Section XV)


texts: A maximization problem with multiple goods and integrated markets

texts:
Update:
I will try to clarify the question: Let us say that the total harvest of the fish population at time t is $H_t$. Every harvest produce three types of fish: salmon ($f_1$), which is valuable and sold as a filee in salmon markets S; Pike ($f_2$), which is less valuable and sold to the fish soup markets P; and roach ($f_3$), which is solely used for fishsticks and sold at the markets R. The prices are endogenous and derived from the utility functions S,P,R, which are strictly concave and have a decreasing marginal utility.

If all the fish could be sold in any possible market, the constraints for the maximisation problem would be:

Total harvests at time t: $H_t=\sum_{i=1}^n v_{it}-\sum_{i=1}^n v_{i,t+1} $ ,             (1)

fish to markets at time t $H_t=\sum_{i=1}^n f_{it}$ , (2)

Where $v_{it} $ is the amount of fish $i$ in the lake at time $t$.

Now, if optimal, it should be possible to sell salmon to soup markets and salmon & pike to the fishstick markets: $S(f_1)$, $P(f_1, f_2)$ and $R(f_1,f_2,f_3)$. You cannot sell other fish but salmon in the filee markets, and roach cannot be sold at the soup markets.

Now the issue is: constraint (2) is pretty and you can easily see that the maximization problem is concave. However, it would allow any fish to enter any markets. If I use  $S(f_1)$, $P(f_1, f_2)$ and $R(f_1,f_2,f_3)$ and (2), it would be optimal to sell all $f_1$ in $S$, all $f_1, f_2$ in $P$ and nothing in $R$, hence the double-counting. I struggling to come up with a constraint that would clearly satisfy the argument that fish that have been sold in some market cannot enter any other market. Thanks for your help!


texts: Cobb-Douglas production function with continuum of goods

texts:
I'm trying to derive the solution to a final producer with unit elasticity of substitution and a continuum of inputs (of measure $x$).

She minimizes input costs, given an output of $q$.

$$ \min_{\{y(i)\}_i, 0 \leq i \leq x} \int_0^x p(i)y(i) di + \lambda\left[ \log q - \log A + \int_0^x \log y(i) di \right] $$

Combining two FOCs over $y(i)$ and $y(j)$, the shadow price drops out:

$$ y(i) = p(j) \frac{y(j)}{p(i)} $$

Multiply with $w(i)$ and integrate, to get total labor cost on the left-hand-side:

$$\underbrace{\int_0^x p(i)y(i)}_{C(x)} = p(j) y(j) x$$

Taking logs:

$$\log y(j) = \log(C(x)) - \log p(j) - \log x \tag 1$$

Plugging back into the production frontier:

$$ \log q = \log A(x) + \log(C(x)) - \log x -  \underbrace{\int_0^x  \log p(i)  di}_{\equiv P(x)}$$

where I denote the price index as $P(x)$. Plugging back (1):

$$ \log q = \log A(x) + \log y(j) + \log p(j)  - P(x)$$

or,

$$ q = \frac{A(x)y(j)p(j)}{P(x)} \\
y(j) = \frac{P(x)}{p(j)}\frac{q}{A(x)}
$$

So, demand for each variety increases in total output $q$, decreases in productivity, and increases in the relative costs of variety $j$ compared to the total price index $P(x)$. This all appears to make sense.

However, Acemoglu gets for $x=1$, and $A(1) = 1$

$$ y(j) = \frac{q}{p(j)}$$

that is, the price index does not appear in his equation, which you can find in his slides, slide. What am I missing?


texts: How to understand: interest income is a moving average of past interest rates

texts:
I encounter this question in the paper by DRECHSLER et al. (2021) (Banking on deposit). How to understand that "interest income is close to a moving average of past interest rates, consistent with the high duration of bank assets. The rates
on these assets are set at origination and remain locked in until they roll off, which makes interest income slow-moving and relatively insensitive to the short rate." from this figure?
I think bank assets (loans) generate interest income for banks, but I do not know how to tell the "moving average" trend of interest income and past interest rates.
Thank you very much in advance.


texts: What is "indirect mechanism" in the context of adverse selectoin?

texts: On this slide deck, page 12, it says "then this direct mechanism implements exactly the same allocation as the indirect mechanism we started". What is indirect mechanism in this context and in particular, what is the "indirect mechanism we started" on this page?


texts: What does Eugene Fama mean "the amount of debt that's financed with equity isn't put aside"?

texts:
I transcribed A Symposium with 2013 American Nobel Laureates at Embassy of Sweden, Washington - YouTube starting at 56:00.
The moderator, AAAS CEO Alan Leshner, claims

Locking up that kind of money would be hard for any

Eugene Fama cuts him off.

Wo Wo Wo. Now you're on weak grounds.

The moderator

In that case, I withdraw the offhand remark.

Fama explains

That's one of the worst fallacies in all this discussion actually.

Someone asks

Would you explain it?

Leshner attempts

Because it's expensive to use money?

Fama explains

It doesn't freeze...What determines the value of something is the assets out of the balance sheet. The amount of debt that's financed with equity, that's not put aside. That's financing assets on the other side. Then you have debt that's also financing assets on the other. So this statement that if they have more equity, they're going to put this aside. Nope. It doesn't happen that way. It gets invested in stuff.

Can someone pls elaborate Fama's answer?


texts: Convert a sequential move game into a simultaneous move game

texts:
A statement from Ponssard and Zamir "Zero-sum sequential games with incomplete information" at the bottom of the first page reads

  AM's result is for zero-sum two-person games in which the two players move simultaneously. This includes of course games in which the moves are made sequentially: Player I moves first, player II is informed of player I's move and then makes his own move. (Such a game can be looked at as a simultaneous game after redefining the pure strategies of player II.)

I am curious about the last statement in parentheses. How does one "redefine" the strategies of the follower to make the game simultaneous move?


texts: How to approach such question of two periods and asymmetric information game?

texts:
There are two players 1 and 2, playing a two-period public good contribution
game. The benefits from the public good per-period to each player is $b_1$ and $b_2$
respectively, which are common knowledge. For the provision of the public good
only one player needs to contribute. Once a player contributes and the good is
provided then both can derive the benefits. The public good lasts for only one
period and contributions are required in each period to renew it.
The per-period cost of contribution for player 1 is private information which can
take two values, $\underline c$ (low type with probability $p$) and $\overline c$ (high type with probability
$1 − p$) for which following condition holds $\underline c < b_1 < \overline c$. However, the cost of
contribution for player 2 takes the value $c_2$ which is common knowledge and is
lower than its benefit i.e. $c_2 < b_2$.
The game is played as per the following sequence:
First period: Only player 1 moves. He can choose to ‘contribute’($C$) or ‘Not to
Contribute’($N$) towards the first period contribution of public good. If player 1
chooses $N$ then both gets 0 otherwise if player 1 chooses $C$ then both players get
their benefits but only player 1 pays the cost. Note that the player 2 observes the
player 1’s action of either $C$ or $N$ but not its type (i.e. the private information
regarding costs).

Second period: The game is played sequentially where player 2 moves first and
chooses $C$ or $N$. Player 1 observes it and decides on $C$ or $N$.
If at least one of them contributes then both players get their benefits bi and those who contribute
pay their respective costs. If no one contributes each gets 0.
Players discount their payoffs by $\delta$, which is common to both. In answering the
questions below, you need to write strategies and beliefs precisely.

(a) Find an equilibrium where different types of player 1 choose different actions
in first period (separating equilibrium).

(b) Find an equilibrium where different types player 1 choose the same action in
first period (pooling equilibrium).

(c) Find a hybrid equilibrium where low type of player 1 in first period chooses
$C$ with probability $\alpha$ and $N$ with probability $(1 − \alpha)$, and player 2 in second
period randomizes between $C$ with probability $\beta$ and $N$ with probability $(1 − \beta)$.

I have attached my workings.


texts: Why is a call option called 'call', and put option called 'put'?

texts:
I'm asking about etymology, and not what these options are. The answers beneath don't feel convincing; can't 'call' and 'put' be interchanged in them? I'll abbreviate Call Option to CO, and Put Option to PO. From Quant SE:

  Not as much on origin of this, but some analogy that I find helpful:

  Call - think of an open auction when bidders call out their prices for an auctioned item. So with a call option you've got a privilege to
  call the strike price, effectively having a right to buy the underlying asset.

  Put - think that you own a privilege to put the asset for sale at the strike price, effectively having a right to sell the
  underlying asset.

  Mind that for an option buyer this is optional to exercise it, yet for
  the option writer it's an obligation to transact, should the buyer
  opt to exercise it.

But can't I be said to:

for a CO, "put" (to the CO seller) to buy the security at the strike price (for a CO)?
for a PO, "call" (to the CO seller) to sell the security at the strike price?

From Quora:

  When you buy a call and exercise it you are receiving stock that you have "called" up from the person that sold you the call, the right to buy.
  When you buy a put you have purchased the right to sell the stock, or "put it" to the person who sold you the put.

Again, can't I say that a:

CO is when a CO seller "puts" the call option to the CO buyer?
PO is when a PO buyer is "calling" the PO seller to buy the security from the buyer?


texts: Categorizing countries as industrial vs emerging vs developing

texts:
Raghuram Rajan (July 2020):

with respect to fiscal support to deal with the pandemic and economic crisis, industrial economies have, on average, deployed 20% of GDP worth of measures; for emerging market economies, that number is 5% of GDP; for developing economies, it is 1%.

What criteria is Rajan using with the above categorization of countries into "industrial", "emerging", and "developing"? Which countries fall in each category?


texts: What are the differences between cryptocurrencies and digital currencies backed by CBs?

texts:
Given all the hype around the cryptocurrencies like bitcoin, ethereum, etc., I'm wondering what are the main differences between those and a possible digital currency, backed by a central bank, in a hypothetical 'cashless society'?

Any help would be appreciated.


texts: Motivation for use of GLS instead of System OLS

texts:
In Wooldridge's graduate book, 2nd edition, page 174, he states «The usual motivation for the GLS estimator is to transform a system of equations where the error has a nonscalar variance-covariance matrix into a system where the error vector has a scalar variance-covariance matrix.» What does he mean by this?

Does he mean that the resulting variance matrix will be diagonal? I've never head the expression «scalar variance-covariance matrix» before. Any help would be appreciated.


texts: Finding long run equilibrium price, quantity and number of firms with a linear average cost function

texts:
I've been been brushing up on my micoreocnomics lately and I came across a question in Perloff that looked really simple, but for some reason I am struggling to answer:

Assume we are in the long run and each firm in a competitive market has a cost function $C = q^2$ and market demand is $Q = 24 - p$.

Determine the long-run equilibrium price, quantity per firm, market quantity and number of firms.

Attempt

In the long run, profits are $0$, therefor firms should enter until $MC = AC$.

$MC = 2Q$ and $AC = Q$. Setting them equal to another we get:

$2Q = Q$, which implies $Q = 0$.

However this result seems incorrect to me, could someone please point me in the right direction. I feel like I am getting this weird result because my AC curve is linear whereas it is usually U shaped.

Thanks


texts: Questions on comparing GDP between various countries

texts:
What is the difference between OER vs PPP? What fundamentally drives them? Shouldnt an arb opportunity exist and wouldnt that difference then go away? My understanding of OER is the official nominal exchange rate that is quoted by banks and is used by travelers to exchange money. PPP is an estimated exchange rate that is a function of the same good that is sold in different countries (causes being difference in costs/living standards). Is PPP the "real" exchange rate? For a given product, say a hamburger and OER rates of A:B of 10:1, let's say that we can buy 5 hamburgers in A at 20 units of A currency for a total value of 100 A dollars. If we bring them to B and in B, hamburgers are worth 3 units B currency, then our 5 hamburgers are now worth 15 B. If we use the OER to convert back to A, then we would have 150 A of value. Shouldn't this arb go away?
GDP numbers (nominal or real) from various countries are usually reported in their own currency. If one wanted to compare GDP between countries, one would have to use an exchange rate to convert to some common currency. What exchange rate should be used (OER vs PPP... and are there others?) and which GDP (nominal vs real) should be used? My intuition is that OER is usually use and its on nominal GDP (since real is usually indexed but its still possible to compare real by taking inflation and exchange rates into account based on difference between the two years that real GDP are indexed to?)
How do interest rates and inflation affect currency strength (in general?)?

Apologies if these are simple macro concepts. I have a limited understanding


texts: What are some database like websites about lower levels of economics (micro/macro) for a research project?

texts:
I'm looking for some websites; books or videos on the beginning levels of economics like micro and macro economics to do a research project projects on.  I found some course videos but they were a bit confusing.  I'm not sure what specific fields I'm supposed to begin with but I'm looking for but the lower levels of subject in both micro and macro economics.

What are some clear and trustworthy resources you recommend.  One's like database with the reference links (works cited) would be really good.


texts:
In some cases I see otherwise stable stocks or commodities having wild swings in price on exchanges. Even though the underlying company or commodity is going along normally and there is no news that the item is anything but stable, traders might be wildly buying or selling causing the market price to fluctuate. This seems to happen more often when an item or stock is the subject of public interest, so there might be an element of "mob psychology" involved.

Are there any standardized models that have attempted to capture the psychological elements of trading?


texts: Relationship between strong and weak axioms of revealed preference

texts:
I keep seeing these following facts just asserted while reading:

Let W = weak axiom of revealed preference
Let S = strong axiom of revealed preference
Let C = the commodity vector

$W \iff S$ when $C \in R^2$
$W \not\to S$ when $C \in R^i, i>2$

I can't find the 1958 paper by Rose that most other papers cite but I am interested in the proof for 1.

My thoughts about it:

I think that any agent whose demand struct satisfies W for a two-dimensional commodity space must have rational preferences. Since his preferences are rational, his demand structure must satisfy S.
Is this roughly correct?

My questions:
1. Anyone have a reliable link to Rose's paper?
2. Anyone have a reliable link to any alternative sources?

If we are in $R^2$ and we have that xRy, is it true that the euclidean distance from the origin to x must be greater than the euclidean distance from the origin to y? If so, is it possible to use this property to show that $W\iff S$ in $R^2$?


texts: tariffs lead to inflation; is this the same as inflation from supply constraints or demand drive, given that the tariff is removed from the money supply? How should the fed be thinking about this in the context of raising interest rates if they use inflation a gauge of how much to hike?


texts: How does Schumpeter's view of capitalism's demise fit in with the importance he placed on innovation?

texts:
Schumpeter is widely remembered for his belief in the power of innovation and entrepreneurship within a capitalist framework. In fact he argues that capitalism owes much of its success to this.

Yet, his argument about capitalism's ultimate downfall in Capitalism, Socialism and Democracy seems to show an strangely negligent view of the nature of innovation and technological change. He argues that a capitalist system will 'creatively destruct' so frequently that it will gradually systematise innovation itself. Entrepreneurship will become a job like any other.

While I agree with and respect much of Schumpeter's contribution to economics, this presumption sticks out like a sore thumb, to me it seems plain wrong. Innovation is disruptive/destructive exactly because it is new, because markets did not predict it, so how can it ever be made in to a predictable bureaucratic process? How can this otherwise exceptionally insightful gentleman, one who was among the first to identify innovation's disruptive power, argue his point in such a seemingly oxymoronic way?


texts: How do I best prevent cheating using a credible threat in a two-person, non-cooperative, positive sum game?

texts:
I'm playing around with a situation in which there are two possible scenarios.

Scenario 1

This involves a transaction between two persons, Supplier and Consumer, who have the option of either behaving honestly or behaving corruptly. One thing to note is that a corrupt transaction is only possible when the Consumer is corrupt. If the Consumer is honest, the transaction will always be honest. The payoff matrix is shown below. (For convenience, I call the agents Supplier and Consumer. Don't worry about what these mean).

(In the images that follow, the Nash equilibrium is highlighted in the green box. I've highlighted the Supplier's best strategy and the Consumer's best strategy in RED and BLUE respectively).

Now comes the tricky part (tricky for me, that is). I'm trying to model an altered version of Scenario 1, called Scenario 2, described below.

Scenario 2

Here, there is a credible threat to the Supplier. The credible threat is that if both Supplier and Consumer act corruptly, and the Consumer gets caught (in my model, we can only detect corruption by the Consumer), then the Supplier will be punished, along with the Consumer. Basically, I want to discourage corruption even before it happens. If I only punished the Consumer, then Suppliers would feel free to latch onto the next corrupt Consumer that comes along. Since I am punishing both Supplier and Consumer, the Supplier might have to think twice before colluding with a corrupt Consumer.

I have a tentative payoff matrix below. I'd like to know if my reasoning in the matrix is correct.

I'm confused because there are two possible payoff matrices for Scenario 2. The only I've shown is the one in which they do get caught. What about the situation where they don't get caught? Do we need to take this into account? And most critical to me, is my reasoning (in italics above) about the double punishment (to Supplier and Consumer) in case of collusion being more advantageous for the system than simply punishing the Consumer a good strategy, assuming a system with a huge pool of Consumers and Suppliers?


texts: Optimal posted price with uniformly distributed values

texts:
A seller offers a price $P \in \mathbb{R}^{+}$. Buyers can have type $\theta$ distributed uniformly on  $ [0,1]$. If a buyer of type $\theta$ accepts, then he gets $\theta-p$, and the seller gets $P$. If he rejects, both the buyer and the seller get 0. Find all PBEs. Here is my solution:

Seller's expected utility from offering $p\in[0,1]$ is $(1-p)p.$ This is maximised at $p*=1/2.$ So in the PBE a seller will offer $p=1/2$ and all buyers of type $\theta>1/2$ will accept. Is this correct?


texts:
I am learning about potential output. We have been told that it is the amount of output that an economy can produce when using its resources, such as capital and labour, at normal rates/maximum capacity. How could an expansion occur if using resources at maximum capacity is considered 'normal'?

Any answers would be greatly appreciated, thanks!


texts:
In my economics class, we're learning about the production possibilities frontier, marginal benefits, and marginal costs. The book uses the example of a company that can choose between producing colas, pizzas, or some combination of both:

The book then goes on to note that while marginal cost can be directly derived from this graph in terms of the slope (which makes sense), the marginal benefit is separate data that depends on preference. Here is the data they present for the marginal benefit of producing one more unit of pizza:

Question: I would greatly appreciate if someone could please clarify why the marginal benefit of producing one more unit of pizza is measured as "Willingness to pay cans of soda per pizza).

To clarify: I understand why marginal cost would be measured in terms of cans of cola. This is because producing one more unit of pizza incurs a loss (cost) of a certain number of cans of cola that we could have otherwise produced.

But for marginal benefit, it's unclear how we're measuring the "benefit" we derive in terms of... cans of cola. That makes no sense.


texts: Solow Growth Model. Steady State. Can someone explain please?

texts:
my lecturer is doing a rather poor job explaining what he's written down, so I'm wondering if someone would be able to explain the following graph for me?

This is a part of the Solow-Swann Growth Model lecture for Macroeconomics, and he's talking about the equilibrium that this model predicts, k stands for capital per worker, s is savings rate, z is technology, d is depreciation rate, n is population growth rate. My confusion is with the Y axis. How does an axis represent two equations..?


texts: Market demand independent of distribution of income

texts:
If preferences are identical and homogeneous, then show that market demand for any good must
be independent of the distribution of income.

My workings are as follows:
$$q^{d}(p)=\sum_{i=1}^{n}f(p_x,p_{-x},I)$$

$$q^{d}(p)=f(p_{x},p_{-x})\sum_{i=1}^{n}I$$
Here, $x$ is the price of that particular good and $(-x)$ is the price vector of all the rest of the goods except $x$. Market demand is given by the submission of all consumers from $1$ to $n$.
But, I'm still confused how this function is multiplicatively separable in the price vector $P$.Can someone give a proof of it.
Thanks!


texts: Why do Higher Interest Rates attract Foreign Investors?

texts:
I am reading the following Article at Investopedia which states

  Generally, higher interest rates increase the value of a given
  country's currency. The higher interest rates that can be earned tend
  to attract foreign investment, increasing the demand for and value of
  the home country's currency. Conversely, lower interest rates tend to
  be unattractive for foreign investment and decrease the currency's
  relative value.

I do not understand why Higher Rates would attract Foreign Investors, therefore unable to see how they can profit from it.

How does this work, and what are some of the common ways Foreign Investors use this to their advantage?


texts: What's the difference between the Life Cycle Hypothesis and Permanent Income Hypothesis?

texts: Would it be correct to say that the Permanent Income Hypothesis (PIH) stipulates that current consumption decisions are made based on future income projections/expectations, while the Life Cycle Hypothesis (LCH) claims that consumption is constant over the average person's life time, and this is made possible, despite changes in income level throughout his/her lifetime, through borrowing when younger and savings during the elderly years?


texts: Money Metric Utility Function: Budget constraints become Utility Functions?

texts:
Im currently reading up on the "money metric utility function" (also known as the minimum income function or direct compensation function).
By definition it is defined as:
$$m(\text{p},\text{x})\equiv e(\text{p},u(\text{x}))$$
Hal Varian writes in Microeconomic analysis (page 109):

it is easy to see that for a fixed $\text{x}$, $u(\text{x})$ is fixed, so $m(\text{p},\text{x})$ behaves exactly like an expenditure function: its monotonic, homogenous, concave in $\text{p}$, and so on. What is not so obvious is that when when $\text{p}$ is fixed, $m(\text{p},\text{x})$ is in fact a utility function.
The proof is simple: for fixed prices the expenditure function is increasing in the level of utility: if you want a higher utility level, you have to spend more money. In fact, the expenditure function is strictly increasing in $u$ for continuous, local non-satiated preferences.
Hence for fixed $\text{p}$, $m(\text{p},\text{x})$ is a monotonic transform of the utility function therefore itself a utility.

Does this (the bolded statement) mean that we essentially convert our consumer's budget constraint/budget line into his indifference curves when prices are fixed?


texts: Is measurement error in self-reported health a problem in this scenario...?

texts:
I am running regressions to estimate the impact of health conditions on life satisfaction.

I have read a paper that showed that there is likely to be measurement error in the self-reported health variables in that those who do not work are more likely to report health problems to justify not working.

My question is, is this a problem for my estimates? I include various dummy controls to capture employment status so do I simply control for this potentially problematic bias due to measurement error?

Or, is the bias still there in which case I guess it would be a downward bias? Does my use of panel data and fixed effects make any difference?


texts:
I am working through exercises in Gali but some of them are rather difficult. I am trying to find a solutions manual to use as an aide for exercises that completely stump me and to confirm solutions for the exercises I have completed.

Does anyone here know if Gali or some other economists published solutions for his exercises?  I have searched extensively with no luck but it seems like there must be some sort of solutions manual available for this text. It is widely used.
Thanks


texts: Fed must hold collateral equal in value to notes in circulation

texts:
The Fed's website has a FAQ "Is U.S. currency still backed by gold?". Part of the answer writes:

  The Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts in to circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.

In 2017, there were \$41.6B in notes in circulation (source). (Of course, the Fed's total assets vastly dwarf this figure -- they are around \$4T now, but were over \$700B even in the years before the financial crisis.)

Three questions about the above statement:

The statement presumably refers to some specific law passed by Congress. What was this law and when was it passed?
Does the Fed specifically earmark some portion of its assets as "collateral" for the notes in circulation? For example, in 2017, did the Fed have \$41.6B in assets specially earmarked as "collateral" for the \$41.6B in circulating notes?
Does the Fed actually keep any record of this? (This was one thing I was looking for but unable to find.)


texts:
Suppose our utility function is the usual CRRA utility with $\gamma=2$ so that:
$$u(C) = \frac{C^{1-\gamma}}{1-\gamma} = -\frac{1}{C}$$
Now suppose there are 2 goods, A and B, available for consumption. The consumption of A and B are denoted $C_A, C_B$. How do I compute the final utility?
For example, if I just add the utility, then the summed utility will be less than consuming either one of the goods, because the utility function is negative.
$$u(C_A) + u(C_B) = -\frac{1}{C_A} -\frac{1}{C_B} < u(C_A), u(C_B)$$
Suppose also that we want to make good B "more valuable". ie. 1 unit of good B should be worth more than 1 unity of good C. How would I reflect this in the utility function? A simple scaling with a value greater than 1 won't work, again because of the negative utility:
$$u(C_A) + u(C_B) = -\frac{1}{C_A} -k \cdot\frac{1}{C_B}$$
where $k>1$
Thanks in advance.


texts: Interpretation of Interesting Utility Function

texts:
Solving introductory microeconomics problems I have come across the following type of utility function:
$$ f(K,L) = (\alpha K^{\frac{\sigma - 1}{\sigma}} + (1 - \alpha) L^{\frac{\sigma - 1}{\sigma}})^{\frac{\sigma}{\sigma - 1}} $$

I find it slightly reminiscent of the logarithm version of the Cobb-Douglas function, but clearly the exponents don't fit with that. So the question is: How would you interpret $\alpha$ and $\sigma$ in this case?. Is $\alpha$ still the relative fraction of capital and labour? How can I think about $\sigma$?


texts:
I am very new to mechanism design so I am a bit lost among the concepts, even the most basic ones.

One thing that is not clear to me is the concept of direct mechanism and its relationship with the revelation principle.

From what I got a direct mechanism is a mechanisms, in which, instead of messages, the agents report their preference/type. Are we assuming this is a truthful report?

I am asking that because the revelation principle is stated as "anything that can be accomplished by any mechanism can actually be accomplished by a direct revelation mechanism that is individual rational and incentive compatible" in this notes but as "a social choice function can be implemented by an arbitrary mechanism (i.e. if that mechanism has an equilibrium outcome that corresponds to the outcome of the social choice function), then the same function can be implemented by an incentive-compatible-direct-mechanism (i.e. in which players truthfully report type) with the same equilibrium outcome (payoffs)." on Wikipedia.

So I don't get if truthfulness is implied by the direct mechanism or if it is an additional requirement.


texts: Are taxes,subsidies and social money transfers(i.e. welfare) accounted in money velocity?

texts:
As far as I know, money velocity is an average amount of times a typical, say, dollar, gets spent on goods during 1 year. So if it's spend N times to pay for goods, then money velocity equals N.
But I wonder if it's all the truth or only part/simplification of it. Suppose an average dollar is spent, on average, 1 time to pay for goods, 2 time to pay taxes, 4 times to pay subsidies, 8 times to pay pensions. What money velocity would be?


texts: Finding the optimal consumption bundle given the strictly concave utility function $v(x,y) = U(x) +y$?

texts:
I am also finding it difficult to understand what are the fundamental differences between analysing optimal bundles between concave and convex functions ?

Does it also happen that the optimal bundle in strictly concave function is $not $ a boundary condition ?
Thanks.


texts: How do transactions in different currencies work?

texts:
Very basic question but I have not much knowledge in this field so sorry:

Say I have a bank account and over the past year there were transactions in different currencies. I am guessing that a transaction in a different currency than 'mine' (whatever that is, I assume an account has like a 'default' currency) gets booked (immediately / later that day / ...) with the exchange rate (at that time / 4th the end of the day / ... ?) + some fees.

How exactly does booking of a transaction in any currency work?


texts: Prisoner's dilemma as a Bayesian one-shot game

texts:
What happens if we assume that there is incomplete information to the prisoner's dilemma game?

For example, suppose we have the following matrix with the utilities $T>R>P>S$ and $2R>S+T$ with only $2$ players and $2$ actions.

With $\Theta_i=\{\underline{\theta},\bar{\theta}\}$, does this mean that we have $2$ subgames (ex-interim) where we fix player $1$'s type and assign probabilities to player $2$'s types? Is this is the correct way to analyze the game?

If there is a paper studying the one-shot Prisoner's dilemma as a Bayesian game, I'd appreciate it very much if you share it with me!

Thank you.


texts:
Given a set of structural equations:

Demand Function: $$Q_1 = \alpha_0 + \alpha_1 P_t + \alpha_2 I_t + \alpha_3 R_t + \mu_{1, t}$$
Supply Function: $$Q = \beta_0 + \beta_1 P_t + \mu_{2, t}$$

Where

$P$ = price
$Q$ = quantity
$I$ = income
$R$ = wealth

How would you proceed with the Hausman test of simultaneity? Suppose you reject the null, which states there is no simultaneity between the error term and the endogenous variable; how can you proceed to obtain the parameters in the model?


texts: Do welfare payments for children incentivise having children?

texts:
A common argument against safety net social welfare for people with children is that it can incentivise people without better options to have children. This could be considered a problem if it means people who aren't fit to be parents continue having children.

For example in New Zealand the the Domestic Purposes Benefit (a benefit paid to people with children, if child support from the other parent does not exceed the base rate) pays about the same rate as a minimum wage full time job.

An argument could be made that the economically rational decision for an uneducated person is to have children, where they can't be fired, aren't subject to starting times or drug tests etc.

Is there any evidence for what the effect of welfare payments for children has?

In particular I'm interested in any situation where the entitlement has either increased or decreased, and what the effects on birthrate or people applying for the benefit has been after that.


texts: Why is Indian rupee is stable against the USD even though most other currencies weakening?

texts: The Indian Rupee (INR) seems fairly stable against the USD (1 USD = 62-64 INR) in the recent times even though most other currencies have weakened against USD, some by 20-30%. Apparently, INR is responsive to most other currencies these days except the USA. Is it related to the strength of the Indian economy, or that INR has already fallen to its lowest point well before other currencies?


texts: Why it is important to observe if the 10Y treasury yield moves nowadays?

texts:
in the context of low yields, where fed continues with fiscal stimulus, I've heard from many economists that this week the 10Y treasury rate has been finally increasing. In which situation is this theoretically problematic for the financial market?
Can someone help me understand a little bit the intuition behind? Just want to clarify that this comment was in the context of financial markets.


texts: Is there a systematic approach to find equilibria in sequential games?

texts:
I know that one can use backward induction to find one particular subgame perfect NE. And I know that wherever possible one can represent the game in normalform and then find all NE.

But is there a systematic way of finding all extensive form specific subtypes of NE, like sequential or weak perfect Bayesian equilibria? What about the rest of the subgame perfect equilibria that can't be found by backward induction?

Do I always have to guess and proof that it really is the kind of equilibrium I think it is?


texts: Confusion about Balance sheet equation and sum of the cashflows

texts:
I was solving a business case I had at school where i just needed to compute the cashflows (CF). Once I have done so I wanted to check that my calculations are all good by verifying that the following equation is true: CF(Operating) + CF(Investing) + CF(Financing) = Cash variation The issue is when I perform this calculation the sum of my cash flows gives me: Cash Variation + Net income

Now I got really confused and verified back all my calculations which seemed all correct (i mean i am simply applying the formulas as they are). So what I did is I started over from the Balance Sheet equation in order to better grasp the dynamics of all this in my head and there I got a surprise:

Balance sheet equation: Fixed Assets (FA) + Receivables(R) + Inventory (Inv) + Cash = Equity (Eq) + Debt-Long Term (DLT) + Debt-MidTerm(DMT) + Supplier (S)

Then by moving things around I get:

-(R + Inv - S) + FA + (Eq + DLT + DMT) = Cash

Given (R + Inv - S) = WCR and if I introduce the Deltas D with last year at this point the equation becomes:

-D(WCR) + D(FA) + D(Eq + DLT + DMT) = D(Cash)

=> -D(WCR) + CF(Investing) + CF(Financing) = D(Cash)

Now to get my operating cash flow I must compute: Net Income - D(WCR) so If I add the net income on the left it must add to the right so I get:

(Net Income + Deprec/Ammort) - D(WCR) + CF(Investing) + CF(Financing) = D(Cash) + (Net Income + Deprec/Ammort)

=> CF(Operating) + CF(Investing) + CF(Financing) = D(cash) + Net income + DAM

What am I doing wrong ? There must be something I am completely missing because mathematically the equation CF(Operating) + CF(Investing) + CF(Financing) = Cash variation cannot be possible

Thank you so so so much for any assistance


texts: Can someone explain intuitively, the Block-Marschack Polynomials that completely characterize random utility.


texts: Is it possible to have a preference relation that is complete but not transitive?

texts:
I've been doing my own reading on non-rational preference relations.
I'm currently under the impression that transitivity follows as a direct result of completeness of preferences. However my (much more advanced colleagues) have told me this is not necessarily the case.
I'm still to understand how this can be. What would such preferences look like?