Econ Bonus Question of the Week

Forecasting the 2011 Nobel Prize in Economics

2011-09-26T17:05:00.000-04:00

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (aka the Nobel Prize in Economics) will be announced on Monday, October 10, 2011. Of the 66 men and 1 woman who have won the award outright or shared in it since the prize began in 1969, 46 have been Americans. The leading university homes of the winners include the University of Chicago (10), followed by the University of California-Berkeley (5), Columbia (4), Harvard (4), and Cambridge University, England (4).

Now, let's see how well you can forecast. Who will be awarded the 2011 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 10.

Congratulations to Thomas Sargent (NYU) and Christopher Sims (Princeton) as this year's winners of the Nobel Prize for Economic Sciences for their "empirical research on cause and effect in the macroeconomy."

Unfortunately, no one correctly predicted either of them to win this year.

Name That Economist

2010-11-01T08:33:00.004-04:00

He's tall. He's ranked in the top 20 at IDEAS. He blogs. He's a macro-wonk.

Congratulations to Yang Yang for correctly identifying N. Gregory Mankiw as the mystery economist. A Harvard economist, Mankiw is a renowned macroeconomist and a former chairman of the Council of Economic Advisors for President George W. Bush. He is the author of two popular textbooks in the field and also blogs on a regular basis. And he is 6'2" tall.

Name That Model

2010-10-18T09:49:00.005-04:00

Whenever the renters of self-storage units default on their payments, the owner has the right to sell the contents of the units to the highest bidder. In some states, potential buyers are prohibited from examining the detailed contents of the units; rather, they are merely allowed to "peek" inside before the bidding process starts.

The type of auction described above is an example of a more general situation that economists have studied and modeled. Can you identify the relevant model? What does the model suggest is the optimal bidding strategy in such situations? Winners of such auctions are often said to suffer from a particular fate--can you name it?

Congratulations to Yuan Tao--a three-time winner this semester--for correctly identifying the common value auction (and its associated "winner's curse").

Forecasting the Nobel Prize in Economic Sciences

2010-09-28T12:42:00.005-04:00

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (aka the Nobel Prize in Economics) will be announced on Monday, October 11, 2010. Of the 63 men and 1 woman who have won the award outright or shared in it since the prize began in 1969, 44 have been Americans. The leading university homes of the winners include the University of Chicago (10), followed by the University of California-Berkeley (5), Columbia (4), Harvard (4), and Cambridge University, England (4).

Now, let's see how well you can forecast. Who will be awarded the 2010 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 11.

Congratulations to Peter Diamond (MIT), Dale Mortensen (Northwestern), and Christopher Pissarides (London School of Economics) as the winners of this year's Nobel Prize in Economic Sciences for their work on search frictions in economic markets.

Unfortunately, nobody correctly forecasted this year's winners.

Highest Grossing Film Of All Time?

2010-09-27T13:13:00.004-04:00

Appearing in 2009, James Cameron's Avatar has generated $2,768,529,651 in world-wide gross revenues (according to this link). It is not, however, the highest grossing film of all time when you take into account inflation.

Using the most recent figures for the CPI, calculate the inflation-adjusted gross earnings using the figures supplied by the link above in order to determine the highest grossing film of all time as expressed in August 2010 dollars. Show all of your calculations.

Congratulations to Yuan Tao, our first two-time winner this semester. See his calculations on the top grossing film of all time, Gone With The Wind, in the comments section. Bottom line: $6,285,131,159!

Name That Economist

2010-09-20T08:25:00.004-04:00

She's been an Engineer (MIT), a Tiger (Princeton), and a Bear (Cal-Berkeley). Primarily a macroeconomist, her research focuses on the determinants of business cycles and the impact of fiscal and monetary policies.

Congratulations to Keyuan Gu for being the first to identify Christina Romer as the mystery economist. Dr. Romer, the outgoing Chair of the Council of Economic Advisors, is well known for her early research on the volatility of the economy before and after WWII. Her later research examined the impact of government spending and tax policies on the macroeconomy.

Food Scarcity

2010-09-13T14:08:00.002-04:00

The Worldwatch Institute regularly predicts an increased scarcity of grain worldwide in the coming years and warns that the world is about to run out of food. How could you use the commodity futures page in the newspaper to evaluate this prediction? If professional speculators disagree with the forecasts of the Worldwatch Institute, in who forecasts would you have more confidence? Why?

Name That Economist

2010-09-06T07:54:00.004-04:00

Do you know who I am? I am a bestselling author of advanced microeconomics textbooks and a former Golden Bear academic official. I now work as the top economist for a private sector company on the West Coast.

Congratulations to Yuan Tao for being the first to correctly identify Hal Varian as the mystery economist. Varian is a microeconomist who specializes in the economics of information. He is the former Dean of the UC-Berkeley's School of Information and now serves as the Chief Economist for Google.

CAFE, s'il vous plait.

2010-08-29T19:29:00.007-04:00

Suppose the government raises the fuel economy standard for automobiles from its current 27.5 MPG to 35 MPG by 2020. Will this necessarily mean that Americans will use less gasoline in 2020? Explain why or why not.

Congratulations to Yang Yang for identifying the often overlooked behavioral response that is likely to happen when fuel economy increases. While Tao Yuan correctly identifies a number of other factors that could influence the ultimate consumption choices of gasoline buyers, it was the impact of the rule itself that I was looking for.

Ugly Criminals

2010-03-31T09:14:00.002-04:00

An economist friend of mine made the following claim: "Criminals are uglier than law-abiding people--it's simple economics at work."

Provide an economic explanation for the above claim. Also, provide one testable hypothesis regarding this claim.

Tequila flavored beer, anyone?

2010-03-18T13:10:00.004-04:00

Alcohol is illegal in the dorms at Abstinens College. Why are students more likely to sneak in a couple bottles of, say, tequila, rather than cases of beer, even though most would rather drink beer than tequila?

Congratulations to Yuan Tao for being the first to provide a plausible economic analysis of the drinking dilemma described above.

Name That Economist

2010-03-04T22:31:00.003-05:00

While Keynes is often thought of as the "father of modern macroeconomics," this Scandinavian economist could also lay claim to the title. Known for his socialist leanings, he favored the development of a welfare state that sought to redistribute income to those less fortunate. Our mystery economist was also known to espouse provocative views on various social issues...even leading to some time in jail because of his views.

Congratulations to Yang Yang for being the first (and only) person to correctly identify Knut Wicksell as the mystery economist.

Gasoline boycott?

2010-02-19T09:48:00.004-05:00

The price of gasoline is now exorbitant. A good scheme for solving the problem is for consumers to boycott gasoline, driving down its price; when the price is low, consumers can resume their higher purchases.

True or False? Explain your answer.

Congratulations to Jennifer Wolfe for being the first to provide a correct answer to this week's question.

Name That Economist

2010-02-12T07:32:00.003-05:00

Here is a haiku to describe the mystery economist:

His foundations told,
a math story of econ,
and led to a prize.

Your answer must also come in the form of a haiku!

Congratulations to William Hamilton for correctly identifying Paul Samuelson as the mystery economist (and using a haiku along the way).

Simpson's Paradox......Doh!

2010-02-04T14:28:00.009-05:00

Professor Neo Klassikle asked his research assistant to find out if the average wage of women rose or fell over a ten-year period. The following morning, the assistant returned and said, "I wasn't able to find anything on women, but I found out that the average wage for all workers fell during that period while the average wage for men rose. It must, therefore, be true that the average wage for women fell." "Not necessarily," said the professor. "It's possible that the average wage for women rose during that period, too." How could that happen? Use a numerical example to support your answer.

Congratulations to Yuan Tao for correctly explaining the seemingly odd set of facts described above. The problem presents an application of Simpson's Paradox.

The Real Reason Dinosaurs Became Extinct

2010-01-28T13:00:00.010-05:00

If doctors became better at curing lung cancer what would happen to the number of people who smoke cigarettes? What would happen to the overall number of people who died from lung cancer? Explain.

(The title to this blog post is in reference to a The Far Side cartoon by Gary Larson in which several dinosaurs were standing around smoking cigarettes--very funny stuff.)

Congratulations to Yang Yang for being the first to submit a reasoned answer to this week's question.

Professor Salaries = f (Student Evaluations)

2010-01-21T14:59:00.005-05:00

Imagine that starting next year, professors' salaries become determined entirely by student evaluations. Professors with the highest ratings will earn around $140,000 a year, while those with the lowest scores will receive about $30,000 a year. What will happen to teaching quality?

Congratulations to Elizabeth Ekey for providing a cogent analysis of the professor compensation scheme. Read Elizabeth's arguments in the comments section.

(This question is borrowed from James D. Miller's Principles of Microeconomics. The "winning" answer will exhibit concise and complete analysis.)

I am a famous economics major. Who am I?

2010-01-14T08:13:00.005-05:00

Detroit and Philadelphia were my playgrounds when I was younger, but Washington D.C. is where I play now.

Congratulations to Josh Bibb for being the first to recognize Senator Jim Bunning as the famous econ major. Bunning is a Hall of Fame baseball pitcher who mostly played for the Detroit Tigers and the Philadelphia Phillies.

Can you tell me how to get to Sesame Street?

2009-11-16T18:44:00.003-05:00

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.

A Mankiw Quiz

2009-11-12T22:23:00.003-05:00

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.

Buckeyes or Wolverines?

2009-11-03T12:55:00.005-05:00

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.

Name That Economist

2009-10-20T15:24:00.006-04:00

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.

Forecasting the Nobel Prize in Economics

2009-10-05T12:36:00.005-04:00

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

They're in Hot Water Now!

2009-09-28T12:48:00.004-04:00

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.

Dallas Cowboys Stadium

2009-09-21T23:27:00.003-04:00

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?

Farm Decisions

2009-09-14T16:22:00.004-04:00

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.

Marietta Armory Square

2009-09-07T11:28:00.006-04:00

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.

Name That Economist

2009-08-31T10:42:00.007-04:00

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.

Elasticity of Apartment Demand

2009-07-05T17:46:00.004-04:00

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."

Beeronomics

2009-06-29T09:12:00.004-04:00

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.

Can You Identify this Famous Economist?

2009-06-24T09:10:00.005-04:00

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.

Location, Location, Location?

2009-06-08T08:35:00.001-04:00

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.

Famous Econ Major

2009-06-02T09:17:00.003-04:00

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.

Grade Insurance?

2009-04-13T09:21:00.003-04:00

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?

Drugs and Crime

2009-03-04T14:37:00.006-05:00

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.

Buick or Toyota? You make the call.

2009-02-23T08:17:00.005-05:00

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 C_b = $200 + 2M/20 where M is the number of miles I drive each year. The corresponding cost of the Toyota is C_t = $600 + 2M/40. These two costs will be exactly the same if I happen to drive 8000 miles (set C_b = C_t 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.

Vending Machine Economics

2009-02-16T12:16:00.007-05:00

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.

A Beautiful Equilibrium?

2009-02-09T12:27:00.006-05:00

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.

		Pepsi
		Cut Price	Maintain Price
Coca-Cola	Cut Price	50, 50	100, 40
Coca-Cola	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.

(Famous) Economists?

2009-02-02T15:10:00.005-05:00

Can you identify the three economists pictured below?

Here are a few clues to help you out.

PhD's all...one 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.

There's gold in them thar hills!

2009-01-26T14:44:00.004-05:00

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?

Experimental Economics

2009-01-23T08:10:00.005-05:00

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.

Escaping with Economics

2008-10-31T07:47:00.005-04:00

You are a hero with a broken sword (Conan, Boromir, or your favorite Dungeons and Dragons character) being chased by a troop of bad guys (bandits, orcs, . . .). Fortunately you are on a horse and they are not. Unfortunately your horse is tired and they will eventually run you down. Fortunately you have a bow. Unfortunately you have only ten arrows. Fortunately, being a hero, you never miss. Unfortunately there are 40 bad guys. The bad guys are strung out behind you, as shown.

How do you get away? (Use economics to help you escape.)

Note: You cannot talk to the bad guys. They are willing to take a substantial chance of being killed in order to get you--after all, they know you are a hero and are still coming. They know approximately how many arrows you have.

Congratulations to Cody Meglio for providing a clever answer to this week's question. Read the comments to find out more.

To coach, or not to coach? That is the question!

2008-10-16T14:47:00.004-04:00

"An examination of the statistics for the Marietta College men's basketball team indicates that when the third string played more, the winning margin increased. If coach VanderWal played the third string more, we would win by a bigger margin."

Evaluate this argument. Also, what Latin term best describes the logical fallacy employed above?

Congratulations to Cody Meglio for providing a correct answer to this week's Bonus Question. Read the comments for Cody's answer: post hoc ergo propter hoc.

Nobel Prize in Economic Science

2008-10-01T08:19:00.007-04:00

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 13, 2008. Of the 61 men who have won the award outright or shared in it since the prize began in 1969 (no woman has yet to win it), 41 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 2008 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 submit 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 13.

Congratulations to Paul Krugman for winning this year's Nobel Prize in Economics. Unfortunately, nobody had guessed that Dr. Krugman would be the winner this year. Here's a nice summary of Krugman's work. In case you didn't make the connection, Krugman is a co-author (along with his wife, Robin Wells) of the Principles of Microeconomics text used in Econ 211.

Cleveland or Boston?

2008-09-24T14:56:00.003-04:00

Suppose you have two job offers upon graduating from Marietta College. One offer is from a company in Cleveland for $45,000 per year. The other offer is from a company in Boston for $60,000. Assuming that all other aspects of the two jobs are identical and that you are motivated solely by monetary rewards, which job offer will you select and why? (Show any necessary calculations as a part of your answer.)

Congratulations to Alissa Bamberger for being the first to recognize that the lower nominal job offer in Cleveland is the more lucrative of the two when adjusted for inflation (see her answer in the comments section).

More Seatbelts = More Deaths?

2008-09-16T15:13:00.006-04:00

Suppose for a particular location, we have the following two facts:

Fact 1: Over the past 20 years, automobile companies have introduced a number of safety devices such as seatbelts and air bags.

Fact 2: Over the past 20 years, the number of highway fatalities per mile driven has increased.

How can you reconcile Fact 1 with Fact 2?

Congratulations to Jeff Staudt for being the first to submit a satisfying answer to the above conundrum. Take a hard look at the picture above and then read his answer in the comments section. Essentially, Jeff is describing what is commonly referred to as a "moral hazard" problem. The idea of using a spike on the steering column has been attributed to Sam Peltzman. Here's a related cartoon.

Envelope stuffing

2008-09-10T08:37:00.004-04:00

Suppose you had $1000 that you split into 10 separate envelopes so that you could give any amount of money from $1 to $1000 when asked. How much money would you put in each envelope?

Congratulations to Matt Ginsky for being the first to submit the correct answer. The correct distribution of the $1000 into 10 envelopes would be: 1, 2, 4, 8, 16, 32, 64, 128, 256, and 489. (Do you notice a trend in the first 9 numbers?)

Can you identify this famous economist?

2008-09-01T07:59:00.004-04:00

Known for his research on productivity in the service sector, models of money demand, and pricing in markets subject to "hit and run" competition, this economist is a perennial contender for a Nobel Prize in Economics. His recent work has concentrated on the role of the entrepreneur in a market economy. He is also an accomplished artist.

Congratulations to Seita Kawamoto for being the first to correctly identify William Baumol as the famous economist.

What price an A?

2008-04-21T09:22:00.003-04:00

An economist at a large state university mentioned to a student that he pays his teaching assistants $5 each if someone gets 90 percent or more correct on the final exam. The economist had previously paid off only twice in 29 years of teaching large introductory sections (total enrollment about 15,000 students over the years). The student pointed out very cleverly that any student who does well creates a positive externality (the dollars paid to the teaching assistants), so students in the class should be subsidized to give them the proper incentives to study hard. Who should offer the subsidy, the teaching assistant or the teaching economist? Identify and explain the underlying principle at work here.

Stock market strategies

2008-04-15T13:07:00.004-04:00

You have been collecting data on the behavior of a particular stock over many years. You notice that every Friday the 13th, the stock drops substantially, only to come back up over the next few weeks. Your conclusion is that superstitious stockholders sell their stock in anticipation of bad luck. What can you do to make use of this information? What effect does your action have? Suppose more people notice the behavior of the stock and react accordingly--what is the effect?

Congratulations to Kaitlin Gossard for providing a reasoned explanation of the likely consequences of the above problem.

Damaged Goods: Another Guessing Game

2008-04-08T09:15:00.004-04:00

Jackie and Greg, returning from a Las Vegas, find that the airline has damaged the identical antiques that each had purchased. An airline manager says that he is happy to compensate them but is handicapped by being clueless about the value of these strange objects. Simply asking the travelers for the price is hopeless, he figures, for they will inflate it.

Instead he devised a more complicated scheme. He asks each of them to write down the price of the antique as any dollar integer between 2 and 100 without conferring together. If both write the same number, he will take that to be the true price, and he will pay each of them that amount. But if they write different numbers, he will assume that the lower one is the actual price and that the person writing the higher number is cheating. In that case, he will pay both of them the lower number along with a bonus and a penalty—the person who wrote the lower number will get $2 more as a reward for honesty and the one who wrote the higher number will get $2 less as a punishment. For instance, if Jackie writes 46 and Greg writes 100, Jackie will get $48, and Greg will get $44.

What numbers will Jackie and Greg write? What number would you write?

Can you identify this (not so) famous economist?

2008-03-30T17:03:00.007-04:00

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.

And the winning bidder is . . .?

2008-03-24T08:51:00.005-04:00

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.

Can you identify this famous economist?

2008-03-18T13:52:00.005-04:00

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.

Can you guess x?

2008-03-10T13:34:00.006-04:00

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."

Do high player salaries cause high ticket prices?

2008-03-03T18:07:00.006-05:00

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).

Speed or Brawn?

2008-02-25T12:06:00.006-05:00

Two of the perennially top-ranked college hockey teams in the country are Harvard and Yale. While tending to be alike in their national rankings, they differ greatly in their playing style. Harvard consistently opts for fast but small players while Yale fields slower but brawnier skaters. This difference in playing styles has persisted over the past several decades despite coaching changes and turnover in player personnel. What accounts for the difference? Explain in terms of economic analysis.

No winner this week. According to Browning and Zupan (1999; p187), the difference is due to the size of the hockey rinks. "Not all hockey rinks are the same size. Harvard's rink is large and this serves to increase the marginal product of speedy versus brawny players--there is more room to play a fast-paced version of hockey. By contrast, Yale's rink is smaller and thereby favors brawn over speed. Since there is less room to run, it becomes easier for large players to hunt down smaller opposition and beat it to a pulp." Indeed, Harvard even keeps their rink much cooler than Yale's so that the ice is faster to skate on, thereby benefiting their players.

How do you get people to tell the truth?

2008-02-18T12:44:00.005-05:00

A restaurant has a staff of 10 servers. The servers have all stored their daily tips in their own personal tip jar located in the restaurant's kitchen. An earthquake occurs and all the tip jars are smashed and all the tip money is mixed together. The restaurant manager gathers up all the money and wants to return it to the servers, giving each the amount of money to which she is rightfully entitled. Each server knows how much money was hers, but nobody knows how much belongs to anybody else. Obviously, each server, if asked, will exaggerate her fair share. How can the money be returned to the rightful servers?

A Bluffing Farmer?

2008-02-11T08:47:00.000-05:00

Consider the following statement from a corn farmer to his workers:

"The price of corn is very low this year, and the most I can get from the crop is $55,000. If I paid you the same amount as I paid you last year ($50,000), I'd lose money, because I also have to worry about the $30,000 I paid three months ago for seed and fertilizer. I'd be crazy to pay a total of $80,000 to harvest a crop I can sell for only $55,000. If you are willing to work for half as much as last year ($25,000), my total cost will be $55,000, so I'll break even. If you don't take a pay cut, I won't harvest the wheat."

Is the farmer bluffing, or will the farmworkers lose their jobs if they reject the proposed pay cut? Explain.

Congratulations to Yang Di for providing the first, complete, answer to the above dilemma. Read the comments section to see Di's reasoning.

Economics in a Laboratory?

2008-02-04T08:58:00.000-05:00

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 occurring data is absent or limited. Arguably the first use of a market experiment occurred 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 approximate year wherein the first recorded use of a classroom experiment in economics took place?

Congratulations to Lang Zhao for correctly identifying that Edward Chamberlin of Harvard University conducted the first recorded market experiment in 1948. A participant in that experiment was Vernon Smith, who later went on to win a Nobel Prize in Economics for helping to pioneer a new branch of economic analysis known as experimental economics.

Can you identify this famous economist?

2008-01-28T12:20:00.000-05:00

Can you identify this famous economist by the following clues?

A sophist, but not a sophomore.
Sa langue était française.
A solar energy advocate?

If you can identify this economist, briefly describe his major contribution to the field of economics.

Congratulations to Yaoguang Li for correctly identifying Frederic Bastiat. Bastiat was an early 19th century French free-trade economist that authored a number of satirical pieces in defense of free-markets. Perhaps his best known work is the Petition of the Candlemakers (look for Section 1.7).

A Separating Equilibrium?

2008-01-21T12:34:00.000-05:00

Frodo, a local auto dealership, wants to hire a salesperson. Automobiles are sold for $20,000 each. A good salesperson can sell 8 autos a month, and a bad salesperson can sell only 1. Salespeople at Frodo earn a base salary of $1000 each month plus a commission per auto sold. If we assume that good salespeople can earn $5000 a month at another job and bad salespeople can earn $2000 a month at another job, in what range must the commission percentage fall if Frodo wishes to hire only good salespeople and it can't tell good from bad salespeople during the initial interview? Show your work.

Congratulations to Tiffany McKee on being the first to submit a correct answer. Read Tiffany's answer in the comment below.

The notion of a separating equilibrium is part of a larger literature on the economics of signalling. Signalling becomes particularly important in economic situations involving asymmetric information (i.e., when one person has more information than another.) In the case above, Frodo is not quite sure which type of salesperson he's interviewing. However, by carefully setting the commission rate, Frodo is able to get the job candidates to "reveal" their true identity during the hiring process.