TOPIC 1 PART 1, Apuntes de Negocios Internacionales

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• Business Economics 2014/
  • Term

Important information

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Study readings before theory class

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First 15 to 20 minutes questions/discussion ofreadings and/or last theory class (voluntary + random

)

random

)

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The entire content of the readings (as indicated inthe PDA) is likely to be the subject of the final exam

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Participation important (quality of answer andfrequency of participation) in seminars but I will alsoconsider positively participation in theory classes

OutlineOutline

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Motivation

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Methodological individualism

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Cost-benefit analysis

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Theory of asymmetric value function

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Theory of asymmetric value function

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Decision making under uncertainty

Objective

We want to improve our understanding of

how individuals make economic

decisionsdecisions

Classical Economic View

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Traditionally, economists view choices as theoutcome of individual

cost-benefit

calculations

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People make choices autonomously

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Understanding the

behavior of organizations

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Understanding the

behavior of organizations

requires understanding the

behavior of its

individual members

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This framework is called

methodological

individualism

Example: Individual andOrganizational Behavior

UPF Choice

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UPF has two alternative uses of its fixed budget^ –

Provide all of you a good education

Stimulate good research

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Student class size presents clear trade

• off

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Student class size presents clear trade

• off

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As does choice of professor

First-Year Student Choice

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Most first year students have two goals:^ –

To be academically successful

To integrate socially / make new friends

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Time constraints mean that pursuing one goal

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Time constraints mean that pursuing one goal often reduces the chance of meeting the other

Example: Lawyer

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Let’s say that you’re a lawyer and you are a great typist and you have totype a whole bunch of things. You can hire someone. And then thedecision of hiring someone versus doing it yourself involves a tradeoff,because you can use your time typing, or you could use your timeattending a very important case.

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So what you really need to compare is, what is the opportunity cost of me

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So what you really need to compare is, what is the opportunity cost of me typing, of the time I use? Let’s say that you can make $100 per hour andyou only pay someone for typing $20 per hour.

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What is your resource constraint?

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What is your opportunity cost of typing?

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What should you do?

Example: Student

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Take a student who annually pays $4,000 in tuition at a statecollege. Assume that the government subsidy to the collegeamounts to $8,000 per student. Instead of studying, thestudent could earn $20,000 for working in a company.

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What is the cost for studying without consideringopportunity cost?

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What is the true cost for studying?

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How much does the student have to pay of the true cost?

Example: Individual Choice Problem Suppose you need to get to a theater by 8pmand begin waiting for a bus at 7pm. At 7:20pmthe bus still hasn’t come, and you suggest to your friend that the two of you take a taxi. Sheyour friend that the two of you take a taxi. She replies “we’ve already been waiting for 20minutes, so we can’t stop waiting now.”

Sunk Cost Error

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Is the 20 minutes you have been waiting for thebus a sunk cost? Why or why not?