10/7/2011 Class16

Marginal vs Total (Water diamond paradox)
We actually concern how many more product we get rather than concern whether we should get that good or not.
Example: Teachers vs Athletes
Given the amount and the skills of teachers, we value the next teacher not nearly as much as we value the next athletes, so the marginal cost of teachers is low. But if we consider the total cost of the teachers combined, it will exceed that of the athletes.

Context can also be an effect. In a laggard village, people long for education, they need teachers, so teachers in that area are more valuable than athletes.

What we care is the services we can get from buying a certain good. For instance, we buy bottles of water because we can get the convenience of taking it with us.So even if the water is free, when we buy a bottle of water, the service isn't free.

Sunk cost
Resources cannot be recoverable when I make the decisions.
Never pay attention to the sunk cost, or you will make bad decisions.
Example: I paid 200 bucks for a ticket of basketball game,but later on I find that I cannot go because of a meeting. Evaluate: I must go to the game because I spent $200 on it. If I don't go, I will lose the money.

False. The decision whether you should go to the game is based on what cost and benefit you recruit when going to the game. If you go to the game, you will miss the meeting, lose time and energy, and since you have skipped the meeting, you are not happy. So I may lose more just for going to the game for the ticket.

Axioms
(1)Scarcity
(2)Human acts with purpose: People respond to incentives
We tend to do things that can lower the ratio of effort to result.
Our behavior will change when incentives change.
Implication: Law of Unintended consequences.
Example: Seat Belt law.
Outcome: We are safer to drive
People respond: drive a little bit faster and carelessly.
Result: More car accidents happen, less drivers die but more get hurt; pedestrains die more.
We are statistical murders:
The money we use to get the seat belts comes from somewhere. If we put it to public health, for example, we could save more people. Seat belts make the people safer in the car, but they actually "kill" people that are not seen.