Talk:Economics

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.

Daniel Nicoloso

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 Nicoloso

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: [1] 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)

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 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

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)

Prior discussion unrelated to homework

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.