Monday, December 31, 2012

Benefits of City Council

Alzheimer's problem of the day.

There is only one doctor in the town of Erewhon. Every time he treats a patient, he must use a pair of disposable rubber gloves. He also finds it necessary to keep an X-ray machine in his office, which he rents for $500 over year. The town council has decided to help the doctor meet expenses, and is undecided between two plans. Under Plan A, the council will provide the doctor with unlimited free rubber gloves for use in his practice; under Plan B, the council will provide him with an X-ray machine. Which plan will benefit the doctor’s patients  more and why?

Plan A.  Assuming that the marginal cost of treating a patient is now zero and the doctor will treat patients up to the point where the marginal benefit equals marginal cost, society will gain because more patients will receive treatment.  In this case, the doctor will treat 9 patients.  But when he pays for the gloves he will only treat 5 patients and charge almost $4 dollars. 

Even if the gloves were a constant marginal cost of $3, then the number of patients the doctor would treat would be six.  When the marginal cost is reduced to zero, he would treat 9 patients.  

I was wondering if there would be any reason why there would be any reason why the price would be driven down to the marginal cost.  There's no Bertrand pricing or Cournot behavior.  As an imperfect competitor, this doctor might the only doctor in the area and the pricing might not change.  

Saturday, December 29, 2012

Doctor's Prices

Alzheimer's problem of the day.

Which of the following circumstances might affect the prices charged by a young doctor just out of medical school and why? a) The high cost of tongue depressors .b) The high cost of X-ray machines (assume that every doctor must have one X-ray machine in his office). c) The high cost of a medical education. d) The fact that this particular young doctor is heavily in debt due to student loans. e) The doctor’s discovery that his loan payments will be higher than he had expected. f) The fact that only a limited number of people are permitted to become doctors  g) An epidemic. h) The fact that this doctor has recently been sued for malpractice. Fortunately for him, the public is unaware of the lawsuit, but unfortunately for him, his insurance company is well aware of it and has raised his rates.  i) It becomes generally known that this doctor’s insurance company has raised his rates. j) Malpractice insurance rates for all doctors go up. k) The doctor in the office next door suffers fatal consequences when he attempts to remove his own appendix. l) The doctor decides to join a very expensive country club.

a. Would affect as it affects the amount that the doctor can supply.  b. Would not affect the price as it is a fixed cost.  c.  Would not affect the price as it is a sunk cost.  d.  Would not affect the price as it is a sunk cost.  e. Would not affect he price as it is a fixed cost, but would reduce his profit.  f. Would influence the price as the license acts as a barrier to entry.  g.  Would influence the price as the demand would shift to the right causing a higher price.  h. Would not affect the price as this is a fixed cost.  However, all relevant information is not included in the price and will change the price in the future as information becomes public. i) Would affect the price as there would be a change in demand that shifts the curve to the left.  j) Would not affect the price.  k) Would affect the price as the number of competitors decrease and he would be able to differentiate his product. l.) This would not affect the price.  If this doctor raises his prices then other doctors will be substituted for him.  This is not a relevant cost to the business.

Fiscal Clifford

This is a totally nonsense post where I equated the fiscal cliff with a clown.  I think at when there is a change in taxes there will be a change in behavior too.

I think macroeconomics is too broad to accurately predict the changes listed on the cartoon.  I agree that they are possible, but I think there are too many changes going on in the world to make these predictions.

Friday, December 28, 2012

Inelastic Supply of corn

If the supply curve for corn is perfectly vertical, how will an excise tax affect the market price of corn? What about a sales tax?

When I started working this problem, I thought I knew what a sales tax and an excise tax were, but I'm not sure now.  This is how I interpreted this problem.

A excise tax is placed on the seller.  In this case, the supply curve can't shift so the entire tax is placed on the producer.  So if the relevant demand curve is D1, then the price seller will sell the corn at $4, send $1 to the government and keep $3.  The producer is hurt by the tax.  Before the tax, the seller was making $16 in revenue, now she earns $12.

If a sales tax is placed on the consumer, then the demand curve shifts to D2 and the consumer pays $3 plus a $1 tax.  The producer collects $4 and sends a $1 to the government and keeps $3. The producer earns $12 in revenue.  

In either case the seller is hurt by the tax when the supply curve is inelastic.  I now digress.

I found this intelligent answer on Yahoo:

Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer surplus, producer surplus, or government surplus. The concept of elasticity was also an important component of the Singer-Prebisch thesis which is a central argument in dependency theory as it relates to development economics.
As always, a tax redistributes income.  The welfare effects will be unequal.  In the next seven days, we will see first hand how a change in taxes affect behavior when the US walks off the fiscal cliff.

Learning Curve

I've often thought about Bloom's Taxonomy as an integrated model. For example, suppose I want to draw a house in perspective. I need all of the levels in the taxonomy to draw the house. I have to create, analyze, apply, and recall graphic elements and use tone and shade to make the drawing more realistic. Everyday for the past 10 years, I have challenged myself to learn a new concept about economics. Sometimes it takes me weeks to learn a new concept. For example, I have been stuck on what price would a downstream monopoly charge to an upstream monopoly. So, to me, the implications of Bloom's is that real learning is holistic and relationships need to be built between prior learning to make sense of new learning. For this reason, I think real learning is difficult. There's a Buddhist saying that I think goes, "When the learner is ready, the teacher will appear." I wonder what the teacher is. Is the teacher insight? A scaffold to the next level? A change in perception?

Thursday, December 27, 2012

Price of Eggs

True or False:
A sharp rise in the price of eggs would be unlikely to last very long; after all, the rise in price would lead to a fall in demand, and this fall in demand would then cause the price to fall.

False.  The question tries to confuse the learner with the difference between the change in quantity demanded with a change in demand.  The question reads if the price of eggs increases, which is a change in quantity demanded.  This is a move from A to B.  If there is a fall in demand, then the blue line, demand curve, would shift to the left but the price would still remain at $7.  

I challenge you to find other examples where the media confuses a change in demand with a change in quantity demanded.

If Alfred E. Newman Were President

I love to draw.  Every day I practice to make marginal improvements.  I have learned much about learning that gives me empathy with the students that I teach.  For example, some times I feel like I can draw anything and other times I can't.  I think my learning curve equals the square root of .05X.  The gains come slowly if at all and most of the time I wonder if I'm learning at all.

Wednesday, December 26, 2012

Change in Demand

True or False
: According to the laws of supply and demand, when the price of a good rises, less of that good will be sold.

The correct answer is "False".  The reason that the price increased was because of a change in demand.  When the demand curve shifts to the right, the rice raises and more of the good is sold, not less.

A change in demand could happen because of a change in tastes and preferences, an increase in income, future expectations of a higher price, an increase in the number of buyers, and a change in the price of a related good.

Tuesday, December 25, 2012

Car Sales

Alzheimer's defense.  Here's today's much needed problem.

True or False:
If we observe a reduction in the number of cars being purchased, then we should expect this change in demand to lead to a fall in price.

This question is partly true.  If the reason why the number of cars being purchased is due to a decrease in demand, then a fall in price is logical.  However, the supply curve can shift to the left as well.  A leftward shift of the supply curve would raise the price of cars and as a result, fewer cars would be purchased.

Monday, December 24, 2012


To abate Alzheimer's, I work problems at random.  Here's a problem I found On the Internet.

True or False
: If a frost wipes out half the Florida orange crop, then some people who want to buy oranges will not be able to.

When a frost wipes out an orange crop, the supply curve shifts to the left and the price rises. If people really wanted to buy the oranges, they would simply pay a higher price to get want they wanted.  So the answer is "false".  But I think there's a secondary effect.  The higher prices would induce more suppliers into the market and the increase in supply would bring the price down.  The price system works to allocate resources and provide incentives to make a profit.  


 This is from a post from PoemShape.

I’ve been noticing a trend. My sampling is unscientific but others are welcome to chime in. I went Christmas shopping with the family today and stopped at my favorite Montpelier bookstore (two used and one new) —Bear Pond Books. Here’s what I can tell you: the poetry section is evaporating. I mentioned the fact to the bookstore clerks but (unsurprisingly perhaps) they didn’t really want to talk about it. I notice the same behavior in other bookstores. Curiously, even when it was patently obvious that the poetry section was a pitiful shadow of its former self, the store employees acted as though they were utterly unaware of it. I can imagine two reasons why. First, what business wants to admit that they’re losing business or under selling? Second, perhaps other customers have noticed the same trend? Maybe owners are fed up with having to explain to that two percent (those who actually buy poetry) that two percent does not a profit make.

Poetry is susceptible to the tyranny of the market.  Market forces determine the size of the market and the distribution of the market.  But individual preferences also determine the market.  When it comes to literature, I think people mostly will choose the literature that matches their natural factor endowments. I also believe that people will consume the product with the lowest marginal cost of consumption.  In other words, people will pick and eat the low hanging fruit.  When it comes to poetry, poetry comes at a high cost of consumption which is out of the reach of most consumers.  In this digital age where video can be watched on a phone, consumers will choose to watch videos before reading.  And when they read, they will choose to read fiction before non fiction.  This represents a change in demand for poetry.  If market forces are truly at work, the price of poetry books should be dropping.

My favorite poem is, "For Once than Something" by Robert Frost.  The analysis is given here.  My favorite part of the poem is :

Water came to rebuke the too clear water.
One drop fell from a fern, and lo, a ripple
Shook whatever it was lay there at bottom,
Blurred it, blotted it out. What was that whiteness?
Truth? A pebble of quartz? For once, then, something.

For me it means that once you get close to something it slips away.  And so is the market.  To think that you can control a market is foolish.

Sunday, December 23, 2012


Proctor and Gamble will soon market a product called Olestra, which can be used in place of fat in cooking, but is very low in calories. Thus it will be possible to make low-calorie hamburgers, French fries, milkshakes, and so forth. True or False: The average American will weigh less after this product appears on the market.

This product is excellent and it is used in potato chips.  This is my take on the problem.  There is will be a change in demand for products that use fat in cooking such as Lays chips so that less is demanded at each price.  But there will be a change in demand for products that use Olestra so that more will be demanded at each price.  So there will be no change in the weight of the average American.  Americans will eat more Olestra products.  The same will happen when electric cars replace gas propelled cars.  What I mean is that when the cost is reduced for cars, people will drive more.  

Saturday, December 22, 2012

Alzheimer's Defense

To keep myself from slipping, I try to complete a problem every day.  While reading Landsberg, I found this seasonal problem"

29. Suppose that wheat is purchased only by poor people, whose demand for wheat is given by the following chart
In the spirit of Christmas, a coalition of rich people has decided to buy wheat at the going market price (whatever that price happens to be) and resell it to poor people at half that price. Moreover, they will buy and resell as much wheat as poor people care to purchase .a) List the coordinates of four points on the new demand curve (that is, the rich people’s demand curve) for wheat. b) suppose that the supply curve for wheat is vertical at a quantity of 7. Do the poor benefit from the generosity of the rich? c) Suppose instead that the supply curve for wheat is horizontal at a price of $2.Do the poor benefit from the generosity of the rich?

My answer is graphed below.  I graphed the rich demand curve as half of the poor so it lays below the poor.  Suppose the supply curve is vertical at 7.  If the market price is $2 then the poor get 7 bushels for a $1 so they are better off.  If the supply curve is horizontal at $2, then the poor are worse off.  Now the poor 5 bushels instead of 7.  

I think my answers are correct.  I think the intent of the curve is that the philanthropist should know the elasticity of demand for the good that they are helping to supply.

Over the last couple of month, I have written several articles for the African Star News.  The articles deal with economic growth in Africa.  You can find a link the articles on the right hand side of my blog under "Favorite Blogs".  I have also been reading deeply about oligopoly behavior and working those problems.  As a result, my posts have been infrequent.  I suspect that my frequency will continue to be erratic as I continue my study.  

Friday, December 21, 2012

KAL Cartoon

This cartoon is brilliant, yet sales of firearms are increasing.  People respond to social forces even when the forces are exogenous.  In my law class we wrote essays about whether they would trade some of their freedom for more protection.  Most students said they would trade their freedom.  If you believe in Maslow's hierarchy of needs, safety is a basic need that must be satisfied before high needs such as  social needs can be satisfied.  I believe in the long run, society will demand more protection.  I believe that the laws of physics that predict chaos theory.  Thus, society will want more guns, not less.

Tuesday, December 18, 2012

Review For Mono-Comp and Oligopoly

1.  Know the characteristics of a mono-comp industry.
2.  Find the profit-maximizing price and output for a mono-comp firm.
3.  Find profit for a mono-comp firm.
4.  Find the profit maximizing point for a mono-comp firm in long run.
5.  What is the excess capacity theorem?
6.  When a mono-comp firm produces at a point where P > MC the firm is inefficient.
7.  Will a mono-comp firm ever be resource allocative efficient?
8.  Will a mono-comp firm advertise?
9.  What characteristics describe a firm in oligopoly?
10. What is the dominant strategy.
11.  Understand the mechanics of the prisoner's dilemma.
12.  What is a payoff?
13.  Identify the relevant strategies in a two player game.
14.  What is a duopoly?
15.  What is tacit collusion?
16.  Work through the notes from Monday.
17.  Understand the mechanics of the kinked demand curve.

Monday, December 17, 2012

Today's Notes

Assume that there are two producers in the bottled water industry.  The producers are Sprouse Distributing and Kon's Kola. The current market price is $5 and each producer is making 2.5 units. 

1.  How much in total revenue is the industry making?
2.  How much profit is each firm making?

Is it possible for Sprouse Distributing to increase their profit?  Assume that the price effect is given by: dP(Q) and the quantity effect is given by dQ(P).  Assume that Sprouse increases her output to 3.5 units.

1.  What is Sprouse's total revenue now?
2.  How much is Kon's Kola?

When a firm is in an industry selling a homogeneous good, one firm can increase their profits by "cheating" on their agreement to keep output constant.  Given this incentive, how does OPEC continue to act like a cartel?

Assume that there are only two competitors in the digital download industry, Apple and Amazon.  When the price is $1 the quantity demanded is 200;  when the price is $0.5, the quantity demanded is 300.  Assume there are no costs and a winner take all market.  Use the payoff matrix below to determine price and output assume no tacit collusion.

Thursday, December 13, 2012

Structural Unemployment

Economics predicts that the economy will destroy old careers as the economy works toward efficiency.  For example, telephone operators have been replaced by automated phone trees, cell phones, and Google.  Yahoo has an excellent article, "Is Your Job About to Become Obsolete?" that shows how creative destruction shows the economy working toward efficiency.

One career that is disappearing is farming.  This is from the article,

Between 2010 and 2020, some 96,100 farmers and ranchers will go out of business, the BLS says. “As land, machinery, seed, and chemicals become more expensive, only well-capitalized farmers and corporations will be able to buy many of the farms that become available,” the BLS predicts. “These larger, more productive farms are better able to withstand the adverse effects of climate and price fluctuations on farm output and income.”
If you like bluegrass music, then Art Stevenson and High Water plays a song John Deere that is fantastic.  In this song Art tells a tale of the demise of the family farm.  I suggest that some of the changes in this market come from economies of scale and changes in technology.  I predict changes in teaching will follow the same path.

Wednesday, December 12, 2012

Lorenz Curve and Gini Coefficient

Today's lecture notes are here.  An excellent interactive demonstration is here.

Use the data below to prepare a Lorenz Curve and find the Gini Coefficient.

The small country of Alpha has 10 citizens. The citizens and their earned incomes are listed below:
Citizen       Earned Income
Zak              $ 2,000
Erika           $10,000
Bill               $ 1,500
Juan            $ 15,000
Harry           $ 16, 000
Jose            $ 9,000
Emily           $ 30,000
Kai               $ 12,000
Robert         $ 8,000
Kathleen      $ 20,000
From the data, have the students graph the Lorenz Curve and calculate the Gini Coefficient.

Sunday, December 09, 2012

Monday's Lecture

Suppose a family of five wants to go a movie at the only theater in town.  There is not a competing firm for hundreds of miles.  If the firm were a pure monopoly, answer the following questions:

1.  What price would the firm charge?
2.  How many seats would the theater sell?
3.  How much is total revenue?
4.  How much is total cost?
5.  How much is profit?
6.  How much is consumer's surplus?
7.  How much is the dead weight loss?

Now assume that the theater can price discriminate.

1.  What quantity does the firm sell?
2.  What is the total cost?
3.  How much is total revenue?
4.  How much profit does the firm earn?
5.  If the firm were perfectly competitive, what quantity would the firm sell?

Saturday, December 08, 2012

Fifty Shades

From the course description:

The course description promises to explore: “the interplay of sexuality, health, public relations and marketing. Topics covered include feminism, addiction, social media marketing, sexual expression versus sexual repression, targeting the mom demographic, domestic violence, literary criticism, and relationship and identity forming. The course also relies on academic texts, online resources, lectures, and guest speakers.”

It is my contention that a college is a profit maximizing entity.  Offering a course that adds little value to human capital is only a product differentiating and branding move.   I contend that the move will indeed make the college increase revenue.

The class might be a positive externality with spillover benefits.  These benefits might inspire more students to take writing classes and learn more about psychology, but I doubt it.  

Thursday, December 06, 2012

Random Cartoon

I drew this to practice my fonts....I am troubled by Syria and pray for peace in that region...

Wednesday, December 05, 2012

Review to Perfect Competition Test

Read Chapter 9.  Here is a down and dirty review:

1.       When is a firm in competitive, long-run equilibrium?
2.       Describe what will happen to the industry supply curve when a firm is making a profit? A loss?
3.       Understand and apply the profit maximizing rule (MR=MC)
4.       Know that the firm’s MC curve is the firm’s supply curve.
5.       Be able to calculate AFC when given ATC and AVC.
6.       Know the assumptions of a perfectly competitive market.
7.       Define and describe the long run supply curve.
8.       When given a graph of a firm’s MC, ATC, AVC, and MR curves, find profit maximization, shut-down price, and loss minimizing position.
9.       Be able to identify each of the curves in 8 above when given a graph.
10.   Define “marginal revenue”.
11.   What is a “price taker”?
12.   Explain why AR=MR=P for a perfect competitor.
13.   Interpret and apply the “Marginal Decision Rule”.
14.   Know that the MC intersects the AVC and ATC curve at the lowest points.
15.   Resource Allocative Efficiency is often called the “socially optimal output”.  In micro, what equation defines the Resource Allocative Efficient point?