Talk:Economics

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)

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)

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.