Sunday, March 30, 2008

Can you identify this (not so) famous economist?

Every economics student knows that graphs are a big part of how economists tell "their stories." Indeed, a picture can be worth a 1000 words. Arguably the bible of modern economics, Adam Smith's Wealth of Nations did not contain a single graph or chart. Who is credited with introducing the use of charts to convey economic information?

Congratulations to David Graham for correctly identifying William Playfair as the first economist to incorporate charts in his writings in order to convey difficult to understand concepts. Playfair is credited with inventing the line, bar, and pie charts.

Monday, March 24, 2008

And the winning bidder is . . .?

You want to sell at auction an antique dining-room suite. There are five people who want it, and they're willing to pay $8,000, $9,500, $6,500, $11,000, and $7,500, respectively. Your reservation price (the price above which the bidding must go before you sell it) is $7,000. No one in the room has any information about the value of the suite to anyone else. At about what price will the suite be sold and to whom? Explain.

Congratulations to Yang Di on his back-to-back wins (and third overall). Di was the first to correctly deduce that the winning price will be approximately equal to the value of the second highest bidder. Though auctions can be organized in many different fashions, the most commonly used mechanism is known as the English Auction.

Tuesday, March 18, 2008

Can you identify this famous economist?

Trained as an engineer, this Italian economist made contributions to general equilibrium theory and developed a well-known efficiency criterion. Can you identify the famous economist pictured here and briefly describe his version of an efficient allocation of resources?

Congratulations to Yang Di, our first two-time winner this semester. Di was the first to correctly identify Vilfredo Pareto. According to the Pareto Criterion, an allocation of resources is not optimal if there exists a reallocation that makes at least one person better off without making any other person worse off. Can you imagine if Congress was forced to make policy changes on this basis? Essentially, it would require a unanimous vote to pass any legislation.

Monday, March 10, 2008

Can you guess x?

Suppose that there are 10 people playing a guessing game. Each of the 10 people choose a number between 0 and 100. The average of these numbers is computed, and this average is multiplied by p = 2/3. We call the resulting number x. The person whose number is closest to x wins a big prize, while all others receive nothing. If everybody selects the same number, then the prize is split equally. What number would you select if your objective is to maximize the chance that you win the prize? Explain your strategy choice and then suggest an economic situation that illustrates the essence of this game.

Congratulations to Josh Busser for submitting a correct answer to this week's question. According to Josh, the dominant strategy in this guessing game is to submit the number 0 (zero). Read the comments to see Josh's explanation. This question comes from Andrew Schotter's Microeconomics (3e) and is a description of a class of games known among economists as "beauty contests."

Monday, March 3, 2008

Do high player salaries cause high ticket prices?

Alex Rodriquez, arguably the best baseball player in recent history, has played for the New York Yankees for 4 years. Imagine that Rodriquez becomes a free agent and auctioned himself to the highest bidder. Consider the following two scenarios:

* The Tampa Bay Rays sign Rodriquez to a big contract.
* The New York Yankees re-sign Rodriquez to a big contract.

Would you expect ticket prices to rise for the team that signs Rodriguez? Explain why or why not.

Sorry, no winner this week. Player salaries represent a fixed cost to pro sports teams. Thus, no matter how many tickets a team sells, A-Rod's salary will not change. What matters in the setting of prices for tickets are the marginal costs of selling one more ticket. However, it's reasonable to believe that such costs are quite small in the great scheme of things. The more important factor in determining ticket prices is the demand for tickets. When a team hires a superstar such as A-Rod, you would expect the demand for tickets to surge among fans, thus putting upward pressure on ticket prices. The surge in demand, though, is likely to be seen only in cities/franchises that sign a "new" superstar. When a team simply re-signs its current superstar, it's unlikely that there will be a new surge in demand for a player who has already been playing with the team for four years. Thus, if ticket prices were to rise in any of the cities above, it's likely to be Tampa Bay and not New York.

Finally, it should be clear that rising ticket prices are
not caused by rising player salaries. Rather, it is just the opposite: rising salaries are generated from rising ticket revenues (due to rising ticket demand).