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.