The New York Yankees are playing the Boston Red Sox at Fenway ...

[luvbio]

The New York Yankees are playing the Boston Red Sox at Fenway Park. It is the bottom of the ninth inning, the score is tied 4-4, the bases are loaded, and there are no outs.
 
  Starting in the seats closest to the field, the crowd begins to stand and cheer , hoping that the Red Sox can drive in one more run and win the game. Describe the collective action problem that has developed in this situation.

Question 2

Using the figure above, show the effect on the real interest rate and the quantity of loanable funds of an increase in expected profit.
 
  What will be an ideal response?

[paavo]

Answer to Question 1

As the crowd in the seats closest to the field begins to stand, spectators behind those standing can no longer clearly see what is happening on the field, so they too must stand to see. This continues throughout the entire stadium until all spectators in the stadium must stand to be able to see over the people in front of them. Although many people in the stands may enjoy standing to cheer on their team in this situation, there may be some in the stands who would prefer to watch the game and remain seated. It is unlikely that spectators who want to stand would choose to forgo what they see as being in their best interest and choose to act in the best interest of the group by sitting down (so then everyone can then sit down and still see the action on the field). This is a collective action problem because sufficient numbers of people are acting in a way that makes everybody worse off.

Answer to Question 2

The increase in expected profit increases investment and shifts the demand for loanable funds curve rightward. As the figure shows, the result is that the real interest rate rises (to 8 percent in the figure) and the equilibrium quantity of loanable funds increases (to 4 trillion in the figure).

[luvbio]

Excellent

[triiciiaa]

TYSM