Saturday, May 26, 2007
On July 13, 2007, at 10:45 am at the Hotel Venetian in Las Vegas, I will be formally presenting my paper. Hey, if you're in the area, stop in.
I have an electronic version that I will send on request.
Friday, May 25, 2007
Friday, May 18, 2007
Contributed by Ding Lu
I think our scorpion is a game theorist. It was his dominate strategy to sting all along. He is a noncooperating game player.
Wednesday, May 16, 2007
Monday, May 14, 2007
Economics 101 predicts that when the price of gas goes up, the demand for a substitute increases. I often see cartoons with consumers substituting motorcycles for SUVs, carpooling, or being shot out of a cannon. In other words when the price of gas increases, suave consumers will substitute.
My son, Jason, thinks that the substitution is really another form of paying a higher price. He's got a point. The market will ration and distribute the goods. Prices are good.
In his price theory textbook, Steven Landsburg makes a salient point. If profits increase when the price increases, then the oil companies must be on the inelastic portion of the curve. What monopoly operates on the inelastic portion of the curve? His conclusion is that oil companies are more of a price taker than a price maker. Mr. Landsburg argues that if oil companies had control over their prices, why did they wait until now to raise them?
Many of my friends are taking vacations this summer and are planning to fly instead of drive. "With the price of gas so high, it's cheaper to fly," said Kathy Haltmeyer. This simple statement describes a market force of supply and demand. The price will not keep raising because alternate forms of transportation become more attractive. The price of gas isn't price gouging by big oil but merely the reflection of supply and demand fundamentals.
Sunday, May 13, 2007
Say there's a McDonalds in the north end of Muscatine and a McDonalds in the south end, but the prices are higher in the north end. In theory, a profit maximizing entreprenuer could buy from the south end at a lower price and sell in the north end at a higher. The entreprenuer could take advantage of the price differences and make a profit from arbitrage. When the same good is sold in two different markets at different prices, the econ 101 term that is used is third-degree price discrimination. I believe our class errored in determining the price in both markets because the marginal revenue we captured was unequal and we would have realized more profit by concentrating in the market where marginal revenue was the greatest.
I think it's probably true that adults can pay more for a CD than a junior high student. To take advantage of the differences between the two groups, we charged adults $6 and students $3. At the Adult price, MR = $1.80. At the Student price, MR = $1.10. This suggests an opportunity for arbitrage in the amount of the yellow rectangle. The marginal cost curve is not shown, but we made a quantity decision of 200 units to breakeven. Even if no reselling of the product occurs, my class still should have constructed a price in which the marginal revenue was the same in both markets.
Saturday, May 12, 2007
In economics, resources are anything that is used to make a good. A good being anything that brings utility. HNI makes office funiture and fireplaces. Is it bad for society if HNI owns all of the resources such as the wood, metal, and patents needed to make these goods? My econ 101 answer is no, if the acquistion of these materials leads to a lower production cost. In this blog, I will prove that production costs decrease, the quanity of furniture produced increases, and the price actually decreases as HNI acquires more of the factors of production needed to make office furniture.
The logic is intuitive. Suppose that HNI pays a monopoly price for its wood. HNI also charges a monopoly price for the furniture it produces. If HNI acquires the wood monopoly, then HNI is no longer charged a monopoly price for wood. Therefore, HNI can lower its costs because its not paying the higher monopoly price for wood. In fact, HNI would have every incentive to pass this savings on to consumers in a socially optimal way.
Friday, May 11, 2007
"People prefer $1 today over $1 next week because, by having it today, they can put that dollar in the bank and have more than a dollar, namely 1 + R (where R is the weekly interest rate), next week. Alternatively, if the money holder discounts the future at a rate greater than the interest rate, the money holder can go ahead and spend the money now.
Just as one dollar today yields 1*(1+R) = 1+R next week, 1/(1+R) today yields (1+R)*1/(1+R) = 1 next period. Thus, the present value of $1 to be received next period is 1/(1+R). If the students have the dollar today, as seems to be the assumption in paragraph 5, the present value is $1 rather than .9090. Only if they would not receive the dollar until next period would the PV be .9090 today.
If the spending options are as close together as a week, I would suggest that it is not the weekly interest rate (in reality, something like .03/53=.0006) or discounting of the future that drive the behavior. Instead, I would simply look at the two options at face value. The opportunity cost of going to the concert is not being able to buy two cookies and spend the concert time studying economics ....
In the last paragraph the "x" determines how many times .50 goes into 1. This is an indication of how many cookies they can buy if they don't go to the concert, so it is indeed the opportunity cost of going to the concert (aside from the value of the time spent going to the concert), but I wouldn't relate it to the discount rate concept. That is, the relative 2-to-1 price ratio of concerts and cookies does not imply that the students discount future benefits by 200%."
Wednesday, May 09, 2007
Natalie's dad is the CEO of HON Industries, a fortune 400 company. On May 8, 2007, I heard Mr. Askren address the shareholders of record at the annual shareholders' meeting. I took notes to see how much 101 economics were discussed in his 45-minute presentation. Below are a few of the notes that I wrote down that command a share price of $50 with roughly 48,000,000 holders.
Tuesday, May 08, 2007
My finance lives next to a man who performs landscaping. The man claims to have the lowest prices in town. He does beautiful work. The Ace of Spades happens to be a black American. If there is any evidence of discrimination, it's in the wage that Ace receives. According to the 1980 US Census, self-employed workers who have the same productive traits and are black, make 19% less than white. This clearly shows that customers are selective in who works in their yard.
Monday, May 07, 2007
Sunday, May 06, 2007
Suppose Sally was working as a part-time receptionist when she met Harry at work. Sally was finishing up her master's degree in education. Harry has a nice job in finance. They marry and then Harry gets a promotion but they have to move to Muscatine, Iowa. Do you think Sally is going to demand that Harry give up his job so she can pursue her teaching career? I think Sally will quit her job and look for a teaching job in her new town while making their new house a home.
Sally has always wanted to be a teacher. Now a position opens up at Muscatine Community College--the only college around without a two-hour commute. How much will she earn? To answer this question, we use the monopsony model which is used when there is only one buyer of a resource. Since there is only one community college, in this case MCC, the college will pay Sally a wage lower than the competitive ideal. In the graph, the competitive wage rate is $10 with employment of 50,000 workers. But because there's only one place to work in the town, 38,000 will work for $8.50.
Saturday, May 05, 2007
Adam Smith wondered why diamonds sell for more than water when water sustains life. The quick and dirty answer is that the question confuses total utility with marginal utility. In other words, diamonds have a high marginal utility, but a low total utility. The total value of diamonds is the yellow shaded area. Water, which is more plentiful, has a low marginal utility but a high total utility. The total value of water is the teal shaded area. Just think of all of the uses water has including bathing, washing clothes, filling up swimming pools, and being used in squirt guns. Water is so plentiful using another gallon is cheap so water gets used to scrub floors and fill up balloons. Diamonds are used as an expression of love.
The diamond-water paradox is used to explain wage differentials. A baby sitter is plentiful but a computer programmer who knows html is scarce. At the margin, the programmer is more valuable than the babysitter, but the total value to society is greater for the babysitter. Can it be that the marginal cost of the babysitter compared to the programmer is a reflection of supply and that explains the wage differentials? Can wage differentials be explained by how plentiful some occupations are so market forces are determining wage differences and not discrimination?
How would lower gas prices affect Doug? He'd drive more. If everyone behaved like Doug, then there would be more pollutants, more congestion on our streets, and more maintenance needed to keep our plant both green and efficient. In this normative discussion, maybe the higher prices are good and everyone should understand that the economy is working to distribute gas efficiently.
The law of demand states, that the higher the cost of a good, the less will be demanded. What's the cost of Robbie's girlfriend? The cost is the 20 textmessages she sends him, walking her to class so he can't look at other women, constant phone calls to him on his cell, and the need to "talk" to him on a regular basis. From an economic perspective, the quantity of time Robbie demands with her decreases as he substitutes selling CDs for me. In the language of economics, the price of good girlfriend increased, so Robbie demands more of substitute good selling CDs.
Robbie's girlfriend could make herself more attractive by making their time together less costly.
Friday, May 04, 2007
Thursday, May 03, 2007
All companies maximize their profit by operating at the point where marginal revenue equals marginal cost. Anyone with a little knowledge of geometry will immediately see this. In the graph to the right, total revenue is equal to the price times the quantity. In this case $7 times 6 1/2 or $45.50 (gray plus yellow). The firm must pay out some in costs which is shown in yellow and equals $26 which is $4 times 6.5. Thus, profit is equal to $19.50 or the gray rectangle.
Wednesday, May 02, 2007
After I wake up in the morning and drink my usual diet Mountain Dew, I'm off to work. After I work eight hours, I want to go home unless there's a monetary incentive such as overtime pay. But will i keep working the whole 24 hours? Not me. After so long at work, I will value my leisure time more and start to substitute my free time for work. This is called the substitution effect. In the mornings after my caffeine jolt, the incentive to work means more to me than my leisure so I go to work. This is called the income effect since i'm choosing to earn money by working longer. The push and pull of the income effect and substitution effect creates a backward bending supply curve for labor. In other words, people will work for the money for a while then eventually they'll need some time off. In the graph, this is shown at L2 hours of labor.