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.

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.

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.

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."

Beeronomics

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?

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?

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.