Classroom Experiments for Intermediate Microeconomics
by
Charles F. Mason
University of Wyoming
Contents
I.Introduction
A. On Using Experiments in the Classroom1
B. On Bringing These Experiments into the Microeconomics Course3
II.Instructions for Specific Experiments
1. Demand, Supply, and Equilibrium5
2. Utility Maximization and Marginal Analysis14
3. Production and Diminishing Returns22
4. Perfect Competition26
5. Monopoly: Outputs, Deadweight Loss, and Regulation31
6. Oligopoly: Collusion vs. Competition39
7. Strategy: Preventing Entry48
8. Discounting56
9. Money in the Bag: Choice under Uncertainty60
10. Environmental Economics: Emissions Permit Trading65
11. Adverse Selection: Lemons Markets74
Acknowledgments
Author and publisher gratefully acknowledge the suggestions and advice of the following economists, who reviewed this material before publication:
Vic Brajer, California State University, Fullerton
James Brander, University of British Columbia
Claire Hammond, Wake Forest University
Debra Israel, Berea College
Donald Lien, University of Kansas
Jeffrey Perloff, University of California, Berkeley
Arthur Raymond, Muhlenberg College
Rochelle Ruffer, Youngstown State University
Robert Rycroft, Mary Washington College
Nora Underwood, University of California, Davis
Peter von Allmen, Moravian College
Don Waldman, Colgate University
Douglas Walker, Louisiana State University
Robert Whaples, Wake Forest University
I. Introduction
A.On Using Experiments in the Classroom
When I first started teaching economics, I was struck by the level of student ambivalence. Surely, I thought, there must be something wrong here. After all, when I was a student I found the subject so interesting that I changed my major to economics, the better to take more classes. Why weren’t my students as interested as I had been?
While I may never have an answer to that question, I have learned over the years that one solution is for the instructor to do everything possible to make the class interesting to students and to facilitate their involvement. By their very nature, experiments require student involvement; experiments provide information that is directly relevant to the student; the results are easy to observe; and a well-thought-out design allows the instructor to interpret the results quickly and to relate these results to the material in the class. Thus, I came to realize that experiments can play a natural role in the instruction process.
But figuring out that it made sense to use experiments in the classroom didn’t mean that I was able to use them effectively right away. I discovered that the effective use of experiments requires careful forethought and planning. It wouldn’t do, for example, to show up with most, but not all, of the necessary props. Nor would it make sense to run an experiment without a good idea of how to explain the role various students would be asked to play. An important element in running a good experiment in the classroom, as in running an experiment as part of a research project, is a well-designed set of instructions.
As part of my research agenda, I learned how to write a proper set of instructions from my friend and longtime colleague Owen Phillips. Of course, most professors don’t have a colleague with Owen’s expertise at the ready. One motivation for writing this supplement is to pass along some of what I have learned, so that others might successfully incorporate experiments into their teaching.
Even with a good set of instructions and all the requisite props, the instructor is still not completely prepared. He or she needs to have a sense for how behavior is likely to develop during the experiment, and a notion of how to weave the observed behavior into a classroom discussion. In addition, the instructor is better prepared when he or she anticipates possible problems or pitfalls and has a plan for avoiding them.
In writing this supplement, I have put together a group of applications, one for each of several chapters that a typical intermediate microeconomics class might cover. Several of these applications deal with standard material that we all cover, while others are best regarded as “optional material,” the sort of topics that we’d like to cover but frequently don’t get around to. Of course, different people focus on different topics, so there are likely to be experiments herein that any individual instructor wouldn’t use. But on the other hand, I have included a range of applications so as to suit a range of tastes.
To facilitate the use of these experiments, I have included a set of instructions, a list of necessary props, my preferred sequencing in conducting the experiment and a list of questions for discussion with each experiment. These elements are necessary ingredients for the successful orchestration of the experiment. For some experiments, I have also included a brief bibliography. While these experiments can be conducted without reading any of the cited works, the papers do place the associated experiments in historical context.
Finally, I have included a list of potential pitfalls with each experiment. While I have experienced many of these glitches firsthand, others anticipate what could go wrong. By and large these latter concerns are based on my professional experience or on my observation of errors that other researchers may have committed. The desire to avoid any such pitfalls underlies a good bit of the design of the various experiments. While the instructor is free to conduct experiments in any fashion he or she desires, those who stray from my suggestions may learn firsthand why I have been so specific in my descriptions.
- On Bringing These Experiments into the Microeconomics Course
For a classroom experiment to be conducted successfully, three requirements must be met. First, the instructor must be able to obtain willing subjects. Second, the subjects must understand their tasks, and there must be clear lines of communication between the experimenter and the subjects so that the rest of the class can easily observe the subjects’ actions as the experiment progresses. Third, the focus of the design has to clearly fit in with the material the instructor is currently discussing, and the results from the experiment must be interpreted and clearly exposited in that light.
Experimental economists have traditionally been concerned about providing sufficient motivation to subjects so that subject actions will provide credible data for testing various hypotheses. It is my belief, however, that unlike the participants in the typical research project, participants in classroom experiments do not necessarily need to be paid in cash. Students can be motivated by cash, classroom points, or some other item of value if they participate, or motivation can occur if the experiment is simply fun to be part of. While there are classroom experiments where I do pay subjects in cash, I usually just reward subjects with bonus class points. At other times, I simply ask for volunteers. However one chooses to motivate students, it is important that potential subjects understand the stakes and the rules governing the experiment. Achieving this understanding requires that the experimental design be carefully thought out and that the necessary props for conducting the experiment are at hand when the experiment commences.
This latter point is crucial if the experiment is to provide a useful learning experience. It will be the rare environment where most or all of the class participates in the experiment, and so there will generally be nonparticipating students. If these nonparticipants can be included indirectly, by getting them to think about what is happening with the participants, then the experiment will be far more tangible to them. To this end, in many of the experiments discussed below I suggest methods to involve nonparticipants. These range from asking them to make predictions about the outcome of the experiment to quizzing them on the probable thought process that participants are using. At times the instructor can encourage involvement by working the nonparticipants’ responses into some sort of assignment, for example by making them part of a homework. At other times the instructor may need to seduce the nonparticipants into becoming interested spectators by making the experiment fun or entertaining – in much the same way that the instructor would want to involve students in any lecture.
In part to facilitate audience involvement, the experiments in this manual are not run on a computer. Instead, they are simple enough to conduct within the classroom and require very little computing ability. This approach reflects the focus on using the experiments as a teaching device rather than as a means to collect data for purposes of extracting a publishable manuscript. Therefore, before running the experiment, it is essential to discuss in class any concepts that a participant must be familiar with to participate in the experiment, and to be ready to interpret the results.
An easy mistake to make is conducting the experiment before students know enough related material to appreciate the results fully. On the other hand, the experiment frequently can be used to provide an initial exposure to a key concept. Thus, it is important to avoid conducting the experiment after students have already learned the “appropriate” results. In the former case, the experimental outcomes will often go over students’ heads, and in the latter case the outcomes will not be as convincing as they would be if students had not anticipated the results. To avoid these difficulties, I indicate the optimal placement of each experiment within the sequencing of lecture material.
Aside from the timing issue, classroom experiments tend to be least successful when the requisite materials are not organized in advance, when students cannot understand the procedure, when they are insufficiently motivated, when the instructor does not adequately consider the possible outcomes and the optimal way to incorporate those outcomes into the course material, or when the instructor does not communicate that he or she is having a good time. For the most part, these errors can be overcome by adequate planning or by experience. Two major purposes of this manual are to make clear the necessary props that the instructor should have at hand when conducting the experiment and to give a sense of the best way to interweave the results into the course.
To these ends, I include a list of the required props, the best way to organize them, and the appropriate sequencing of events in the description of each experiment. I also suggest instructions to be read to the class for each experiment. These instructions are quite important, as they provide the only means for explaining the rules of the experiment, the timing of actions, and the aspects that participants observe prior to taking their actions. To borrow from game theory, the instructions are like a description of the game in layman’s terms. Some users may find certain parts redundant or repetitive and may wish to gloss over such sections. While doing so need not cause any problems, I would urge such users to ask students frequently if they need clarification. Perhaps the most important part of the instructions are those at the end, where we typically ask subjects if they have any questions. Bearing in mind that some students will need to be cajoled into asking for help, I tend to let the question, “Are there any questions?” hang for a good while before I start the experiment.
For most of the experiments I outline below, the required materials are simple, and the experiment can be easily explained to students. On occasion, some ability to compute payoffs on the spot is required; in this event a hand-held calculator with the capability of holding calculations in memory will suffice. My overriding goal has been to keep the design simple enough that any classroom instructor can conduct the experiment with a reasonable amount of preparation, and that a typical student can understand the design and make sense of the results.
In designing these experiments I have generally suggested a combination of tasks that allow the completion of the experiment within 50 minutes. This time frame includes both the running of the experiment and the discussion of the results. To enhance this discussion, I include a proposed list of discussion questions for each experiment. While these questions are not meant to be exhaustive, they do represent the issues that I have found to be most useful in my teaching, and the ones that students tend to find most interesting.
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©2001 Addison Wesley Longman
II. Instructions for Specific Experiments
- Demand, Supply, and Equilibrium
- Overview
Of all the experiments that have been conducted to analyze various economic theories, perhaps the best-known are those that use the supply – demand model to study market equilibria. Market experiments are relatively easy to conduct and generally successful. Published examples are plentiful (see Smith [1962] for an early example, after which the experiment described in this chapter was patterned, and Smith [1989] for a nice overview on the experimental method). The purpose of this experiment is to convince students of the predictive power of the supply – demand model. With a modicum of care, you will be able to include many students in the experiment. Students generally come away from this experiment satisfied that the simple model of interaction satisfactorily summarizes the data. In my view, this appreciation is important if the professor is to successfully integrate applications that are based on the model, such as implications of different types of taxes. In addition, the experiment in this chapter provides a relatively easy introduction to the use of experiments in an intermediate microeconomics class.
B.Requisite theory
Students should have been exposed to the concepts of supply and demand, at both the individual and market level. While most intermediate students will have a good grasp of the supply and demand model, those who have not taken an economics class for some time may need some review. My preference is to run this experiment before discussing market equilibrium, since this allows one to sell students on the impressive predictive power of the model before they see it on the chalkboard. (On the other hand, if you have already discussed equilibrium, you can link the results from the experiment to earlier lectures).
C.Props
- Record sheet for every participant
- Instructions for every participant
Each participant gets a record sheet (a page containing a copy of a record sheet for a buyer and a record sheet for a seller is provided below). These sheets show the subject’s role (buyer or seller) and his or her reservation price. For buyers, the reservation price is the points received if he or she buys (i.e., the value to the buyer), from which the sales price is subtracted. For sellers, the reservation price is the points given up if he or she sells (i.e., the seller’s cost), onto which the sales price is added. The record sheet also has places for the subject to write down the sales price in each period of the experiment, and the net profit obtained in each period. You will need to read the instructions (also provided below) before starting the experiment. If you have access to an overhead, you may want to prepare transparencies with the instructions, so that the class may read along with you. Finally, you will need an obvious place to write down the outcome from each period, such as a blackboard or a clean overhead transparency, and a helper to keep track of the action. The helper could be a TA or a student volunteer. If it’s a student, be sure to allocate points to him or her.
D.Time
Allow 15 - 20 minutes to recruit participants, locate them in a central area of the classroom, read the instructions, and deal with any questions. Each “period” should be relatively short. The first few periods are likely to take longer, so allow 3 minutes for periods 1, 2, and 3, and 2 minutes for each of periods 4 and 5. Allow for 1 minute between periods 1 and 2, between periods 2 and 3, and between periods 4 and 5, to allow subjects to consider what they have seen. Also count on spending 2 minutes after period 3, for class discussion. Spend the remaining time (12 – 17 minutes) discussing the key results, including a graphical exposition of the design and the relation between the theoretical predictions and the observed events. One option is to stop the experiment after three periods, if behavior has converged to the market equilibrium. So doing will reduce the amount of time spent on the experiment by several minutes.
E.Number of participants
Use no fewer than 8 buyers and 8 sellers, for a total of 16. It would be preferable to have a larger number of subjects, but more than 32 becomes difficult to manage. There is no need for equal numbers of buyers and sellers, nor for an even number of participants. If you have an even number of participants, split them equally between buyers and sellers; if an odd number, add one extra seller. Non-participants can be included by asking them to write down predictions of the number of trades and the typical price before each period. Indicate that they will be scored on the accuracy of their predictions. Because there is a larger range of potential quantities, it is best to place more points on the quantity prediction. Give three points per period, with 2 possible for the quantity prediction and 1 for the price prediction. For the quantity prediction, award 2 if the prediction is exactly correct, 1 if the prediction is within 1 of the actual number of trades, and 0 otherwise. For the price prediction, award 1 further point if the predicted price is within $1 of the average price, and zero otherwise.