Answers to questions as they were in July, 2006
1. Repetition gives a statement credibility, and many books have repeated the story that Thomas Carlyle coined the term "dismal science" in reaction to the writings of Thomas Malthus. However, David Levy has argued that this popular story of the origin of the term is wrong and that the issues involved in the origin of the term were completely different. You can find Levy's position on the internet with a search of "Dismal Science" and Levy.
From what you found, what position were economists defending? What was the position of Carlyle and his allies?
You should find they were arguing about slavery and the equality of people. The economists were against slavery, and Carlyle was in favor of it.
2. The reading noted that James Buchanan, a Nobel-Prize winning economist, once quipped that an economist was someone who did not believe that whatever was worth doing was worth doing well. How would an economist justify doing something poorly?
What is something you have done that you did not do as well as you could have done? Explain why in terms of costs and benefits. (Comment: This question is not asking you to describe a mistake you once made. This is asking you to apply the insights of Buchanan's statement that economists disagree with the statement that whatever is worth doing is worth doing well. Do you always clean your room well? Do you always write your papers well? Do you study as much as you can for economics? Economists believe that, because of scarcity, life is full of compromises. We do somethings rather poorly and there is nothing wrong with that.)
(In the next chapter you will meet the production-possibilities frontier. After you learn about it, see if you can use it to illustrate the situation you just described in terms of it.)
There are many answers to this question. The important thing is that the students recognize cost.
3. One of Aesop's fables tells of a fox who one day saw a bunch of grapes that looked very delicious. The fox was hungry and made a mighty effort to jump up and grab the grapes, but they were just out his reach. Finally he gave up and left, saying to himself, "I bet they were sour."
a) Where can you see the problem of scarcity in this little story?Grapes were scarce, or else the fox would not have had to work to get them.
b) How did the fox initially try to deal with the problem of scarcity?
It tried to produce grapes.
c) How did the fox ultimately deal with the problem?
It adjusted wants.
d) Was the fox's final solution a bad solution, or is there merit in it?
I think it was a good solution, but you can disagree.
(You can probably find the original story of the fox and the grapes by searching the internet. What was the moral of the story supposed to have been? Can you find anyone else who thinks this little fable can illustrate an idea from economics?)
4. Javascript question on positive/Normative--work it to get the answers.
5. Would you prefer a society in which everyone earned $35,000 or a society in which half the population earned $75,000 and the other half earned $25,000? Is this question relying on your positive or normative judgments?
Normative
6. Suppose that a large electronics company has invented a locator device that can be implanted in the brain stem of humans and allows the individual to be located or tracked at all times. The tracking information would be stored on computer, so a complete record of everyone's location at all times would exist. They have a group of experts that argues that if all people had these chips implanted and if everyone were allowed to access the data for everyone, then crime would be reduced by 95%.
a) On the nightly news a group of other experts are disputing whether the crime rate would be reduced 50% or 70% or 95%. Is this dispute one of positive or normative positions?Positive
b) On the news a group of people is debating whether we should have mandatory implantation of the device if the company's experts are correct. What position would you take and why? Is this dispute about positive or normative issues?
Mostly normative
c) Can you separate out the areas of controversy that would be largely positive issues from those that are primarily normative?
Positive--what will the effects be; normative--do we want those effects.
7. At the end of the 17th century, England instituted a tax based on the number of windows a person had. Parliament wanted to force those who were wealthier to pay more, but did not have any way to enforce an income tax of the sort we have. At the time, however, windows were a luxury item, so there was a high correlation between wealth and the number of windows a person had. Hence, Parliament taxed windows. What unintended consequence resulted from this tax? (Hint: How could the wealthy avoid the tax?)
People avoided the tax by bricking up windows. We hope that those who impose taxes are a little more aware that taxes change behavior than the British Parliament was 300 years ago.
8. Critics of drivers' education programs claim that the programs do not reduce the number of accidents that teenagers are involved in. How could this program make teenagers safer drivers and yet increase accidents? (Comment: Once you see the logic here, you will be able to see that a great many other situations are similar. Will making cars more fuel efficient reduce the amount of gasoline used? Will encouraging high school students to us condoms reduce the number of teenagers becoming pregnant? Will making cars safer reduce the number of injuries and deaths from traffic accidents? After a tragic death in a national park that was the result of two campers getting lost, the parents of one proposed that all people going into the wilderness be equipped with cell phones. Can you be sure that giving out cell phones to people going out into the wilderness would reduce problems? Could it increase them?)
(Hint: if you cannot see the logic in any of the above examples, consider this one. Many of the fiercest critics of smoking strongly oppose any attempt to develop a safer cigarette. Why would they take this position?)
Drivers' education may make teenagers safer drivers, but it also encourages more of them to drive. If it makes teenagers 50 percent safer, but increases the number of miles they drive by 101%, it will increase the total number of accidents.
The logic is similar for other programs. Discovering more fuel efficient motors encourages drivers to buy bigger cars or to move from cars to vans. This shift is not necessarily bad, but it could result in the average number of miles per gallon dropping rather than rising. Distributing condoms may make each act of sexual intercourse less likely to result in pregnancy. But when sex is safer, people will increase the amount of it that they engage in. Giving people cell phones may make each trip into the wilderness safer, but because people feel safer, more will venture into the wilderness.
There is no way to tell from theory whether the incentive effect will partially or completely offset the direct effect. Only observation will let one discover that. Economists write papers on these topics. For example of what these papers look like, see Gerald S. Oettinger, "The Effects of Sex Education on Teen Sexual Activity and Teen Pregnancy," Journal of Political Economy, Vol. 107, No. 3 (June 1999), pp. 606-44.
When you automatically see these incentive effects, you are beginning to think like an economist.
1. "In Ithaca, New York, where I live, the cable TV system carries
most New York Yankee baseball games. One August night, sportscasters
Phil Rizzuto and Bobby Murcer were calling a slow game between the
Yankees and the Milwaukee Brewers. Between pitches, Rizzuto was
looking over his record sheets and remarked that the Brewers had done
much better in day games than in games played at night. Murcer
checked his own records and found that the Yankees, too, had a much
higher winning percentage during the day. With characteristic
enthusiasm, Rizzuto then conjectured that all teams have better
records for day games. In a brisk exchange of the sort that makes
summer evenings in Ithaca seem to fly by, the two then spent the rest
of the inning discussing the poor lighting conditions in American
League parks and various other difficulties that might help account
for why teams do so poorly at night."
(Frank, Robert H. Choosing the Right Pond: Human Behavior and the
Quest for Status (New York: Oxford University Press, 1985), p.
3.)
There is something terribly wrong in the discussion described in the
previous paragraph. What is it and why is it wrong?
This is a matching problem. Total wins must equal total losses. If one team improves its winning percentage, at least one other must have a lower winning percentage.
2. Suppose that a cure for all cancer is discovered. Use the discussion of the section to explain why this cure will increase the percentage of people who die from heart disease.
If we add up all percentages of causes of death, they must equal 100%. If suddenly the percentage dying from cancer is reduced to zero, the percentages still must add up to 100%. The people who do not die from cancer will now live until some other cause of death catches them. Some of them will eventually die of heart disease.
3. (This question is now in Javascript form)
Suppose that Crusoe and Friday live together on an isolated island. Each day, Crusoe can either catch four fish or gather eight coconuts, and Friday can either catch six fish or gather three coconuts. Compute the production outcomes of this economy in the table below.
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Both fish |
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Friday fishes, Crusoe gathers |
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Crusoe fishes, Friday gathers |
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Both gather |
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When you complete the table above, you have not constructed a production-possibilities frontier because one of these possibilities is not ON the frontier, but inside of it. Which one of the four is inside the frontier?
Crusoe fishes, Friday gathers.
4. The Dukedom of Scimonoce (it is a backward economy, hence its name) is a totally agricultural economy that grows only corn and/or oats. There is no trade with neighboring countries, and there are only five small plots of farmland that produce as follows:
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a) If the country decides that it wants 30 units of oats produced, what is the largest amount of corn that can be produced? 90 Which of the five plots do you plant in oats to get this result, and which do you plant in corn?
In Corn AB
In Oats CDE
b) Given your answer in part (a), what is the opportunity cost of 10 more units of oats (increasing oat production from 30 to 40)? 40 corn
c) Finish filling in the production-possibilities table below and plot the points on the graph.
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d) Where is the point 30 oats and 30 corn on the graph? (Label it X.) Is it possible to produce 30 units of corn and 30 units of oats? If you answer that 30 corn and 30 oats is attainable, explain how you get it, that is, where do you plant oats and where do you plant corn.
yes; several ways. DE in corn, ABC in oats; C in corn, BDE in oats, A idle; etc.
e) Is the production of 30 corn and 30 oats efficient? no
f) Where is the point 40 oats and 60 corn on the graph? (Label it Y.) Is it possible to produce 40 oats and 60 corn? If you answer that 40 oats and 60 corn is attainable, explain your planting decision that makes it possible. not attainable
g) Will the dukedom produce up to its potential if plot A is left empty? What will happen to the production-possibilities frontier?
no; since it does not produce to potential, it must be below the production-possibilities frontier, which shows potential. (Students want to move the curve.)
h) Suppose consumers decide that they want 1000 units of corn and 300 units of oats. Will anything happen to the production-possibilities frontier? Explain.
Nothing. What people can produce and what they want are two very different things. (Students will want to move the curve--ask them if a famine makes food magically appear.)
i) Suppose the owner of plot E finds a method to increase his (and only his) oat production to 20. Recompute the production-possibilities table and draw the new curve on the graph above.
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j) Suppose that the dukedom has a dispute with a neighbor and loses plot E. What will happen to its production-possibilities frontier? Moves inward to
k) There are only two changes which will move a production-possibilities frontier, and parts i and j illustrate them. What are those two changes?
Only changes in the amount or quality of resources or changes in technology will move a production-possibilities frontier
l) From the information given, can one tell which combination of oats and corn the dukedom should produce? Explain.
No. One also needs information about preferences, which are not given here.
5. Which salesman would you expect to be more likely to cheat his customers: a door-to-door salesman or a salesman from a large steel company selling to a major automobile manufacturer? Explain your answer in terms of the costs and benefits of cheating.
If one is caught cheating an established customer, one loses that customer. If there are no repeat customers, there is no cost to cheating them. There is good reason people do not trust salesman who will never come back--it is the background to the musical The Music Man.
6. Yesterday after my wife got home from shopping, she discovered that she had been overcharged $.30 on an item she had purchased. Should she have gone back and demanded this mistake be corrected? Answer in the manner an economist would use to approach this problem.
What is the cost of going back? If it costs more than $.30, then accept the loss.
7. Identity theft has become an organized crime, with specialization and a division of labor. The people who steal the information may not be the people who use it. They can sell it to others who extract cash from credit cards or bank accounts.
a) Why is it bad for potential victims that these thieves have discovered specialization and division of labor?Specialization increases total output. Organized thieves have the ability to steal a lot more.
b) Those who steal the information sell it to complete strangers on the internet, and those who use it, called cashers, pay a percentage of their take back to those who stole the IDs. Why should the cashers pay anything? Why not just take the money and run? It cannot be a sense of honesty since they are in the business of being dishonest. Why should there be honor among thieves?
Reputation, if not honor, matters even among thieves. If someone is known not to cheat partners, they will find many more partners willing to work with them.
8. (This is now in javascript form.)
Lgg, Hrmm, and Dxjq are three cave men. On any day Lgg can either gather 100 berries or hunt and kill three rabbits, Hrmm can either gather 100 berries or kill two rabbits, and Dxjq can gather 100 berries or kill one rabbit.
a. Use these data to construct their joint production-possibilities frontier. (Fill in the blanks in the Rabbits column.)
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b. Zjgf who can gather 100 berries per day but can not kill any rabbits joins the group. What will happen to their production-possibilities frontier?
c. If each of these persons was self-sufficient and devoted half his or her time to gathering and half to hunting, what would the total production of berries and rabbits be? (Assume you can kill half a rabbit!)
200 berries (50+50+50+50) and 2 rabbits (1.5+1 + .5 + 0).
d. Now the four of them decide to specialize and trade. Assuming they keep the number of berries the same as in part c, how many rabbits can they gain by specialization and trade?
They can add three rabbits. (Kind of
magic--rabbits out of thin air!)
Zjgf and Dxjq gather berries, obtaining 200. Lgg and Hrmm kill
rabbits, obtaining 5.
9. Light is a wonderful thing. When the power goes out in the evening, most of us are lost without electrical lights. However, some people worry about light pollution. Search for the term "light pollution" on the internet and explain why some people are upset about light pollution.
Answers will vary.
10. Americans are attracted to the idea that they should be allowed to do anything that does not hurt others. Yet once understands the concept of externalities, which is the term that economists use for the topic of byproducts, one can find them just about everywhere. Can you think of any activity that you do or can do that does not in some way affect others?
Answers will vary. But if you probe hard enough, you will find something in almost all actions that affects others.
11. Economist Robert Frank argued in Choosing the Right Pond that much of our spending was a quest for status. He noted that if one person gains in status, others must lose status; the competition is at best a zero-sum game. He saw evidence of this quest in many markets such as in clothing, automobiles, housing, and education. One of the markets to which his analysis can be applied is plastic surgery. When some plain Jane or Joe gets some surgical help to make her or him look better, does it affect others? Might social disapproval of plastic surgery make some sense?
Yes, they are now lower in the ranking of beauty; probably.
12. At one time wind energy was a panacea of environmentalists for
energy problems. It was supposed to be renewable and nonpolluting.
Critics of wind power suggested that the large capital expenditures
it needed made wind power too expensive and that the output of
electricity was too variable to be useful.
If you search the internet for "wind power" and "stop wind" you will
find that environmentalists are now divided on the desirability of
generating electricity from wind. One can argue that their different
views of the byproducts, which economists call externalities, are at
the root of their divisions.
a) One side argues that the alternatives to wind power have too many externalities. What are the externalities of electricity generated by fossil fuels, water, and nuclear powerEmissions into the air and water for fossil fuels; hydroelectric can harm fish by disrupting streams and floods areas that may be important wildlife habits; nuclear is feared irrationally by many people but does have the problem of disposing of spent fuel. My daughter who lives in Nevada thinks trying to bury it in the desert of Nevada is a terrible idea, but it makes sense to me.
b) What are the externalities that those who oppose wind power stress?
Answers will vary.
c) You may have to dig a bit into the sites to find an answer, but what solutions do those who oppose wind power see for the energy problems that face the nation?
Answers will vary.
13. "I had long been puzzled by the behavior of the whaling industry.... [W]hales, which could provide a permanent resource if harvested prudently, were overexploited and driven toward extinction. This mysteriously "self-destructive" behavior of the industry was explained to me by a Japanese economist. Like most conservationists, I had assumed the industry's goals would be to maximize the sustainable annual yield of whales. In fact the industry has been trying to maximize the present value of the whale resource. If various species of whales are driven to extinction... the capital can be turned to the rape of another (in the minds of economists) array of available resources. Such behavior [is] perfectly rational in the dominant economic paradigm...." (From Erlich, Paul. "Environmental Disruption: Implications for the Social Sciences." Social Science Quarterly, March 1981, p 10.) From what you have learned in these readings, do you think Erlich (or the unnamed Japanese economist) understands the usual view of economists about why whales are threatened with extinction? Explain. (Hint: Does the whaling industry have goals or do individual whalers have goals?)
This is an incredible passage. Erhlich was recognized as a leading environmentalist in the 1970s, but this passage reveals he did not understand the problem of the commons. Do you want someone who is clueless about the source of a problem to be trying to solve it?
A fundamental starting point of economics is that groups do not have goals. Individuals have goals.