Monday, November 16, 2009

Can you tell me how to get to Sesame Street?

There are three groups in Marietta. Their demand curves for public television in hours of programming, T, are given respectively by:

W1 = $200 - T
W2 = $240 - T
W3 = $320 - 2T.

Suppose public television is a pure public good that can be produced at a constant marginal cost of $200 per hour.

a) What is the efficient number of hours of public television? Explain how you determined the answer.

b) How much public television would a competitive private market provide? Explain how you determined the answer.

Thursday, November 12, 2009

A Mankiw Quiz

The following question was posed by Harvard economist Greg Mankiw on his well-read blog. See if you can provide an answer.

Only one firm produces and sells soccer balls in the country of Wiknam, and as the story begins, international trade in soccer balls is prohibited. The following equations describe the monopolist’s demand, marginal revenue, total cost, and marginal cost:

Demand: P = 10 – Q
Marginal Revenue: MR = 10 – 2Q
Total Cost: TC = 3 + Q + 0.5 Q^2
Marginal Cost: MC = 1 + Q

where Q is quantity and P is the price measured in Wiknamian dollars.

a. How many soccer balls does the monopolist produce? At what price are they sold? What is the monopolist’s profit?

b. One day, the King of Wiknam decrees that henceforth there will be free trade—either imports or exports— of soccer balls at the world price of $6. The firm is now a price taker. What happens to domestic production of soccer balls? To domestic consumption? Does Wiknam export or import soccer balls?

c. In our analysis of international trade in Chapter 9, a country becomes an exporter when the price without trade is below the world price and an importer when the price without trade is above the world price. Does that conclusion hold in your answers to parts (a) and (b)? Explain.

d. Suppose that the world price was not $6 but, instead, happened to be exactly the same as the domestic price without trade as determined in part (a). Would anything have changed when trade was permitted? Explain.

Tuesday, November 3, 2009

Buckeyes or Wolverines?

Suppose a student athlete has two options: Play football for the Ohio State University or play football for the University of Michigan. The athlete anticipates that if he stays healthy he will play in the NFL and his salary will be $1,700,000 if he attends OSU and $1,250,000 if he attends UM. If he does not make it to the NFL, the athlete anticipates his salary will be $85,000 per year if he attends UM and $65,000 if he attends OSU. Finally, the student anticipates the odds of a career-ending injury at UM are 15% whereas at OSU the odds are 6%. Given this information, which school will the student attend, all else equal? Show all of your calculations which lead to your answer.

Congratulations to Xiaotian (Eric) Ma for being the first to figure out this week's question. In making the decision over which college to attend, a simple decision rule might be to choose the college that, on average, provides the higher expected income. The probability of injury will govern the likelihood that the young athlete will ever play professionally or settle for a regular career with his bachelor's degree.

Thus, the expected value of attending each college can be calculated as:

EV(OSU) = (0.94)($1,700,000) + (0.06)($65,000) = $1,601,900
EV(UM) = (0.85)($1,250,000) + (0.15)($85,000) = $1,075,250

As Eric points out, OSU provides the young athlete with the better income potential.

Tuesday, October 20, 2009

Name That Economist

One of the brightest up-and-coming young economists, this scholar made headlines when she published a paper that contradicted an earlier published paper that she had written based on her dissertation. The daughter of two economists, she was the subject of several research papers on account of her unusual bedtime behavior while a two-year old.

Who is she and what topic caused her to write a paper contradicting her dissertation work? Also, what was her unusual bedtime behavior?

Congratulations to Yang Yang for correctly identifying Emily Oster as the mystery economist. Read more about Dr. Oster here. See her in action here.

Monday, October 5, 2009

Forecasting the Nobel Prize in Economics

The Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel (aka the Nobel Prize in Economics) will be announced on Monday, October 12, 2009. Of the 62 men who have won the award outright or shared in it since the prize began in 1969 (no woman has yet to win it), 42 have been Americans. The leading university homes of the winners include the University of Chicago (10), followed by Columbia (4), Harvard (4), University of California-Berkeley (4), and Cambridge University, England (4).

Now, let's see how well you can forecast. Who will be awarded the 2009 Nobel Prize in Economics? Your educated guess must be posted as a comment to this post before the Nobel Prize announcement is made. In the event that more than one person submits identical guesses, the earlier timestamp of the comment will determine the winner. The bonus points will be added to the winner's next exam score following the Nobel announcement on October 12.

No one guessed the 2009 winners of the Nobel Prize in Economics. Congratulations to Elinor Ostrom (Indiana University) and Oliver Williamson (Cal-Berkeley) on this year's award

Monday, September 28, 2009

They're in Hot Water Now!

Last year Antoine and Antawn occupied separate apartments; each consumed 300 gallons per month of hot water. This year they are sharing a larger apartment. To their surprise, they find that they are consuming 1000 gallons per month. Explain.

Monday, September 21, 2009

Dallas Cowboys Stadium

The new Dallas Cowboys Stadium got me thinking: At a football stadium where some fans live nearby and others travel great distances to attend, where would you expect to find a higher percentage of long-distance travelers: in the cheap seats or in the expensive seats? Why?

Monday, September 14, 2009

Farm Decisions

An economy consisting of farms has the unusual production function for each farm as described in the table below. Apparently with an even number of workers, they play cribbage.

Number of Workers Marginal Product
1 20
2 15
3 19
4 14
5 18
6 13
7 17
etc. etc.

If you had 10 farms and 40 workers, how would you allocate them among the farms? How much total output would your farms produce? Explain.

Congratulations to Qi Wu for being the first to come up with a correct answer to this week's question. Read her answer (spread over two comments) in the comments section.

By the way, thanks to the late George Stigler for the above question.

Monday, September 7, 2009

Marietta Armory Square

The city of Marietta is currently debating the future of the old Armory building on Front Street. Suppose that the mayor has proceeded with his plans to refurbish the building and use it as a transportation hub and visitor center. The estimated cost to complete the museum was initially $1.6 million. The mayor also believes that the transportation hub will generate an estimated benefit of $2.4 million.

The benefit estimate appears to be correct, but costs to date total $2.7 million, and the transportation hub still is not ready. The cost of completing the transportation hub, X, is uncertain.

City Council member Flintstone wants to stop now: "Whatever the value of X, it is clear that the transportation hub will yield negative net benefits." Council member Rubble wants to continue: "If we stop now, we will have wasted $2.7 million."

Comment. How should the decision depend on the value of X?

Congratulations to Kaitlin Huck for being the first of three to submit a correct answer. Using marginal analysis, the decision on whether to continue the project or not hinges on the value of X, the cost of completing the project. The $2.7m costs to date are sunk costs and should not affect the decision to continue or stop the project.

Monday, August 31, 2009

Name That Economist

Do you know me? I am a Harvard trained economist and later became the youngest tenured professor ever at Harvard at the age of 28. Both of my parents are economists and two of my uncles are Nobel prize winning economists. Who am I?

Congratulations to Matt Hickman on being the first to identify Larry Summers as the mystery economist. Lawrence (Larry) Summers is the current Director of the White House's National Economic Council. His past positions include Secretary of the US Treasury, Chief Economist for the World Bank, and President of Harvard University.

Sunday, July 5, 2009

Elasticity of Apartment Demand

Suppose that an effective rent ceiling has been established on the market for apartments in Marietta. What sort of disequilibrium would this cause?

Now, suppose the rent ceiling is removed. Evaluate the following statement:

"The removal of the rent ceiling will cause the total expenditures on the part of consumers to rise if the demand for apartments is price inelastic."

Monday, June 29, 2009


If consumers buy 1000 bottles of beer per week, and if the price of beer rises by $0.50 per bottle, then the consumers' surplus will decrease by $500. True, False, or Uncertain. Explain your answer.

I am retiring this question. Using Jacob's numbers, let's assume that the initial price of beer is $2 per bottle and that the demand curve is linear. Furthermore, let's assume that for every $0.50 increase in price, the quantity demand falls by 200 units. These assumptions imply that the demand curve intercepts the price axis at $4.50. The graph below illustrates our situation.

If the price of beer rises from $2 to $2.50, the quantity demanded falls to 800. The resulting loss in consumer surplus is shown as the yellow area. A simple calculation shows that this area equals $450. That is, CS will fall by less than $500.

Wednesday, June 24, 2009

Can You Identify this Famous Economist?

Do you know me? At the start of the 1980s, I bet a world renowned environmental doomsayer that the world was not running out of resources. The doomsayer bet $1,000 in 1980 that five resources (of the doomsayer’s choosing) would be more expensive in 10 years. The doomsayer lost: 10 years later every one of the resources had declined in price by an average of 40 percent. Who am I? (In your answer, include the list of resources involved in the bet.)

Congratulations to Rachel YuanQi for identifying Julian Simon as the economist in question.

Monday, June 8, 2009

Location, Location, Location?

George runs a miniature golf course in Marietta, Ohio. He rents the course and equipment from a large recreational supply company and supplies his own labor. His monthly earnings, net of rental payments, are $800, and he considers working at the golf course just as attractive as his only other alternatives, working as a grocery clerk for $800/month.

Now George learns that his uncle Kramer has died and left him some land in downtown New York City (right next to the Empire State Building). The land has been cleared, and George discovers that a construction company is willing to install and maintain a miniature golf course on it for a payment of $4000/month. George also commissions a market survey, which reveals that he would collect $16,000/month in revenue by operating a miniature golf course there. (After all, there are many more potential golfers in Manhattan that in Marietta.) After deducting the $4000/month payment to the construction company, this would leave him with $12,000/month free and clear. Given these figures, and assuming that the cost of living is the same in New York as in Marietta, should George, a profit maximizer, switch his operation to Manhattan?

Congratulations to Jeremy Jusek for providing the first correct answer. While the revenue estimates clearly indicate that Manhattan is a more lucrative market, it's also likely to be much more costly to operate a mini-golf course in downtown Manhattan given the scarcity of land. As Jeremy points out, the opportunity cost of using the land for a mini-golf course is likely to be extremely high. It's probably better to sell the Manhattan property and stay put in Marietta.

Tuesday, June 2, 2009

Famous Econ Major

Can you identify the famous economics major from the clues below?
  • Corporate big wig in need of a wig.
  • Software is the name of his game.
  • His business partner dropped out of Harvard to start a soon-to-be giant company.
Congratulations to Josh Baker who was the first to discern the mystery econ major as Steve Ballmer, the CEO of Microsoft. You can find more famous economics majors here.

Monday, April 13, 2009

Grade Insurance?

Suppose that a company offers "grade insurance" that works as follows: For each course in which you get a grade below a C, the insurance company pays you $500. Before offering the insurance policy for sale, the insurance company looks over the transcripts of university students and finds that on average 10% of all grades are below a C. Explain why the insurance company would be incorrect in assuming that it would only have to pay claims on about 10% of its policies. What is the implication of your analysis for the optimal premium (i.e., price) the company should charge its customers?

Wednesday, March 4, 2009

Drugs and Crime

Assume that the price elasticity of demand for marijuana is -1.20 and the price elasticity of demand for cocaine is -0.40. Assume further that marijuana and cocaine users get the funds to pay for their habit by resorting to petty larceny. Suppose the government increases enforcement against drug suppliers such that the prices of both illegal goods rise by 20%. What will happen to the price of each drug? What will happen to the amount of petty larceny committed by marijuana and cocaine users? Explain precisely.

Monday, February 23, 2009

Buick or Toyota? You make the call.

If I am an energy-conservation-minded consumer who can't afford to buy a new car, should I rent a 10-year old Buick ($200/year, 20 miles per gallon) or a 10-year old Toyota ($600/year, 40 mpg)? What does my choice depend upon? Explain. (Hint: How many miles would you have to drive each year for the Toyota to become more cost effective than the Buick?)

Congratulations to Andrew Bolton for being the first to provide a correct answer. This question (with a few modifications) came from Robert Frank's Microeconomics and Behavior text. Frank writes that it depends on how many miles you expect to drive:

The impulse of many conservation-minded consumers is immediately to choose the Toyota because of its better gas mileage. But there are only so many used Toyotas to go around. Suppose there are a total of 1000 Buicks and 1000 Toyotas. If I rent a Toyota instead of a Buick, someone else will have to rent a Buick instead of a Toyota. If my goal is to save energy, I should take the Toyota only if the person who will end up with the extra Buick is someone who drives fewer miles each year than I do.

But how can anyone possibly know whether that would happen? If the rental rates of the two cars are determined in the open market-place, and people generally pick the kind of car that minimizes their total driving expenses, we can say this: My choosing the Toyota will reduce society's energy consumption if and only if the Toyota is cheaper for me than the Buick. To see why, first note that if gasoline costs $2 per gallon, the yearly cost of the Buick is given by Cb = $200 + 2M/20 where M is the number of miles I drive each year. The corresponding cost of the Toyota is Ct = $600 + 2M/40. These two costs will be exactly the same if I happen to drive 8000 miles (set Cb = Ct and solve for M). If I drive more than 8000 miles, the Toyota is cheaper for me; if I drive less, the Buick is cheaper.

But how do I know that the person who rents the Toyota I could have rented won't be someone who drives even less than I do? If everyone follows the rule "drive the cheapest car," this clearly cannot happen at the given rental rates. (If the Buick is cheaper for me, it will also be cheaper for someone who drives fewer miles per year than I do.) But what if half the drivers, including me, drive 4000 miles a year while everyone else drives only 3000? If that were the case, then everyone would find the Buick cheaper at the current rental rates. No one would want to rent a Toyota. Rental companies would then discover that they could boost the prices on their Buicks substantially and still manage to rent them all. By the same token, they would have an incentive to cut the rental rates on their Toyotas, rather than watch them gather dust in their parking lots. In the end, the rental rates of the two cars would adjust so that the Toyotas are cheaper overall for the heavy-mileage drivers, the Buicks cheaper for the light-mileage drivers.

Monday, February 16, 2009

Vending Machine Economics

Tokyo's streets are characterized by a plethora of vending machines--dispensing everything from soft drinks, candy, cigarettes, magazines, personal toiletries, and beer. Unlike other major cities such as New York and London, virtually every downtown street corner seems to have at least one vending machine. Explain why vending machines are so prevalent in Tokyo versus more traditional purveying mechanisms such as newsstands, grocery stores, and liquor stores.

Congratulations to Jenny Kuebel (our first two-time winner this semester) for being the first to provide a reasonable explanation for the prevalence of vending machines in Tokyo. I think Jenny hits the nail on the head when she notes that vending machines take up very little space compared to a standard brick and mortar store. The scarcity of land in downtown Tokyo suggests that rents would be very expensive for such brick and mortar stores.

Monday, February 9, 2009

A Beautiful Equilibrium?

The movie A Beautiful Mind details the life of mathematician John Nash, winner of the 1994 Nobel Prize in economics for his contribution to game theory known as the Nash Equilibrium. Consider the following cola pricing game as described by the matrix below.


Cut Price Maintain Price
Coca-Cola Cut Price 50, 50 100, 40
Maintain Price 40, 100 80, 80

Each firm has two strategies: either maintain the current price of their cola, or to cut price. The numbers inside the matrix represent the profits that each firm earns depending on the strategies chosen by each firm. Thus, if Pepsi maintains its price and Coke cuts price, then Coke will earn $100 and Pepsi will earn $40.

What is the Nash Equilibrium for this game? Explain carefully.

Congratulations to Jake Verdoorn for correctly identifying and describing the only Nash Equilibrium in the game above.

Monday, February 2, 2009

(Famous) Economists?

Can you identify the three economists pictured below?

Here are a few clues to help you out.
  • PhD's from the University of Chicago and the other two from the Ohio State University.
  • Dedicated teachers all...out-of-the class their roles are as a woodworker, poet and a roundtable organizer.
Congratulations to Andrew Bolton for recognizing the three economists above as (left to right) Jack Prince, Wen-yu (Frank) Cheng, and Bert Glaze. You are welcome to learn more about these three pillars of Marietta College by visiting the Business & Economics Department's to see tributes displayed on the walls of the B&E Reading Room, Thomas 123.

Monday, January 26, 2009

There's gold in them thar hills!

In the Woody Allen film Radio Days, a character who has never been able to succeed in the world of business decides to begin a career engraving gold jewelry. He argues that this should be especially lucrative because the engraver gets to keep the gold dust from other people's rings. Using economics, explain what is wrong with this character's assessment of his potential career choice?

Friday, January 23, 2009

Experimental Economics

Experimental economics involves the application of laboratory methods as a means of understanding human behavior. By conducting laboratory experiments, economists are able to evaluate competing theories of individual and market behavior where naturally occuring data is absent or limited. Arguably the first use of a market experiment occured in a graduate economics class involving a teacher (who was a well-known economist in the area of industrial organization) and a student (who would later be a pioneer in the field of experimental economics). Can you name the teacher, student, the college, and the year wherein the first recorded use of a classroom experiment in economics took place?

Congratulations to Jenny Kuebel for quickly identifying Edward Chamberlin of Harvard University conducted the first recorded market experiment in 1948. A participant in that experiment was Vernon Smith who was later to become a pioneer in developing a new branch of economic analysis known as experimental economics.