Question 37 on the final exam
From a student about the final exam:
I have thought through this question again and here is what I came up with. Mr. Schlafly successfully persuaded me to assume that the demand for rackets is equal to that for shoes. In fact, I believe that that assumed equality works against his answer rather than for it.
37. If China spends 3 units to produce a tennis racket but 5 units to produce a pair of tennis shoes, and the United States spends 9 units to produce a tennis racket but 10 units to produce a pair of tennis shoes, then how should China allocate its production (assuming “free trade”)?
(a) China should produce half tennis rackets and half tennis shoes. (Winning answer if you assume equal demand for both goods and further assume that China chooses to completely satisfy demand)
(b) China should produce only tennis rackets. (Losing answer)
(e) Can’t tell. (Winning answer otherwise)
In order for China to only make tennis rackets it must buy shoes from America. Thus, instead of making one racket and one pair of shoes for a total of 8 units, China can make 3 rackets and sell two of them to the US for a pair of shoes and 8 units: thereby saving themselves 7 units! This brings us to a particular bit of wisdom that I think is rather poetic: If it sounds too good to be true, it probably is. The flaw in China’s racket-only money-making scheme is that they can’t continue to make only rackets forever. No matter what the demand for rackets, it cannot be infinite (Lets say hypothetically that each country has demand for 1000 of each good). Therefore, China will only be able to sell a limited number of rackets to the US; when they have sold all 1000 rackets to the US, they will have only gained 500 shoes and will be forced to produce their own. QED.
This question involves an interesting though unrealistic mix of a monopoly and a monopsony: While China is the only country that can afford to produce tennis rackets, it also has only one country to whom they can sell. One might argue (as I did above) that China will sell 2 rackets to the US for one pair of shoes and 7 units (which saves America 1 unit and China 6), yet one also might argue that the price would be 2 rackets for one pair of shoes and 2 units (which saves America 6 and China 1). You can only really tell that the number of units given to China in addition to the pair of shoes will be > 1 and < 9.
The quick, easy, common-sense, solution:
Why would America ever produce a pair of shoes for 10 units when they can buy one from China for somewhere in between 5 and 10?
Why China will produce all the tennis rackets and all the shoes:
In the situation above involving in which China sells two rackets to the US for a pair of shoes and between 1 and 9 units, the combined units that the two countries save is 7 units per two rackets and pair of shoes. Alternately, if China produces two rackets and a shoe and then sells rackets to the US (for between 3 and 9 each) the combined units that the two counties save for each two rackets and pair of shoes is 12.
- This is really quite simple. The overall consumption of resources to produce "x" rackets and shoes is minimized by 3x (China producing rackets) plus 10x (U.S. producing shoes), for a total of 13x. If China produces just one pair of shoes, then the U.S. has to produce the corresponding racket, and their total is 14 rather than 13 the other way. The wasted allocation of resources can no longer be shared as a benefit to one or both countries.--Aschlafly 20:16, 24 May 2007 (EDT)
I still don't see why the US has to produce the corresponding shoe. Why can't China make all the shoes and all the rackets? Why must the US produce anything instead of just buying from China? --Ben Talk 20:39, 24 May 2007 (EDT)
- Well, then the U.S. would have to produce something else (software?), but that goes beyond the information set forth in the question. Sticking with the question, the U.S. has to produce some goods to be able to trade with. The U.S. could not simply spend all its money on imports and sustain that indefinitely.--Aschlafly 20:55, 24 May 2007 (EDT)
Ah... Are we then also assuming that the United States' exports are limited to tennis shoes? I think that you definately should have mentioned that in the question. Some of us seem to have a grossly unfounded faith in american agriculture. How much money should we have assumed that the U.S. did have to work with? --Ben Talk 21:01, 24 May 2007 (EDT)
- I think it's unreasonable to assume, from the facts given in the question, that the U.S. could trade (for example) cows (export meat) for tennis rackets. It's implicit that the universe of goods is what is presented in the question.--Aschlafly 21:14, 24 May 2007 (EDT)
I thought of a better answer to your previous comment:
"Sticking with the question, the U.S. has to produce some goods to be able to trade with. The U.S. could not simply spend all its money on imports and sustain that indefinitely."
You're right, it can't simply spend all its money on imports and sustain that indefinately. Nor, can it spend all its money on producing tennis shoes asnd sustain that indefinately either. My next comment is this: Your solution defies the Coase Theorem! In a world with no transaction costs (you did not mention any in the question) there will be the same amount of economic activity regardless of who owns what. BECAUSE CHINA CAN PRODUCE SHOES MORE CHEAPLY THAN THE U.S. THEY MUST PRODUCE ALL THE SHOES! Whether the U.S. has any alternate means of income does not change the fact that they will accuire the shoes more cheaply if they buy them from China. --Ben Talk 21:34, 24 May 2007 (EDT)
There are three different parties (or rational economists if you will) mentioned either directly or indirectly in this question: The USA, China, and the recipients of the production costs. China and America will both be better off if they minimize the amount paid to the third party above. This is accomlished by having China doing the production. --Ben Talk 22:31, 24 May 2007 (EDT)
- Ben, you make a good point and your citation to the Coase Theorem is superb. You're right that, economically speaking, China should do all the production. But, alas, that was not one of the answer choices! It's doesn't fit your "can't tell" choice either. Ha ha ha, the given answer is still the best answer!--Aschlafly 22:58, 24 May 2007 (EDT)
I beg to disagree. You can reasonably assume that China will do all the producing, but you can't tell the relative quantities of the two goods (which is what you asked for) unless you assume that China's marginal revenue for producing one more shoe equals their marginal cost at the same number that their MR = MC for rackets. If you do assume this then (a) will be the correct answer; not (b). The only way that (b) can be correct is if there is such a little demand for shoes that China's MR will be less than MC for the very first shoe. --Ben Talk 08:55, 25 May 2007 (EDT)
- I think the MR would factor in the comparative advantage in trading rackets for shoes, right?--Aschlafly 10:29, 25 May 2007 (EDT)
Acctually, my whole point is that I don't think that comparitive advantage affects the answer in this particular scenario. The Law of Comparative Advantage does indeed imply that the U.S. would be better off selling shoes to China for tennis rackets rather then producing their own rackets, but the Coase Theorem demonstrates that the U.S. would be even better off if they bought their shoes from China instead of producing them. I think that comparative advantage would only force the U.S. to make shoes if they could do so either more cheaply than China or at an equal price.
Mr. Schlafly could you explain the conditions for a monopoly to shut down?
Daniel N. (yes, I'm back from vacation and just in time for the final)
- Daniel, lecture ten says:
- A monopoly shuts down in the short run if when MR = MC, AVC > P.
- A monopoly shuts down in the long run if when MR = MC, ATC > P.
Wow, Daniel, Sharon beat me to this! She is exactly right. Here is what I prepared in response to your superb question:
- A monopoly shuts down in the short run as long as average variable cost (AVC) is greater than the price: AVC > P. That is because the firm loses money for every additional good it sells.
- A monopoly shuts down in the long run if when average total cost (ATC) is greater than the price: ATC > P. That is because there is nothing the company can do in the long run to become profitable. There is no hope.--Aschlafly 16:24, 23 May 2007 (EDT)
Questions on Week 12
Hi Mr. Schlafly!! On question #4 of this week's homework you talk about an increase in profits with the increase of the owner's inventory. Is this increase in profit permanent or does it only last for that one year?--Kevin51292 11:58, 7 May 2007 (EDT)
- Kevin, the increase in profits is for just that additional year. In other words, she spends $100,000 today to receive $104,000 a year from now. Should she do that?--Aschlafly 13:57, 7 May 2007 (EDT)
Questions on Week 11
Question from a student: In the Honors only example in Economics_Lecture_Eleven, the profit is the same for three and four employees because for the fourth employee, (P x MP)=W.
With three employees, revenue is (20+18+16) x $5=$270. Cost is $70x3=$210. So profit with three employees is $60.
For four employees, revenue is (20+18+16+14)x$5=$340. Cost is $70x4=$280. So profit is once again $60.
Wouldn't the company prefer to hire three employees instead of four? The fourth employee increases output, but not profit. This is bad for the seller because price decreases when supply increases."
Assuming your math is correct above, the price would not decrease when the supply increases unless this is a monopoly. Instead, this is a monopsony. So the company would be indifferent between three or four employees, but probably prefers four employees because he is helping more people that way and has greater protection in case an employee quits or becomes sick.--Aschlafly 12:37, 30 April 2007 (EDT)
Mr. Schlafly, on question eight, what did you mean by "explain". What exactly did you want us to explain?
- Simply explain your answer with a sentence or two. For example, I choose answer __ BECAUSE ....--Aschlafly 11:40, 2 May 2007 (EDT)
Questions for Midterm Exam
students, enter questions here:
Mr. Schlafly, in class last thursday you said that in prisoner dilemma it is rare for both prisoners to get off without any jail time. But if the prisoners are rational and want to minimize their jail time then neither of them will confess. Now if both of them are thinking like this then they will each assume that the other will not confess. Therefore neither of them will confess. This is off course assuming that both are rational prisoners.
- A rational prisoner will assume his partner will rat him out, because that will reduce the snitch's jail time significantly. The idea is that parties are self-interested, and will work toward maximum individual benefit than for the shared benefit of an organization. --Thammersmith 17:19, 17 April 2007 (EDT)
But if neither of them confess then the jail time for both of them is zero years. If they both know that this is a possible outcome then they will try to reach that by assuming that the other will try to reach that. If one of them rats on the other than he still gets jail time, just not as much. If they are both looking for self-interest then they will both not confess because then nobody can be put in jail.
- Daniel - I just reviewed the lecture that discussed the prisoner's dilemma. Based on the potential sentences that could be distributed in the example you have been provided, I share your concern. I found a great example of this piece of game theory on the web, which you might want to take a look at here:  Ultimately, the purpose of the game is to show that all actors are self-interested, and will look for an individually beneficial outcome as opposed to a mutually beneficial outcome. Think of it as an exercise as how utilitarianism doesn't always work in practice. Hope this helps. --Thammersmith 13:44, 18 April 2007 (EDT)
- This is how I think it should be laid out. If both prisoners confess, they get 4 years each. If both do not confess, they are pinned with a smaller crime and each get 2 years. If A confesses, and B does not, the police give A a deal and he becomes a snitch, pinning the crime on B. In that scenario, A gets 1 year and B gets 5. This creates an individual motive for A to confess, although the most mutually beneficial action is for both actors to confess. Therefore - if A confesses, he either gets 4 years or 1. If A does not confess, he either gets 2 years or 5. Does this help? --Thammersmith 13:51, 18 April 2007 (EDT)
Daniel, I realized after class last week that the benefits in my prisoner's dilemma were not correct. So your criticism is exactly right. If the benefits for neither to confess are the best benefits available, then the Nash Equilibrium will be that neither will confess.
The benefits should be such that the maximum benefit (e.g., zero time in jail) goes to the criminal who confesses (snitches) when the other defendant does not confess. That benefit scheme then causes the Nash Equilibrium to be when both confess.
I'll discuss this in class tomorrow. Your criticism is right, and Thammersmith's response is right also. The mistake was mine. Maybe this week we'll rerun the "dilemma" with a different benefit scheme to see if the outcome is different.--Aschlafly 23:36, 18 April 2007 (EDT)
Mr Schlafly, your benefits made perfect sense for the type of dilemna it was. To change it so that the nash equilibrium would come out as they both confess wouldn't make sense. Because we're assuming that the only evidence that can be aginst them is their own confession, then it would make most sense for them to get any jail time for not both not confessing.
- Its sort of like a test graded on a curve. Lets say Mr. Schafly gives a test and says that the person with the highest score will set the 100% mark. Therefore, if no-one answers any question, the highest score will be 0, and that will be 100%. BUT if someone answers a question, everyone who didn't answer will be stuck with F's. Now, you can trust your classmates if you want, but human nature says someone will be spooked and do the test. Its the same with the prisoner's dilemma. You could all work together and get out of prison, but can you trust your partner not to rat you out?--Elamdri 22:09, 24 May 2007 (EDT)
Questions on Week 8 Homework
Hi Mr. Schlafly!! On question #6 It seems to me that Anthony would sell his goods at $6 to maximize his income. However, I can't seem to figure out how to calculate the social cost of selling six units at $6 each because I can't seem to figure out how to determine the output that wasn't sold because it was a monopoly. Could you please explain to me how I can find that? Thanks.--Kevin51292 18:16, 7 April 2007 (EDT)
Question 6 does not mention Anthony. Did you mean this question 8?
Question 8. Suppose Anthony owns a company having marginal costs of $5 for all his units. If he sells only one, then he reaps $11; selling two fetches a price of $10 piece; selling 3 attains a price of $9; selling four reaps $8; Q=5 would have P=$7; Q=6 has P=$6, etc. A competitive firm would have the same cost and demand numbers. What does Anthony sell at, and what is the social cost of his monopoly?
Anthony would pick the output level that maximizes his profits. Perhaps you've done that. Now the harder question concerns the social cost of his monopoly. What would the price and output be in a competitive market? Perhaps some extrapolation is required on the curve. I did say "etc." Hope that helps.--Aschlafly 20:14, 7 April 2007 (EDT)
Questions on Week 7 Homework
students, enter questions here:
Hi Mr. Schlafly. On question #7 you ask at what price you should sell dinner tickets at. However, it seems to me that there is no price where you can cover the cost of the speaker, plus the marginal cost of each person attending. Am I missing something or what? Thanks.--Kevin51292 11:00, 29 March 2007 (EDT)
- Uh oh. I just saw this now. But should pricing be based on demand rather than supply? I guess supply costs would be a factor.--Aschlafly 17:22, 5 April 2007 (EDT)
Questions on Week 6 Homework
Hi Mr. Schlafly!! On question #7 of this week's homework it seems a little confusing to me. The first two sentences say this. Suppose your classmate's company grew and grew, until it had 1 million employees. But then the economy had a downturn, and you faced bankruptcy. I think that you might have meant that your classmate faced bankruptcy as you have not mentioned anyone other than the classmate to that point and later to say that you are in the legislature. Is this correct that the question should read that your classmate faces bankruptcy? Thanks.--Kevin51292 07:22, 19 March 2007 (EDT)
- Right. My apologies! I meant your classmate's company faced bankruptcy.--Aschlafly 09:51, 20 March 2007 (EDT)
Hi Mr. Schlafly!! Well I think I have a second question about the homework. On question #8 is the marginal product increased by putting more fertilizer on your fields? Thanks.--Kevin51292 08:00, 20 March 2007 (EDT)
- Yes.--Aschlafly 09:51, 20 March 2007 (EDT)
Also in question 8, what exactly is meant by "ever-increasing marginal product."? Can an infinite amount of food be grown on a single acre given an infinite amount of fertilizer, or is the marginal product of the fertilizer increased when it is spread out over a larger area? Thanks
- "Ever-increasing marginal product", if extrapolated to infinity, means that an infinite amount of food could be grown given an infinite amount of fertilizer. It doesn't need more area. A bit unrealistic, I realize.--Aschlafly 21:15, 20 March 2007 (EDT)
In question 5, is it correct to assume to that "editor" refers to members of the general public who use this sight, and not only to site administrators? Thanks.
- "Editors" on these wiki sites means the contributors (and uses) of information. So the answer to your question is "yes".--Aschlafly 14:53, 20 March 2007 (EDT)
Questions on Week 5 Homework
Questions on Week 4 Homework
Hi Mr. Schlafly!! On question #3 of this week's homework you talk about an increase of 90% when the original number is 4 units of utility. Am I right to assume that the 90% increase is really 190% of the original number (4)? Thanks. User:kevin51292
- REPLY TO HOMEWORK QUESTION: No, Kevin, that's not correct. There is declining marginal utility. The first hour the benefit is 4 units, but the second hour the benefit must be less: 90% times 4.--Aschlafly 12:41, 5 March 2007 (EST)
(add more questions here)
Mr. Schlafly, in question number 7, what is political bias?
- Daniel, question 7 says: "Do you think a Giffen good really exists? Can you see any possible political bias in the claim that Giffen goods exist? Your views, please."
- By "political bias," I mean bias motivated by a political belief or goal. For example, "scientists say there is global warming" may be motivated by a "political bias" of the scientists wanting more government control over business, under the guise of preventing global warming. As an other example, the (false) claim that "gun control would save lives" reflects a "political bias" to take guns away from lawful citizens and require them to rely more on government rather than self-defense.--Aschlafly 14:52, 7 March 2007 (EST)
Hi Mr. Schlafly!! In question #8 you say prove the Law of Demand, I assume that means that I am to prove why the Law of Demand states that I should buy more of the milk when I'm only considering marginal utility. Is this correct?--Kevin51292 17:05, 7 March 2007 (EST)
- Right. Hint: you may use the law of equiproportional marginal benefit (MUa/Pa=MUb/Pb=MUc/Pc). --Aschlafly 18:09, 7 March 2007 (EST)
Questions on Prior Weeks' Homework:
Question two in assignment two says: "Suppose the price demand curve is P=$20-Q, where P is price and Q is quantity. Also suppose the price supply curve is P=$4 Q. At what price and quantity will the good be sold?" The lecture does not address how to work with these equations. Are we supposed to graph them using the price as the slope and Q as the y intercept? ~ SharonS 17:55, 16 February 2007 (EST)
- Sharon, we can expect the good to be sold where supply equals demand. If supply were greater than demand, then the price would be lowered to sell the surplus. If supply were less than demand, then the price would be raised to increase profits.
- You can find where supply equals demand either by graphing the supply and demand curves and seeing where they intersect, or by solving the two equations to find the common values of P and Q through use of algebra.
- Hope that helps!--Aschlafly 23:29, 16 February 2007 (EST)
- P.S. Just as in class and in the lecture, P (price) is graphed using the y-axis, and Q (quantity) is graphed using the x-axis. --Aschlafly 00:49, 17 February 2007 (EST)
- Thank you! I didn't think of finding the common values of P and Q using algebra. Solving the equations with algebra gives the answers for P and Q in dollars. Should I just take the dollar sign off the number I get for Q and treat that as the quantity sold? ~ SharonS 10:30, 17 February 2007 (EST)
- Yes, just remove the dollar sign. There is always a mismatch in units in graphing Price (in dollars) as a function of Quantity (a non-dollar variable)--Aschlafly 10:37, 17 February 2007 (EST).
I am a bit confused with problem four in assignment two. The question reads:
- "Suppose 1000 persons in a town each have the following weekly demands for gas, and the gas stations have the following weekly supplies:
- Gallons Demand Price/gallon Supply Price/gallon
- 10 $2.50 $.50
- 20 $2 $.75
- 30 $1 $1
- 40 $.75 $1.50
- (A) What is the price and overall quantity of gas sold each week?
- (B) Suppose Congress declares war and imposes a price control of $.75 per gallon. At what price and overall quantity will gas sell each week?"
I don't understand what is meant by the first sentence. Do a thousand people need ten gallons, a thousand need 20 gallons and so on, or are there only a thousand people, roughly a quarter of which will need each quantity? ~ SharonS 13:15, 19 February 2007 (EST)
- REPLY: Good question, Sharon. "Suppose 1000 persons in a town each have the following weekly demands for gas ..." means "each" person has the expressed demand (and likewise, the supply is for each). As always, the key is to find where supply meets demand, or where the supply and demand curves intersect.--Aschlafly 16:25, 19 February 2007 (EST)
- Thank you! I think I've got it now. ~ SharonS 16:54, 19 February 2007 (EST)
Hi Mr. Schlafly!! On the homework for this week on question #2 you ask at what quantity the goods will be sold at on the curve. How do you label the quantity? I know with the price you would obviously label it as dollars, but do you do the same for quantity? Thanks. -User:kevin51292
- REPLY: Great question, Kevin. "Quantity" is expressed in the units of goods specified (e.g., gallons, pairs of shoes, candy bars, etc.). Where, as in question 2, no goods are specified, then you could simply say "units".--Aschlafly 15:14, 20 February 2007 (EST)
Hi Mr. Schlafly!! Thanks for the above answer, that really clarifies things. As I am doing my homework I came across another question that I had. On question #6, are you looking for the price at which the strangers want to buy all the tickets that the scalpers offer, or are you looking for the highest common price at which tickets could be sold? Because there are multiple common prices that would result in tickets being sold (anything ranging from $8 to $15). User:kevin51292
Kevin, assume that a common price (a "market price") is used for all sales.--Aschlafly 16:38, 20 February 2007 (EST)
- 1) How does economic theory explain why anyone ever gives anything but money as a gift?
- If someone gives me (say) The New Annotated Sherlock Holmes: The Complete Short Stories I might be pleased, but if someone gave me $95 I could buy The New Annotated Sherlock Holmes: The Complete Short Stories, in which case I would be just as pleased. Or, I might use the money to buy something different which I liked better. Or, I might know of a place to buy it at a discount, in which case I could have my book and extra money, too.
- If someone gives me money, the worst case is that I do not know of anything that would please me more than the intended gift. In every other case, I can do better with the money than with the gift. Therefore, it would seem that the economist's "rational man" would always prefer to give and receive the money. Dpbsmith 15:51, 8 February 2007 (EST)
The "rational man" is not merely interesdted in money but in total utility (the economic term for overall satisfaction); he might get more utility by reciving a gift that he knows was specially chosen for him by the giver than from a cash gift that has no personal meaning. Likewise he would get utility from giving a meaningful gift. In fact, if it were simply about money the "rational man" probably would not be giving at all!
--BenjaminS 12:38, 9 February 2007 (EST)
Good point Ben. Also, remember that money really has no inherent value- it must be exchanged before it is useful to anyone except perhaps a coin collector. Thus, by giving someone a useful item as a gift rather than money, you are sparing the receiver of the gift the transaction costs involved in exchanging money for that item. So if we assume (1) that the giver knows what gift the reciever wants, (2) that the reciever would consider it a chore to take the neccesary steps to obtain the gift, and (3) that the giver will not mind, or perhaps even enjoy, taking those same steps, then the traditional mode of gift giving becomes economically rational. -Chris J
- 2) Consider a company whose stock pays no dividends, and whose management's states that their intention is not to pay them in the future. The present value of a future stream of zero dividends is zero. How does economic theory explain why people are willing to buy such stock? Dpbsmith 16:39, 8 February 2007 (EST)
There are two scenario's that come to mind. The straightforward explanation is that the firm is a charitable organization, and the investors by stock in view of the beneficial effect the firm has on their community. The second explanation is that the economic activity of the aforementioned firm is beneficial to the investor. For example, small business owners in a certain town might be willing to invest in a ski-mountain, golf resort, amusement park etc. moving in their town even if it were not directly profitable, if it would attract tourists and increase the demand for their own goods and services. -Chris J
- Well, that wasn't all that hypothetical an example. Many stocks pay no dividends. For example, that described Digital Equipment Corporation for at least three decades; it was no charity; and investors were willing to pay quite a lot of money for Digital shares. Dpbsmith 21:05, 16 February 2007 (EST)
- The stock gets it's value from the total value of the company divided by the number of outstanding shares. Dividends are the profits made by a company that are not reinvested in the company as retained earnings. The only way to take money out of a company is to pay all the shareholders proportionally. So if the company were sold for cash for example, each shareholder would get a portion of the sale in proportion to how many shares they have. By leaving the profits in the company the value of the company increases, increasing the value of the stock. The stock price and company value match up because of two forces acting on the stock price: 1) If the stock price is lower than the value of the company then someone could buy enough of the stock to sell the company for cash and make more than he paid for the stock. 2) If the stock price his higher than the value of the company, then the market demand for the stock decreases because you wont be able to get that amount of money out of the company and the price drops accordingly.
Forgive this newbie question but - Could we move course homework to another page / section? It would clarify article discussions and allow for a higher quality page. AP James Feb 22 2008