Thursday, December 04, 2008

When must a monopoly firm shut down?

"Monopoly is good for producers but bad for consumers. The gains of the former offset the losses of the latter. On balance,here is no reason to think that monopoly is bad for the economy." Is this statement true? Why or why not?

Is a monopolist subject to any competitive pressures? Explain. Would an unregulated monopolist have an incentive top operate and produce efficiently? Why or why not?

How will high entry barriers influence (a) the long-run profitability of firms, (b) the cost efficiency of firms in the industry, (c) the likelihood that some inefficient (high-cost) firms will survive, and (d) the incentive of entrepreneurs to develop substitutes for the products supplied by the firms? Are any competitive pressures present in markets with high barriers to entry? Discuss.

What are oligopolies? Why is oligopolistic collusion more difficult when there is product variation than when the products of all firms are identical?

What is price discrimination? Is it harmful to the economy? How does price discrimination affect the total amount of gains from exchange? Why do colleges often charge students different prices, based on their family income?

Tuesday, December 02, 2008

What is a price searching firm? Define monopoly. What are the three barriers to entry discussed in class today?

Read about barriers to entry with respect to the legal profession.

Also, here is a remarkable example of spontaneous order.

Graphically show a monopolistic firm earning an economic loss. Under what circumstances might a monopoly firm operate while earning economic losses? Why would a firm want monopoly rights to produce a product that it believes would earn an economic loss?

Show a monopoly earning a normal profit.

Why does marginal revenue not equal demand for a monopoly firm?

Invisible Heart readers will find this story from Dani Rodrik's weblog of interest.

Thursday, November 13, 2008

How does the competitive firm decide on the profit-maximizing level of output? Why is the average cost curve important in this model? Where do average fixed costs show up?

If a competitive firm is earning an economic loss and several other firms in its industry exit the market, then will this firm then earn a normal profit? Explain.

How are competitive firms earning a normal profit affected when costly "homeland security" regulations are imposed on them? If these firms start earning economic losses, then will they have to exit the market? Explain.

Do competitive, price taking firms have supply curves? Explain. Under what conditions do can such firms operate under a loss? What is the shutdown rule?

What happens to economic profits and economic losses in the long run? Why?

Define: increasing , constant, and decreasing cost industries.

Why is perfect competition often used as a benchmark from which to compare other market structures?

Price taking behavior occurs when
A) P = LRAVC.
B) the firm cannot sell all it wants at the market price.
C) the firm faces so much competition that it cannot control its
price.
D) both a and c
E) both b and c

If a firm is making zero economic profit,
A) it will be forced to shut down and leave the market.
B) it will also generally be making zero accounting profit.
C) it is doing as well as typical firms in other markets.
D) it will not survive in the long run.

If the firms in a price-taker market are making short-run profits, what will happen to the market price in the long run? Explain.

“In a price-taker market, if a business operator produces efficiently—that is, if the cost of producing the good is minimized—the operator will be able to make at least a normal profit.” True or false? Explain.

Suppose the government of a large city levies a 5 percent sales tax on hotel rooms. How will the tax affect (a) prices of hotel rooms, (b) the profits of hotel owners, and (c) overall spending on hotel rooms (spending that includes paying the tax)?

If coffee suppliers are price takers, how will an unanticipated increase in demand for their product affect each of the following, in a market that is initially in long-run equilibrium?
a. the short-run market price of the product
b. industry output in the short run
c. profitability in the short run
d. long-run market price in the industry
e. industry output in the long run
f. profitability in the long run

Suppose that the development of a new drought-resistant hybrid seed corn leads to a 50 percent increase in the average yield per acre without increasing cost to the farmers who use the new technology. If the producers in the corn production industry were price takers, what would happen to the following?
a. the price of corn
b. the profitability of corn farmers who quickly adopt the new technology
c. the profitability of corn farmers who are slow to adopt the new technology
d. the price of soybeans, a substitute product for corn

“When the firms in the industry are just able to cover their cost of production, economic profit is zero. Therefore, if demand falls, causing prices to go down even a little bit, all of the firms in the industry will be driven out of business.” True or false? Explain.

Tuesday, November 11, 2008

To summarize the schedule for later this month:

Nov. 18: No class. You are expected to watch the video linked to on BlackBoard. This link is available now.

Nov. 20: No class. Assignment will be posted to BlackBoard during regular class times on this day.

Nov. 25: Test 3 will be given, as scheduled, in class.

***

Note the InTrade graphic below. InTrade predicted with 100 percent accuracy the results of the presidential election.

***

What assumptions are necessary for the perfect competition model? How realistic are they?

Why are firms operating in perfectly competitive markets considered price takers? Why do competitive firms produce at an output level at which marginal revenue equals marginal cost.

How does the competitive firm decide on the profit-maximizing level of output?

How does the competitive firm decide on the profit-maximizing level of output? Why is the average cost curve important in this model? Where do average fixed costs show up?

How are competitive firms earning a normal profit affected when costly "homeland security" regulations are imposed on them? If these firms start earning economic losses, then will they have to exit the market? Explain.

Farmers are often heard to complain about the high costs of machinery, labor, and fertilizer, suggesting that these costs drive down their profits. Does it follow that if, for example, the price of fertilizer fell by 109 percent, farming (highly competitive industry with low entry barriers) would be more profitable? Explain.

Thursday, November 06, 2008

The New York Times edition for the day after the election--OBAMA--is selling for over $100 on eBay. Also, from the WaPo: "Newspapers Sell Like Hotcakes as People Seek Momentos".
Here's a post-election map from the New York Times. The result (depending on Missouri, which is siding with McCain) is exactly as predicted by InTrade.

To summarize the schedule for later this month:

Nov. 18: No class. You are expected to watch the video linked to on BlackBoard. This link is available now.

Nov. 20: No class. Assignment will be posted to BlackBoard during regular class times on this day.

Nov. 25: Test 3 will be given, as scheduled, in class.

***

What is the Law of Diminishing Marginal Returns?

Colin lives in Lineville [pronounced: LAHN-vl], Alabama, and likes to grow zucchini. He applies fertilizer to his crop twice during the growing season and notices that the second layer of fertilizer increases his crop, but not as much as the first layer. What economic concept best explains this observation?
A) the law of diminishing marginal utility
B) the law of diminishing marginal returns
C) return equalization principle
D) the principal-agent problem

Define long run costs. How is any given point on a long run average cost curve related to a short run cost curve?

Students often confuse (a) diminishing returns related to variable factors of production and (b) diseconomies of scale. Explain the difference between the two, and give one example of each.
Define: economies and diseconomies of scale. How are they depicted on the long run average cost curve? What industries have been characterized by economies of scale over the course of your lifetimes?

What three factors cause long-run cost curves to shift?

What assumptions are necessary for the perfect competition model? How realistic are they?

Why are firms operating in perfectly competitive markets considered price takers? Why do competitive firms produce at an output level at which marginal revenue equals marginal cost.

How does the competitive firm decide on the profit-maximizing level of output?

Wednesday, November 05, 2008

Some quick thoughts on voting:

Economic theory today argues that voting occurs on instrumental and expressive grounds. Instrumental voting occurs when the voter thinks his or her actions will have an effect on the outcome of the election. So, people voting in (say) states in which the margin of victory was expected to be close may be doing so because they think that their vote will affect he outcome. (Even if this were to be the case, and this voter's caused the election to be decided by one vote, the vote would still not be decisive. An election like this would be decided in the courts.)

Expressive voting is another reason why people vote. This occurs when people vote, not to be decisive, but simply out of the satisfaction that is received by supporting one side or another, or identifying with one side or another. Voting in this case is an avenue through which one can express his or her personality. People vote because they enjoy it--it is a way to maximize one's preference function, whether or not you expect to be decisive. For them, the benefit received from voting, or identifying oneself as a voter, exceeds the cost.

Here is a short video from PBS of Gordon Tullock explaining why he does not vote.

In an article entitled "Pigskins and Politics," David Laband and his coauthors look at whether people who root for college football teams--an action they they consider "non-political expressiveness"--tend to be expressive voters as well. This study focuses on Auburn, where there is much non-political expressiveness directed toward the football team.

Finally, in another Auburn connection, AU economist Richard Ault discusses the economics of mass democracy in this 2005 talk.

Tuesday, November 04, 2008

Define the short run and the long run. What types of industries are likely characterized by longer short runs? Why?

Explain, verbally and graphically, total fixed costs, average fixed costs, total variable costs, and average variable costs.

Graphically, verbally, and mathematically (with equations) explain the relationships between TC, TVC, TFC, ATC, AVC and AFC.

Suppose a firm produces bicycles. Will the firm's accounting statement reflect the opportunity cost of bicycles? Why or why not?

Explain the factors that cause a firm's short-run average variable costs to decline initially, but to eventually increase as output rises.

***
When costs that do not change with the level of output are
divided by the output level, you have calculated
A) total cost.
B) average total cost.
C) average fixed cost.
D) marginal cost.

Marginal cost is defined as
A) total cost divided by quantity.
B) the change in total cost resulting from the production of one
additional unit of output.
C) total variable cost divided by the number of units produced.
D) average fixed cost times the number of units produced.

In the short run, if average variable costs equal $20, average
total costs equal $70, and output equals 100, then the total
fixed cost equals
A) $50.
B) $1,000.
C) $5,000.
D) $9,000.

***
Here is the embedded version of the InTradedata for the election. At 11:00 on Tuesday, the predictions ran 364 for Obama, and 174 for McCain.  



Also, here is the Amazon link for The Wisdom of Crowds.

Thursday, October 30, 2008

Inferior Good:

What are the major determinants of a product's price elasticity of demand? Studies indicate that the demand for Florida oranges, Bayer aspirin, watermelons, and airfares to Europe are elastic. Why?

Former Detroit mayor Kwame Kilpatrick proposed last year a 2 percent fast food tax in Detroit, with the stated purpose of trying to alter the incentive to eat fast food (as opposed to the purpose of raising revenue). Is his proposal, if passed, likely to be successful? Will it raise much revenue? Answer in terms of elasticity of demand. (Note: the tax proposal was rejected by Detroit voters.)

Assume that real incomes fell during the 1990-1991 recession by 10 percent, and that the demand for Yugos increased by 15 percent. Can you determine an income elasticity measure?

Your book notes that the measure of the income elasticity for food is 0.51. Why do you suppose that the measure is inelastic for this good? Would you expect it to increase if looking at specific categories of food? Why or why not?

Define: income elasticity, cross elasticity, and elasticity of supply. What signs would you expect for these measures? Why?

In producer theory, how are costs of production derived? What are the three assumptions of producer theory? How are they related to scarcity? What role does the consumer play?

In a market economy, what do firms do? What are residual claimants? Differentiate between the three types of firms discussed in class.

Differentiate between the explicit, implicit costs that firms face. What are total costs? What sunk costs?

What is economic profit? How might it differ from accounting profit? Explain why firms that are making zero economic profit are likely to continue in business.

Which of the following statements do you think reflect sound economic thinking? Explain your answer.
a. "Because we own rather than rent, and the house is paid for, housing doesn't cost us anything."
b. "I own 100 shares of stock that I can't afford to sell until the price goes up enough for me to get back at least my original investment."
c. Private education is costly to produce, whereas public schooling is free."

Tuesday, October 28, 2008

What is elasticity?

What is likely to be more elastic: the demand for JSU T-shirts or the demand for JSU football T-shirts?

Assume that the Internet results in increased competition for the JSU Bookstore. Explain this (verbally and graphically) in terms of a change in elasticity of demand.

University of Chicago Prof. Austan Goolsbee and Yale University Prof. Judith Chevalier argue in a paper that price changes at one Internet site affect sales of both that retailer and its competitor. It considers sales at Amazon.com and BarnesandNoble.com, and finds that "[a] 1 percent price increase at BN.com pushes sales down 4 percent, making price rises a bad idea. By contrast, the same increase at Amazon reduces sales by only 0.5 percent a net revenue gain." It concludes that Amazon.com has demonstrated it is possible to build large base of customers who will not go to competition if prices are raised. Question: Fully explain this phenomenon in terms of elasticity. What factors probably go into making consumers less price responsive at Amazon.com's web site vs. Barnes and Noble's web site?

Many public colleges and universities have raised tuition in recent years. Will tuition increases result in more revenue? Under what conditions will revenue (a) rise, (b) fall, or (c) remain the same? Explain this in words, focusing on the increased relationship between the increased revenue from the students who enroll despite the higher tuition and the lost revenue from lower enrollment. If the true price elasticity for public university education was -1.2 (as suggested in a recent article), what would you suggest colleges do to expand revenue? Also, how do you suppose the supply and demand for higher education changes during a recession, if at all?

Define: unit elasticity. What do you think would happen to sales revenues if price fell in a market characterized by unit elasticity?

Sue loves ice cream but cannot stand frozen yogurt deserts. Carole likes both and can hardly tell the difference between the two. Who will have the more elastic demand for yogurt?

What effect would the practice of obtaining prescription drugs from Canada on the Internet have on the elasticity of demand for prescription drugs? Why?


***

For which one of the following goods would you expect the demand to be most elastic?
a. gasoline
b. premium gasoline
c. unleaded gasoline
d. Exxon unleaded gasoline

The demand curve for cigarettes is likely to be
a. horizontal.
b. very flat (but not horizontal).
c. vertical
d. very steep (but not vertical).

John enjoys hockey games more than movies yet in a typical year he goes to 10 movies and 2 hockey games. This suggests that
a. John is clearly not maximizing utility.
b. if John is rational, hockey must be more expensive than movies.
c. if John is rational, movies must be more expensive than hockey.
d. the price of NASCAR races (a hockey substitute) has increased.
e. none of the above

Which one of the following goods would likely have the most elastic demand?
a. Kellogg's corn flakes
b. salt
c. a new Toyota automobile
d. fresh green beans

If a 10 percent rise in airfares leads to a 5 percent increase in total expenditures on air travel, the price elasticity of demand for air travel in this range must be
a. 2.0.
b. elastic.
c. 0.5.
d. inelastic.

If the board of regents of a major state university system plans to raise tuition in order to increase revenues, the regents must believe student demand is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. perfectly elastic.

Assume that Joe's Bakery sells 130 pies at a price of $9, 110 pies at a price of $10, and 95 pies at a price of $11.
a. Calculate the absolute value of the arc elasticity of demand if Joe raised the price of pies from $9 to $10. Is demand in this range elastic or inelastic?
b. Assume that Joe lowers his price from $11 to $9. What is the arc elasticity of demand?

Tuesday, October 21, 2008

Answer this question.

If I measure my marginal utility for my 100th McDonald's hamburger to be 8, and my first Coke to be 7, then which one will I consume next?

Define: consumer equilibrium. How do price changes upset consumer equilibrium?

Define: income and substitution effects.

Monday, October 20, 2008

Reminder: Test 2 is this Thursday, and you will be required to bring the Scantron form to take it. See you then!

Saturday, October 18, 2008

Trick or Treat:




Sign of the Times?




Thursday, October 16, 2008

Define: rent seeking. Explain, verbally and graphically, the economic case against minimum wages. Who benefits from minimum wage laws? How does rent seeking fit into this analysis?

Explain some of the full costs associated with wealth transfers suggested by public choice analysis.

Define: utility, marginal utility, marginal benefit, diminishing marginal utility.

Why consumers treat political and market goods differently.

Explain the relationship between total utility and marginal utility. What is the principle of diminishing marginal utility? Is it possible to have increasing marginal utility?

What is the slope of the total utility curve (upward or downward) in the range of negative marginal utility?

Which of the following most directly reflects the law of diminishing marginal utility?
a. After watching two football games, Terry decides to watch a third game.
b. A sports fan enjoys watching Monday night football rather than going to the theater.
c. After listening to three compact discs, Kim decides to go bowling rather than listen to a fourth disc.
d. A musician receives the biggest ovation of the evening after playing the final number of a recital.

Talk about moral hazard:

When a financial institution holds a mortgage, homeowners must live with the fear of foreclosure. Private institutions only have obligations to shareholders. In the case of a defaulting borrower, they will look to recover as much of their principal as possible. If foreclosure is their best option, they will take it in a heartbeat.

The government has no such obligations. Its only goal is to keep voters happy. After supposedly bailing out the fat cats on Wall Street, no politician wants to be accused of evicting struggling families. Once you understand this, all of your anxiety should melt away. Why pay your mortgage if foreclosure is off the table, and if you know that lower payments, and possibly a reduced loan amount, would result? A tarnished a credit rating is a small price to pay for such a benefit.

Unfortunately, this boon will not extend to those foolish individuals who either made large down payments or resisted the temptation of cashing out equity. The large amount of home equity built up by these suckers, I mean homeowners, means that in the case of default foreclosure remains a financially attractive option. As a result, these loans will be much less likely to be turned over to the government.

If your mortgage does become the property of Uncle Sam, the growingly popular impulse to “just walk away” should be replaced by “just stay and stop paying.” No one will throw you out. After a few months, or years, of living payment free, you will get a call from a motivated government agent eager to adjust your loan into something affordable.

That is investment adviser Peter Schiff, writing in the San Diego Union-Tribune. Read the whole article.


Tuesday, October 14, 2008

Which of the following is a true statement about the effect of a government-imposed minimum price floor when the price set is above the normal free market price?
a. If the government imposes a price floor, total consumer surplus will decrease
b. If the government imposes a price floor, all firms in the market will gain
c. If the government imposes a price floor, there will be a shortage
d. If the government imposes a price floor, consumer surplus will increase

What is the definition of consumer surplus?
a. The difference between the consumer's willingness to pay and and the price actually paid for the product.
b. The total value placed on products by the market
c. The difference between the consumer's willingness to pay and the firm's cost of the product.
d. The total value placed on products by consumers

Most of the benefits to agricultural support schemes such as the European Common Agricultural Policy go to
a. Consumers
b. The Government
c. Producers
d. Everyone gains equally from price supports

Evaluate the following quote from tomorrow's Washington Post (Oct. 15) in terms of Schumpeter's creative destruction:
At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said.

Tuesday, October 07, 2008

Note: I recommend that students who have never used BlackBoard attempt to log in before Thursday to be sure they know their password. Once you begin the assignment, you will not be able to navigate away from it. (If you do, you will not receive credit for the assignment.) The assignment involves reading an article in the External Links tab, and then submitting essay answers in the Assignments tab.

***

Explain how voters can be considered consumers and how governments can be considered producers. What limits are there to this analogy?

Define rational ignorance. What are some reasons why we'd expect consumers to make better decisions than voters? Why is voting not rational? Why is voting rational? Here is

Explain how voting for a politician is like buying a bundled good. How does this help politicians deviate from their constituencies' interests? Look at the argument made here. Explain it in terms of point 3 from today's lecture.

George Bernard Shaw wrote that "A government that robs Peter to pay Paul can always depend on the support of Paul." Relate this statement to the special interest effect. How does this affect consumer surplus? How does this affect producer surplus?

"Since government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises." Evaluate this view.

Define: the special interest effect. Give examples. Why would producers seek political favors that have the effect of reducing producer surplus? Explain verbally and graphically.

Most of the benefits to agricultural support schemes such as the European Common Agricultural Policy go to
a. Consumers
b. The Government
c. Producers
d. Everyone gains equally from price supports

Friday, October 03, 2008

Here are the questions for yesterday's (Oct. 2) lectures:

What are public goods? Give examples. Why do many economists think that they pose problems for society?

Define asymmetric information. Why would some economists justify government intervention in the presence of asymmetric information? Why would some economists not justify it?

New York Magazine says: Grin and Share It: "The music industry?s lame lawsuits against MP3-loving kids aren?t going to put the file-sharing genie back into the bottle. As Martha might say, it?s a good thing."

Which of the following is true about the market and public sector?
a. Competition is not present in the public sector.
b. There is more free choice for individual consumers in the market sector.
c. The public sector utilizes the price mechanism more than the market sector.
d. The link between the consumption of a good and the payment for a good is clearer in the public sector.

Compared to the ideal, when producing a good generates external costs, market allocation will likely result in an output that is too
a. large and a price that is too high.
b. large and a price that is too low.
c. small and a price that is too high.
d. small and a price that is too low.

A public good is a good
a. produced by the government.
b. that, if made available for consumption by one person, is also available for the benefit of others.
c. produced by private firms but financed by the government.
d. consumed by private individuals and financed by public contributions.

Now two other bands--Oasis and Jamiroquai--are following Radiohead's example. I have never heard of these groups either (have you?). Just the same, I would not be surprised if this became the promotion/distribution scheme of choice for all bands that make the brunt of their income via live performances relative to CD and iTunes sales.

Tuesday, September 30, 2008

What are the full costs of government spending?

How does government provide a protective function to society? Are there any losses to society for this protection?

Explain government's justification for reducing antitrust activities.

If sellers of toasters were able to organize themselves, reduce their output, and raise their prices, how would economic efficiency be affected? Explain.

In response to the terrorist attacks of September 11, 2001, airline security screening increased dramatically. As a result, travelers must now spend considerably more time being screened before flights. Would it make economic sense to devote enough resources to completely prevent any such future attacks? Why or why not?

Tuesday, September 23, 2008

Graphically and verbally explain tax incidence in the labor market.

How does Gwartney define government? What are the other definitions of government discussed in class? Explain the allocative efficiency rationale for government.

How does competitive behavior result in public and private markets?

What is the one-to-one payment-consumption link? Give examples. Explain how weakening it can result in misallocation/waste of goods.

Here is the data from the Northeast-Midwest Institute discussed in class. Look at the third column. According to this, there are now 32 net tax-consuming states. (Alabama ranks sixth.)

Compare the factors that explain resource allocation in the private and public sectors.

Sunday, September 21, 2008

Worth Reading: A local businessman owner explains the problems he faces extra market force is used to stop him from raising prices after a crisis. From today's Birmingham News.

Gas station owners just trying to survive

Sunday, September 21, 2008

In response to talk about price-gouging by oil companies, I want to say a couple of things from a gasoline retailer's point of view.

First, it should be pointed out the fuel that was already available here and bought at lower prices was street priced based on the reasonable expectation of a continuing supply. When it became clear Hurricane Ike was going to hit the Texas coast and the refineries were shutting down and no more continuing supply would be available, the value of those existing gallons significantly increased. Supply and demand.

Hurricane Gustav already had pinched the supply line, and with the refineries not producing, the pipeline not pumping, and the fact it would take seven to 10 days at best to get it all back up and running, we were looking at a limited supply of fuel. That, in turn, caused prices to rise, especially in light of the "panic" buying going on Friday, Sept. 12, the day the storm hit.

And there was a lot of "panic" buying going on Friday. This buying greatly increased demand, unnecessarily, on what was already a limited supply, putting even more upward pressure on prices.

As for gouging, the state of Alabama considers "excessive pricing" to be prices that exceed 25 percent of the average retail price of that product in the 30 days preceding the declaration of an emergency.

For example: If the average price in the preceding 30 days for a particular retailer was $3.50 a gallon, then the retail price should not exceed $4.375 during the state of emergency, unless you can provide documentation that your "actual costs" incurred can be shown to be greater.

As for my station, the lowest price I have posted in the past 30 days was $3.599, and the price I posted Sept. 12 was less than 25 percent of the lowest I had posted in 30 days. With this in mind, except for a few stations that had real "actual cost" issues, I don't think I saw any prices that would be considered "excessive" by the state. Most, I would say, were well within the 25 percent range; the majority of which, like myself, were a good bit less.

Consumers need to remember we are looking at the very real prospect of running out of supply altogether, as I did after Hurricane Ivan for seven days in 2004. We must look at the long run of what is going on and position ourselves to make it through the entirety of the shortage, so we can stay open, do business, pay our people and have some gas to sell to those in real need.

At the time of this writing, I knew of at least two stations in my immediate area that have not had any resupply since running out Sept. 12, yet they still have all of their ongoing bills to pay, not the least of which is their employees.

I don't like the higher prices any more than my customers. But if that is what I must do to keep from being put out of business, then it must be done.

If you look around, the higher prices have had the desired effect of tempering demand, which, in turn, has caused those prices to begin to fall back toward normal levels. If nothing else, this situation has personified the basic economic principle that price is gauged by the availability of supply of a product and the relative demand for it.

With the price of oil continuing to fall and the prospect of resupply becoming a reality, I am fairly sure consumers will see a sizable decrease in the price of gas in the next seven to 10 days, all things being equal.

I hope this gives a more clear picture of what it is like for a single, independent retailer like myself who can ill-afford to be out of business for even one day.

I, like many others, learned some very hard lessons after hurricanes Ivan in 2004 and Katrina in 2005. I did not move my prices fast enough then and ended up being out of fuel for a significant amount of time, which nearly bankrupted me.

This is not like a grocery store running out of milk or bread. It's more like McDonald's running out of hamburgers; why would anyone stop there at all? Lee Emond Sr. operates Dodge City BP/Highway 69 Fuel Center in Cullman County. E-mail: ltesr@bellsouth.net.


Friday, September 19, 2008

Privatizing fish supplies? In the Ocean? The Economist explains how it is being done.

The Alaskan halibut and king crab fisheries illustrate how ITQs can change behaviour. Fishing in these waters had turned into a race so intense that the season had shrunk to just two to three frantic days. Overfishing was common. And when the catch was landed, prices plummeted because the market was flooded. Serious injury and death became so frequent in the king crab fishery that it turned into one of America's most dangerous professions (and spawned its own television series, "The Deadliest Catch").

After a decade of using ITQs in the halibut fishery, the average fishing season now lasts for eight months. The number of search-and-rescue missions that are launched is down by more than 70% and deaths by 15%. And fish can be sold at the most lucrative time of year--and fresh, so that they fetch a better price.

In a report on this fishery, Dan Flavey, a fisherman himself, says some of his colleagues have even pushed for the quota to be reduced by 40%. "Most fishermen will now support cuts in quota because they feel guaranteed that in the future, when the stocks recover, they would be the ones to benefit," he says.

Although governing authorities are important in setting up ITQs, so is policing of the system by the fishermen themselves. In the Atlantic lobster fishery a property-based system has arisen spontaneously, says Dr Worm. Families claim ownership over parcels of sea and keep others out. Anyone trying to muscle in on the action risks being threatened; their gear may be cut loose or their boat could vanish.

Thursday, September 18, 2008

Verbally and graphically explain labor and loanable funds markets. What happens to interest rates when savers decide to save more? Show graphically.

Economist Roy Cordato notes the relationship between resource markets and product markets to make the economic case against recycling, in this 1995 article.

What are price controls? How are they maintained? Explain, verbally and graphically, price ceilings and price floors.

Define tax incidence. What is the difference between economic incidence and legal incidence?

What must happen for shortages and surpluses to persist?

What socially beneficial results occur when relative prices rise? I.e., what is their effect on consumers and producers? How is this related to Smith's "invisible hand"?

Here is an old news story about someone trying to sell a kidney on eBay.

How is the tax incidence likely to be different for gasoline and Oreo cookies?

What is meant by the incidence of a tax? What conditions would cause sellers to bear the full burden? Explain.

"We should a 20 percent luxury tax on expensive automobiles (those with sales prices of $50,000 or more) in order to collect more revenue from the wealthy." Will the burden fall primarily on the wealthy? Why or why not?

Wednesday, September 17, 2008

One of the benefits of having me for Micro is that you'll probably feel confortable emailing me in a few years with questions for some zero-priced consulting. Here's an email I received today from a former student.
I took one of your economics courses a few years ago I consider you to be a high authority on all things economics-related. So, I wanted your opinion on a recent discussion I had with a co-worker. It was about the deregulation of the oil industry. He maintains that this deregulation sparked the upward movement of oil prices leading, obviously, to rising gas prices. I know very little about deregulation of anything so I didn't argue with him, I just listened. I His definition of deregulation was the introduction of barrels of oil to the stock market. My very small economic background led me to believe that deregulation was good for lowering prices because the government was lessening its intrusion on whatever industry. What is an accurate definition of deregulation? Has this participated in the rising prices of oil (which have actually been falling)? What kind of deregulation occurred in the oil industry and when? I sent this email to Dr. Walter E. Williams and he directed me to an article which stated that the prices of oil dropped during the years leading up to the end of the 90s. Why did oil go up so quickly during and after 2005? Is it all related to supply or just the fear by speculators that supply was low? Thanks for your time.
How would you respond? The essence of the question deals with what's affecting supply in oil markets, and is deregulation a major factor.

My response was that we have not seen deregulation in the oil markets and that, if anything, regulations have increased, with laws requiring (say) corn-based fuels and new grades requirements for gas, to say nothing of regulations that have allowed exactly zero new oil refineries to be built in the United State since the 1970s (although I have been told that one is now being built). Lobbyists haven't exactly been losing their jobs (if only!), and environmental regulations are often embraced by large firms because they hinder competition from competitors who cannot pay regulatory costs. Less competitive, and more monopolistic, markets result. Speculators are hardly a factor here. If they were such a force in these markets, then why have prices fallen so precipitously over the last few months?

What's more, it is important to think critically about such issues. It is intellectually weak to decide that when markets swing, then it must always result from deregulation. In truth, there is real deregulation (good) and re-regulation that goes under the name of deregulation (bad).

Which brings to mind another question to think about. Why are rising prices bad when we are talking about oil and gas markets, but good when we are talking about housing and stock prices? Is this inconsistent? Email me your thoughts, and we'll discuss these issues in class.

Tuesday, September 16, 2008

Define: surplus, shortage, excess supply, excess demand.

What is the economic case for the practice of what many term "price gouging"?

What signals do price changes send to producers and consumers?

What's wrong with this way of thinking? "Economists claim that when the price of something goes up, producers increase the quantity supplied to the market. But last year, the price of oranges was really high and the supply of them was really low. The economists are wrong!"

How will a substantial increase in the demand for housing affect the wages and employment of carpenters, plumbers, and electricians? OR, for that matter, how will a substantial decrease in the demand for housing affect these wages? (Here is an article dealing with this issue from Sunday's Birmingham News.)

What's wrong with this way of thinking? "Economists argue that lower prices will result in fewer units being supplied. However, there are exceptions to this rule. For example, in 1972, a very simple ten-digit electronic calculator sold for $120. By 2000, the price of the same type of calculator had declined to less than $5. Yet business firms produced and sold many such calculators in 2000 than they did in 1972. Lower prices did not result in less production or in a decline in the number of calculators supplied."

This weekend, Alabama plays the University of Arkansas (the"Razorbacks") in beautiful Fayetteville, Arkansas. Assume that at one hour before the game, it appears that many people want to go to the game but cannot find tickets for sale at the their face value. Verbally and graphically describe this market. Can you graph it? What role are scalpers playing?

Today's Birmingham News reports that there are fewer shortages in gasoline in Alabama, relative to other states, in the aftermath of Hurricane Ike. What does this tell us about relative price flexibility in Alabama compared to those other states? Explain graphically.

Which of the following is a positive economic statement?
a. An increase in the minimum wage will reduce employment.
b. The minimum wage should be increased to reduce poverty.
c. Social conscience demands that we increase the minimum wage.
d. Thoughtful people oppose an increase in the minimum wage.

Which of the following do you think would lead to an increase in the current demand for beef?
a. higher pork prices
b. higher consumer income
c. higher prices of feed grains used to feed cattle
d. widespread outbreak of mad cow or foot-and-mouth disease
e. an increase in the price of beef

Try this exercise (for fun).

Previous test question:

Talladega Superspeedway, which holds almost 200,000 spectators, is in the tiny town of Talladega, Alabama.

(3 points) On the weekend of the big race, hotel rooms in Talladega rent for $300 per night. On non-race weekends, they rent for $50 per night. Why?
(4 points) What happens if the Talladega City Council imposes an ?anti-gouging? ordinance that caps the price of rooms at $50 per night?

What must happen for shortages and surpluses to persist?

What socially beneficial results occur when relative prices rise? I.e., what is their effect on consumers and producers? How is this related to Smith's "invisible hand"?

Sunday, September 14, 2008

I, Pencil in Newsweek:
Improbable as it might seem, perhaps the most important fact for a voter or politician to know is: No one can make a pencil. That truth is the essence of a novella that is, remarkably, both didactic and romantic. Even more remarkable, its author is an economist. If you read Russell Roberts's "The Price of Everything: A Parable of Possibility and Prosperity" you will see the world afresh—unless you already understand Friedrich Hayek's idea of spontaneous order.
Read the whole piece here.

Thursday, September 11, 2008

Remember, we will be taking our tests now using Scantrons. Be sure to bring this one to each test. If you do not bring one, you will not be allowed to take the test.

Define the Law of Demand, demand schedule, and demand curve.

Define: substitutes and complements. What are perfect substitutes and perfect complements? How would a change in the price of good A result on the market demand of good B if A and B are complements? Give an example.

Differentiate between changes in quantity demanded and changes in demand. Differentiate between changes in quantity supplied and changes in supply.

What causes the demand curve to shift left or right?

Define: Law of Supply. How many of the following "goods" do you think conform to the the general law of supply? Explain your answer in each case.
a. gasoline
b. cheating on exams
c. political favors from politicians
d. the services of heart specialists
e. children
f. legal divorces

True or false: If global warming has the effect of allowing farmers to produce more crops due to longer summers, then the result would be an increase in the quantity supplied of agricultural goods.

What are some factors that affect demand? supply?

Which of the following do you think would lead to an increase in the demand for beef?
a. higher pork prices
b. higher consumer income
c. higher prices of feed grains used to feed cattle
d. widespread outbreak of mad cow or hoof-and-mouth disease
e. an increase in the price of beef

Wednesday, September 10, 2008

Given our lecture yesterday, it should not be surprising that Socialism.net approves of the federal takeover of Fannie and Freddie and then urges "let's take over the rest."
Textbook prices have risen three-fold since 1987, according to this article in the Birmingham News. Read it. The federal government is now getting involved, with legislation to curtail bundling by textbook publishers, a tactic that helped them counter losses due to the burgeoning Internet resale market. The article even notes the practice of scanning text pages and posting them to Pirate Bay.

Violating bundling violates the property rights of the publishers, notwithstanding the immense cost to students that bundling entails. But attacking bundling does not solve the industry's problems with respect to the Internet. If bundling becomes forbidden, what other ways might textbook publishers respond to the Internet threat?

Tuesday, September 09, 2008

Read the summary to "Private Property Rights to Wildlife: The Southern Africa Experiment" by Muir-Leresche and Nelson. They write: "It is thus particularly significant that in the past 30 years Zimbabwe, Namibia, and South Africa have altered their legal regimes to give full control over the use of wildlife to the private owners of the land on which the wildlife are located. Prior to that, private landowners had limited incentives to increase wildlife populations, because the state denied them the full opportunity to profit from wildlife."

What two important functions are performed when property rights institutions are established and enforced? (Answer in terms of Bill Gates's property rights over the code to Windows and that house next door to Sunny King in Anniston.)

What is the significance of this guy (and how would you interpret the quote provided at that link)?

Define: specialization and division of labor. (Be sure to read Adam Smith's pin factory example nearby.)

True or false and explain: The benefits that can accrue to society from well-defined property rights can occur as long as property owners hold a title to their property.

Define: comparative advantage. I LOVE Alabama wine. Based on the Law of comparative advantage, why shouldn't I support a state-funded program to encourage the development of the Alabama wine industry?

Define: capitalism and socialism. In a market economy, how is the new wealth created distributed? How did Marx critique this system?

Define command economies. How does the lack of market prices hurt socialist economies? What would happen if I took points away from A students to give to F students, so that everyone would pass this class with a C average?

What are voice and exit? How are they different in the public and private sectors? (See the Birmingham News editorial mentioned in class today, discussing a significant exit in Birmingham's public sector. What evidence is there that this has significantly affected the operation of Birmingham's public schools?)

"The government should provide goods such as health care, education, and highways because it can provide them free." Is this statement true or false? Explain your answer.

"The economic way of thinking stresses that good intentions lead to sound policy." Is this statement true or false? Explain your answer.

"Positive economics cannot tell us which agricultural policy is better, so it is useless to policymakers." Evaluate this statement.

Which of the following is a positive economic statement?
a. An increase in the minimum wage will reduce employment.
b. The minimum wage should be increased to reduce poverty.
c. Social conscience demands that we increase the minimum wage.
d. Thoughtful people oppose an increase in the minimum wage.

Thursday, September 04, 2008

What is the difference between normative and positive economics? What's scientific about economics? Can an argument be valid and not sound? Explain.

What are some synonyms for preferences? What are some synonyms for constraints? (See the movie about preferences and constraints.

Define: Ceteris paribus.

Why does voluntary trade increase utility? What are transaction costs and how can they reduce the benefits of trade? What are some examples of things provided by the market to reduce transaction costs?

What are property rights institutions? What are the four consequences of well-defined property rights, as discussed in class?

Read the summary to "Private Property Rights to Wildlife: The Southern Africa Experiment" by Muir-Leresche and Nelson. They write: "It is thus particularly significant that in the past 30 years Zimbabwe, Namibia, and South Africa have altered their legal regimes to give full control over the use of wildlife to the private owners of the land on which the wildlife are located. Prior to that, private landowners had limited incentives to increase wildlife populations, because the state denied them the full opportunity to profit from wildlife."

True or false and explain: The benefits that can accrue to society from well-defined property rights can occur as long as property owners hold a title to their property.

Tuesday, September 02, 2008

The marginal analysis of tea brewing:

It doesn’t take an econ Ph.D. to brew tea—but Barry has one and sometimes it actually helps. Here’s how. Sugar, like most goods, has a declining marginal utility. One teaspoon takes away tea’s bitterness. Another adds a nice sweetness. That’s where we stop. More sugar add calories but not much more taste. By the time you’ve got teaspoons per serving, it’s liquid candy. Green dragon Tea is organic and just a tad sweet. Honestly yours, Seth and Barry.
Please note the link to "I, Pencil" on the right.

Define economics, microeconomics, and macroeconomics. What two elements are important in any definition of economics?

What are the three factors of production? What is the difference between an economic good and a free good? Define opportunity cost. Why are scarce goods never free (but sometimes zero-priced)?

What is economizing behavior?

The Kennedy Center wants more middle and lower income earners to attend its concerts. What is a good way to achieve this goal, given that individuals economize?

Why haven't CAFE standards worked?

The great social philosopher Gordon Gekko (from the movie Wall Street) said, "Greed is good." What are some of the social advantages of human selfishness, as discussed in class?

What does it mean to think on the margin? Define marginal analysis.

What is the difference between a good economist and a bad economist, as discussed today in class? Give examples. Why is there a bias toward bad economics in a democracy?

Wednesday, November 28, 2007

Incentives matter (part 3):

Incentives matter (part 2):

A Yale economics professor and a Yale law school professor are hoping that the next diet trend to take off is their own, which involves getting dieters to sign binding contracts committing to pay significant sums of money if they fail to meet their weight-loss goals.

The economist, Dean Karlan, tested the method himself, promising to hand over $1,000 to a friend every week that he didn't drop one pound. Soon enough, he lost 10 pounds, getting down to 170 pounds without paying a cent.

Now, Mr. Karlan and Ian Ayres, the law professor who also teaches at Yale's school of management, are launching a company based on this strategy. StickK will officially open next month, just in time for New Years' resolutions aimed at losing pounds gained at holiday parties and family feasts. The company will have a Web site offering individuals hoping to reach a goal — anything from sticking to a diet to learning to ride a unicycle — legally binding contracts where they will pay a set dollar amount to charity if they fail in their endeavor.

[Full article here.]

Tuesday, November 27, 2007

Incentives matter: This Hellend and Tabarrok paper argues that commercial bail and bounty hunters work well in forcing defendants to appear in court and in recapturing them if they do fail to appear compared to those released on their own recognizance or on a public bail system.

Monday, November 26, 2007

Invisible Heart readers will find this story from Dani Rodrik's weblog of interest.

Tuesday, November 20, 2007

What is a price searching firm? Define monopoly. What are the three barriers to entry discussed in class today?

Read about barriers to entry with respect to the legal profession.

Also, here is a remarkable example of spontaneous order.

Graphically show a monopolistic firm earning an economic loss. Under what circumstances might a monopoly firm operate while earning economic losses? Why would a firm want monopoly rights to produce a product that it believes would earn an economic loss?

Show a monopoly earning a normal profit.

Why does marginal revenue not equal demand for a monopoly firm?

Tuesday, November 13, 2007

How does the competitive firm decide on the profit-maximizing level of output? Why is the average cost curve important in this model? Where do average fixed costs show up?

If a competitive firm is earning an economic loss and several other firms in its industry exit the market, then will this firm then earn a normal profit? Explain.

How are competitive firms earning a normal profit affected when costly "homeland security" regulations are imposed on them? If these firms start earning economic losses, then will they have to exit the market? Explain.

Do competitive, price taking firms have supply curves? Explain. Under what conditions do can such firms operate under a loss? What is the shutdown rule?

What happens to economic profits and economic losses in the long run? Why?

Define: increasing , constant, and decreasing cost industries.

Why is perfect competition often used as a benchmark from which to compare other market structures?

Price taking behavior occurs when
A) P = LRAVC.
B) the firm cannot sell all it wants at the market price.
C) the firm faces so much competition that it cannot control its
price.
D) both a and c
E) both b and c

If a firm is making zero economic profit,
A) it will be forced to shut down and leave the market.
B) it will also generally be making zero accounting profit.
C) it is doing as well as typical firms in other markets.
D) it will not survive in the long run.

Thursday, November 08, 2007

What is the Law of Diminishing Marginal Returns?

Colin lives in Lineville [pronounced: LAHN-vl], Alabama, and likes to grow zucchini. He applies fertilizer to his crop twice during the growing season and notices that the second layer of fertilizer increases his crop, but not as much as the first layer. What economic concept best explains this observation?
A) the law of diminishing marginal utility
B) the law of diminishing marginal returns
C) return equalization principle
D) the principal-agent problem

Define long run costs. How is any given point on a long run average cost curve related to a short run cost curve?

Students often confuse (a) diminishing returns related to variable factors of production and (b) diseconomies of scale. Explain the difference between the two, and give one example of each.

What happens to total product when marginal product is negative?

Define: economies and diseconomies of scale. How are they depicted on the long run average cost curve? What industries have been characterized by economies of scale over the course of your lifetimes?

What three factors cause long-run cost curves to shift?

What assumptions are necessary for the perfect competition model? How realistic are they?

Why are firms operating in perfectly competitive markets considered price takers? Why do competitive firms produce at an output level at which marginal revenue equals marginal cost.

How does the competitive firm decide on the profit-maximizing level of output?

Tuesday, November 06, 2007

Define the short run and the long run. What types of industries are likely characterized by longer short runs? Why?

Explain, verbally and graphically, total fixed costs, average fixed costs, total variable costs, and average variable costs.

Graphically, verbally, and mathematically (with equations) explain the relationships between TC, TVC, TFC, ATC, AVC and AFC.

Suppose a firm produces bicycles. Will the firm's accounting statement reflect the opportunity cost of bicycles? Why or why not?

Explain the factors that cause a firm's short-run average variable costs to decline initially, but to eventually increase as output rises.

What happens to average product when marginal product is greater than average product?

At what point does marginal product start to decrease?

When costs that do not change with the level of output are
divided by the output level, you have calculated
A) total cost.
B) average total cost.
C) average fixed cost.
D) marginal cost.

Marginal cost is defined as
A) total cost divided by quantity.
B) the change in total cost resulting from the production of one
additional unit of output.
C) total variable cost divided by the number of units produced.
D) average fixed cost times the number of units produced.

In the short run, if average variable costs equal $20, average
total costs equal $70, and output equals 100, then the total
fixed cost equals
A) $50.
B) $1,000.
C) $5,000.
D) $9,000.

Thursday, November 01, 2007

In producer theory, how are costs of production derived? What are the three assumptions of producer theory? How are they related to scarcity? What role does the consumer play?

In a market economy, what do firms do? What are residual claimants? Differentiate between the three types of firms discussed in class.

Differentiate between the explicit, implicit costs that firms face. What are total costs? What sunk costs?

What is economic profit? How might it differ from accounting profit? Explain why firms that are making zero economic profit are likely to continue in business.

Which of the following statements do you think reflect sound economic thinking? Explain your answer.
a. "Because we own rather than rent, and the house is paid for, housing doesn't cost us anything."
b. "I own 100 shares of stock that I can't afford to sell until the price goes up enough for me to get back at least my original investment."
c. Private education is costly to produce, whereas public schooling is free."

What is the principal-agent problem? When will the principal-agent problem be most severe? Why might there be a principal-agent problem between the stockholders and the managers of a large corporation?

Tuesday, October 30, 2007

Here is a fascinating interesting story in yesterday's New York Times on gas shortages and price ceilings in Venezuela. (Zero-priced registration required.)
Motorists in the United States smarting from rising gasoline prices, take note: Mr. Taurisano pays the equivalent of $1.50 to fill his Hummer’s tank. Thanks to a decades-old subsidy that has proven devilishly complex to undo, gasoline in Venezuela costs about 7 cents a gallon compared with an average $2.86 a gallon in the United States.
It turns out that this popular subsidy mostly benefits the wealthy and has been in place there since the 1940s.
Assume that Joe's Bakery sells 130 pies at a price of $9, 110 pies at a price of $10, and 95 pies at a price of $11.
a. Calculate the absolute value of the arc elasticity of demand if Joe raised the price of pies from $9 to $10. Is demand in this range elastic or inelastic?
b. Assume that Joe lowers his price from $11 to $9. What is the arc elasticity of demand?

Assume that real incomes fell during the 1990-1991 recession by 10 percent, and that the demand for Yugos increased by 15 percent. Can you determine an income elasticity measure?

Your book notes that the measure of the income elasticity for food is 0.51. Why do you suppose that the measure is inelastic for this good? Would you expect it to increase if looking at specific categories of food? Why or why not?

What are the major determinants of a product's price elasticity of demand? Studies indicate that the demand for Florida oranges, Bayer aspirin, watermelons, and airfares to Europe are elastic. Why?

Detroit mayor Kwame Kilpatrick proposed last year a 2 percent fast food tax in Detroit, with the stated purpose of trying to alter the incentive to eat fast food (as opposed to the purpose of raising revenue). Is his proposal, if passed, likely to be successful? Will it raise much revenue? Answer in terms of elasticity of demand.

(Note: the tax proposal was rejected by Detroit voters, so Kilpatrick then proposed a state law that would impose the tax. It is worded in such a way that would only apply to Detroit. Read more here.) Define: income elasticity, cross elasticity, and elasticity of supply. What signs would you expect for these measures? Why?

***

If the quantity demanded of a product rose from 900 to 1,200 when the price of the product fell from $11 to $9, the arc price elasticity of demand coefficient is equal to
a. -0.20.
b. -0.70.
c. -1.0.
d. -1.42.

The price of a product falls from $15 to $10, and as a result the quantity demanded increases from 240 to 300 units. We can conclude that over this range the price elasticity of demand for the product is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. equal to -0.4.

Friday, October 26, 2007

Remember the Broken Window fallacy, discussed in the first part of this course? Here is a good example of it, applied (predictably) to the California wildfires. Fires must be great for the economy. Thank goodness we get them every year.

Tuesday, October 23, 2007

Answer this question.

If I measure my marginal utility for my 100th McDonald's hamburger to be 8, and my first Coke to be 7, then which one will I consume next?

Define: consumer equilibrium. How do price changes upset consumer equilibrium?

Define: income and substitution effects.

What is elasticity?

What is likely to be more elastic: the demand for JSU T-shirts or the demand for JSU football T-shirts?

Assume that the Internet results in increased competition for the JSU Bookstore. Explain this (verbally and graphically) in terms of a change in elasticity of demand.

University of Chicago Prof. Austan Goolsbee and Yale University Prof. Judith Chevalier argue in a paper that price changes at one Internet site affect sales of both that retailer and its competitor. It considers sales at Amazon.com and BarnesandNoble.com, and finds that "[a] 1 percent price increase at BN.com pushes sales down 4 percent, making price rises a bad idea. By contrast, the same increase at Amazon reduces sales by only 0.5 percent — a net revenue gain." It concludes that Amazon.com has demonstrated it is possible to build large base of customers who will not go to competition if prices are raised. Question: Fully explain this phenomenon in terms of elasticity. What factors probably go into making consumers less price responsive at Amazon.com's web site vs. Barnes and Noble's web site?

Many public colleges and universities have raised tuition in recent years. Will tuition increases result in more revenue? Under what conditions will revenue (a) rise, (b) fall, or (c) remain the same? Explain this in words, focusing on the increased relationship between the increased revenue from the students who enroll despite the higher tuition and the lost revenue from lower enrollment. If the true price elasticity for public university education was -1.2 (as suggested in a recent article), what would you suggest colleges do to expand revenue? Also, how do you suppose the supply and demand for higher education changes during a recession, if at all?

Define: unit elasticity. What do you think would happen to sales revenues if price fell in a market characterized by unit elasticity?

Sue loves ice cream but cannot stand frozen yogurt deserts. Carole likes both and can hardly tell the difference between the two. Who will have the more elastic demand for yogurt?

What effect would the practice of obtaining prescription drugs from Canada on the Internet have on the elasticity of demand for prescription drugs? Why?

What are the major determinants of a product's price elasticity of demand? Studies indicate that the demand for Florida oranges, Bayer aspirin, watermelons, and airfares to Europe are elastic. Why?

Detroit mayor Kwame Kilpatrick proposed last year a 2 percent fast food tax in Detroit, with the stated purpose of trying to alter the incentive to eat fast food (as opposed to the purpose of raising revenue). Is his proposal, if passed, likely to be successful? Will it raise much revenue? Answer in terms of elasticity of demand.

(Note: the tax proposal was rejected by Detroit voters, so Kilpatrick then proposed a state law that would impose the tax. It is worded in such a way that would only apply to Detroit. Read more here.) Define: income elasticity, cross elasticity, and elasticity of supply. What signs would you expect for these measures? Why?

***

For which one of the following goods would you expect the demand to be most elastic?
a. gasoline
b. premium gasoline
c. unleaded gasoline
d. Exxon unleaded gasoline

The demand curve for cigarettes is likely to be
a. horizontal.
b. very flat (but not horizontal).
c. vertical
d. very steep (but not vertical).

John enjoys hockey games more than movies yet in a typical year he goes to 10 movies and 2 hockey games. This suggests that
a. John is clearly not maximizing utility.
b. if John is rational, hockey must be more expensive than movies.
c. if John is rational, movies must be more expensive than hockey.
d. the price of NASCAR races (a hockey substitute) has increased.
e. none of the above

Which one of the following goods would likely have the most elastic demand?
a. Kellogg's corn flakes
b. salt
c. a new Toyota automobile
d. fresh green beans

If a 10 percent rise in airfares leads to a 5 percent increase in total expenditures on air travel, the price elasticity of demand for air travel in this range must be
a. 2.0.
b. elastic.
c. 0.5.
d. inelastic.

If the board of regents of a major state university system plans to raise tuition in order to increase revenues, the regents must believe student demand is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. perfectly elastic.

Thursday, October 18, 2007

Define: rent seeking. Explain, verbally and graphically, the economic case against minimum wages. Who benefits from minimum wage laws? How does rent seeking fit into this analysis?

Explain some of the full costs associated with wealth transfers suggested by public choice analysis.

Define: utility, marginal utility, marginal benefit, diminishing marginal utility.

Why consumers treat political and market goods differently.

Explain the relationship between total utility and marginal utility. What is the principle of diminishing marginal utility? Is it possible to have increasing marginal utility?

What is the slope of the total utility curve (upward or downward) in the range of negative marginal utility?

Which of the following most directly reflects the law of diminishing marginal utility?
a. After watching two football games, Terry decides to watch a third game.
b. A sports fan enjoys watching Monday night football rather than going to the theater.
c. After listening to three compact discs, Kim decides to go bowling rather than listen to a fourth disc.
d. A musician receives the biggest ovation of the evening after playing the final number of a recital.
In the year 2020, newspapers will be smaller and mostly zero-priced, or so predict some futurists queried by the World Association of Newspapers.

Tuesday, October 16, 2007

Explain how voters can be considered consumers and how governments can be considered producers. What limits are there to this analogy?

Define rational ignorance. What are some reasons why we'd expect consumers to make better decisions than voters? Why is voting not rational? Why is voting rational?

Explain how voting for a politician is like buying a bundled good. How does this help politicians deviate from their constituencies' interests? Look at the argument made here. Explain it in terms of point 3 from today's lecture.

George Bernard Shaw wrote that "A government that robs Peter to pay Paul can always depend on the support of Paul." Relate this statement to the special interest effect. How does this affect consumer surplus? How does this affect producer surplus?

"Since government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises." Evaluate this view.

Define: the special interest effect. Give examples. Why would producers seek political favors that have the effect of reducing producer surplus? Explain verbally and graphically.

An increase in market demand for a normal good other things being equal will lead to
a. A fall in consumer surplus and a rise in producer surplus
b. A fall in both consumer and producer surplus
c. A rise in consumer surplus and a fall in producer surplus
d. A rise in both consumer and producer surplus

Consumer surplus in a market will tend to be higher when demand is
a. income elastic
b. income inelastic
c. price inelastic
d. price elastic

Which of the following is a true statement about the effect of a government-imposed minimum price floor when the price set is above the normal free market price?
a. If the government imposes a price floor, total consumer surplus will decrease
b. If the government imposes a price floor, all firms in the market will gain
c. If the government imposes a price floor, there will be a shortage
d. If the government imposes a price floor, consumer surplus will increase

What is the definition of consumer surplus?
a. The difference between the consumer's willingness to pay and and the price actually paid for the product.
b. The total value placed on products by the market
c. The difference between the consumer's willingness to pay and the firm's cost of the product.
d. The total value placed on products by consumers

Most of the benefits to agricultural support schemes such as the European Common Agricultural Policy go to
a. Consumers
b. The Government
c. Producers
d. Everyone gains equally from price supports
Today's Dilbert illustrates the difference between pecuniary and non-pecuniary wealth:

Wednesday, October 10, 2007

Now two other bands--Oasis and Jamiroquai--are following Radiohead's example. I have never heard of these groups either (have you?). Just the same, I would not be surprised if this became the promotion/distribution scheme of choice for all bands that make the brunt of their income via live performances relative to CD and iTunes sales.

Tuesday, October 09, 2007

What are public goods? Give examples. Why do many economists think that they pose problems for society?

Define asymmetric information. Why would some economists justify government intervention in the presence of asymmetric information? Why would some economists not justify it?

New York Magazine says: Grin and Share It: "The music industry’s lame lawsuits against MP3-loving kids aren’t going to put the file-sharing genie back into the bottle. As Martha might say, it’s a good thing."

Which of the following is true about the market and public sector?
a. Competition is not present in the public sector.
b. There is more free choice for individual consumers in the market sector.
c. The public sector utilizes the price mechanism more than the market sector.
d. The link between the consumption of a good and the payment for a good is clearer in the public sector.

Compared to the ideal, when producing a good generates external costs, market allocation will likely result in an output that is too
a. large and a price that is too high.
b. large and a price that is too low.
c. small and a price that is too high.
d. small and a price that is too low.

A public good is a good
a. produced by the government.
b. that, if made available for consumption by one person, is also available for the benefit of others.
c. produced by private firms but financed by the government.
d. consumed by private individuals and financed by public contributions.

Monday, October 08, 2007

Here is an audio interview with a George Mason economist on the Radiohead story. A key point here is that Radiohead is among the first bands to try this business model. This story also illustrates the decades-long decentralizing trends that we discussed in class.

Thursday, October 04, 2007


What is Jerry Lewis' opportunity cost of doing interviews?

Compare the factors that explain resource allocation in the private and public sectors.

What are the full costs of government spending?

How does government provide a protective function to society? Are there any losses to society for this protection?

Explain government's justification for reducing antitrust activities.

What are externalities? Give examples of positive and negative externalities. How do many economists justify the role for government in the presence of negative externalities? Of positive externalities?

Wednesday, October 03, 2007

What are some non-coercive/market solutions that would deal with problems like this?

Tuesday, October 02, 2007

Graphically and verbally explain tax incidence in the labor market.

In case you're interested, here are the most expensive items on eBay.

How does Gwartney define government? What are the other definitions of government discussed in class? Explain the allocative efficiency rationale for government.

How does competitive behavior result in public and private markets?

What is the one-to-one payment-consumption link? Give examples. Explain how weakening it can result in misallocation/waste of goods.

Here is the data from the Northeast-Midwest Institute discussed in class. Look at the third column. According to this, there are now 32 net tax-consuming states. (Alabama ranks sixth.)
From yesterday's New York Times:
How much would you pay for the next Radiohead album, “In Rainbow”? This is not a trick question: Your answer will be as binding as a dictator’s edict.

“IT’S UP TO YOU,” the rock band’s site informs customers pre-ordering the digital download, which will be available Oct. 10. Doubters get a second assurance: “NO REALLY. IT’S UP TO YOU.”

As proof, the order form’s section for price is blank — and it will accept the lowest possible amount for the site: One British penny (about two American cents). After a perfunctory credit-card charge, Radiohead, one of the most popular and innovative rock bands of the past two decades, will gladly hand over a copy of the whole album for less than a dollar, PC World concluded in an article noting that Apple’s iTunes Music Store was left out of this deal.

There is no maximum price, nor any other guidance, setting up what is may be the biggest experiment in digital-era music-industry pricing to date. What are people willing to pay for music? How many will pay full price? How will the average price compare to what a typical record company would likely have charged? Will people pirate it anyway?
Read the full article here.

Tuesday, September 25, 2007

Verbally and graphically explain labor and loanable funds markets. What happens to interest rates when savers decide to save more? Show graphically.

Economist Roy Cordato notes the relationship between resource markets and product markets to make the economic case against recycling, in this 1995 article.

What are price controls? How are they maintained? Explain, verbally and graphically, price ceilings and price floors.

Define tax incidence. What is the difference between economic incidence and legal incidence?

What must happen for shortages and surpluses to persist?

What socially beneficial results occur when relative prices rise? I.e., what is their effect on consumers and producers? How is this related to Smith's "invisible hand"?

Here is an old news story about someone trying to sell a kidney on eBay.

* * *

Which of the following events would be illustrated as a shift in the supply curve for handguns?
(I) a decrease in the price of resources used in producing handguns
(II) an improvement in technology, reducing the production cost of handguns
(III) an increase in the price of rifles, a substitute product for handguns

a. II only
b. III only
c. I and II only
d. I, II, and III

A decrease in the price of leather used to make shoes would cause the
a. demand for shoes to decrease.
b. demand for shoes to increase.
c. supply of shoes to decrease.
d. supply of shoes to increase.

Friday, September 21, 2007

Campus bookstores are beginning to enforce policies that discourage students from recording textbook prices so they can compare with books offered for sale online.
Jarret A. Zafran ’09 said he was asked to leave the Coop after writing down the prices of six books required for a junior Social Studies tutorial he hopes to take.

“I’m a junior and every semester I do the same thing. I go and look up the author and the cost and order the ones that are cheaper online and then go back to the Coop to get the rest,” Zafran said.

“I’m not a rival bookstore, I’m a student with an I.D.,” he added.
[Full story here.]

How are bookstores trying to affect the slope of the demand curve for textbooks through these policies? If the Internet makes substitutes more available, what are some ways that booksellers (campus bookstores, textbook publishers) will respond?