Difference between revisions of "Economics Lecture Seven"

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In this Lecture we introduce the concept of "perfect competition." To get to "perfect competition," let's first learn what "competition" is, and let's learn it well.

According to the dictionary, "competition" was not first used in 1605. What conclusion might an historian draw from that simple observation? Shakespeare had completed nearly all his plays by then, and a search of all of Shakespeare's works reveals that he never used the word, not even once.^[1] Imagine that!

Leonardo da Vinci competed with Michelangelo, and the world benefited from their achievements. In math and physics, Isaac Newton competed with Leibniz and a river of accomplishments flowed. Sports rivalries are famous also for bringing out the best in each side.

In business, it is the competition that brings out the best service, highest quality goods, and lowest prices. Wal-Mart competes with Target and K-Mart. Federal Express competes with UPS for shipping services. Phone companies compete with either for cell phones and home service. Television stations compete with each other. Fox News competes with CNN. Politicians compete with each other to win elections. The dictionary definition of the "free market," which was first used in 1907, is "an economic market operating by free competition."^[2]

We all think we know what "competition" is, but can we define it precisely? Here's one attempt: "competition is the rivalry by people or companies for achievement, success, customers, attention or praise." Not all competition is good: competition for praise could land the winner in the pitfall set forth in the Bible: "and the first shall be last, and the last shall be first!"

But competition for customers is something we like, particularly as a customer. It means companies will be constantly trying to offer a lower price and better deal than their rivals. That saves us, as customers, money, and allows us to obtain better goods and services. Without the competition, we would be stuck with companies that charge as much as they like, and provide as poor quality goods and services as they want. Competition rewards hard work; the lack of competition encourages laziness.

The economic definition of competition should include rivalry for resources in addition to customers, as companies can compete with each other for workers too. So let's define competition in economics as the "rivalry for goods, services or resources among different buyers or sellers." Perhaps you can improve on that definition.

It helps to look at the "perfect case," and that is "perfect competition." How should we define that?

Perfect Competition

Perfect competition is a set of conditions that are ideal for someone benefiting from the competition, such as a consumer of a good who wants the best quality and the lowest price. The conditions are these:

1. Many buyers and sellers. You can't have perfect competition without a lot of competitors! In a classroom situation, two or even five students competing for a good grade may not be enough. If a few get lazy, then all may stop working. But in a large group of students, you can be sure that someone is working hard. Similarly, the more gas stations in an area, the more the competition.

2. Goods that are perfect substitutes for each other. The ability to substitute one for the other is what makes the market so perfectly competitive. Pencils are so inexpensive because there are so many perfect substitutes for them, as one brand of pencil substitutes easily for another. Any variance in quality would prevent perfect substitution, and frustrate perfect competition.

3. Perfect knowledge in the market. Fully informed consumers and suppliers are also necessary for perfect competition. If Wendy’s is selling a hamburger at a lower price than McDonald’s or Burger King, but no one knows about Wendy's, then the competition is not going to be perfect. McDonald's and Burger King would be able to continue to sell overpriced hamburgers.

4. Perfect mobility of resources. Put another way, the competitors must have identical costs for their supplies. If one competitor, say a gas station, has higher costs than the others, such as a higher price of gas from its suppliers, then it is not going to be able to be competitive.

(Additionally, there cannot be any price discrimination. Ignore this point if you do not recall what "price discrimination" is!)

Every Economics exam has a few questions about "perfect competition," and you will answer them correctly by remembering the above four points and applying them correctly.

Beyond the value of acing exams, perfect competition is useful as an ideal against which to analyze imperfections. Understand why a market does not have perfect competition, and then it becomes easier how to deal with that market, or how improvements might occur.

An investor in the stock market may want to stay away from companies that are in perfectly competitive markets, because the competition will reduce prices and profits for the companies. But a buyer or consumer prefers a perfect competition because it lowers price and improves quality!

If you are the owner of a firm, do you like competition? No, not when other firms are competing against you, because that competition will cause you to lower your prices and lose profit. But you do want want perfect competition among your suppliers, because that will help keep your costs lower.

Exam tip: On a typical Economics exam, "perfect competition" or "perfectly competitive" will be in nearly 20% of the questions. When you see that in a question, it means that prices are at their lowest possible point. The competition causes everyone to lower their prices down to their minimum. Profits are zero. If the labor market is perfectly competitive, then everyone is making the lowest possible wage. These is no excess or surplus or "fat" or inefficiencies in a perfectly competitive market.

Example of Perfect Competition: Sports

Let's look at sports and see if it qualifies as "perfect competition" among athletes:

1. Many buyers and sellers? Yes. There are many teams competing for support of fans, and many fans choosing between different teams to support.

2. Goods that are perfect substitutes? Yes (services in this case). It's easy to stop rooting for the New York Giants and start rooting for another team, such as the New York Jets.

3. Perfect knowledge in the market? Yes, everyone knows the scores and the ticket prices are published for anyone who is interested.

4. Perfect mobility of resources? Pretty much "yes" again, as each team has tryouts and participates in a massive draft of college players every year.

But wait, you say, there is only one NFL. It looks like there is perfect competition within the NFL, but there is no other league that has perfect competition with the NFL. That is true: the NFL itself has little or no competition. There was a USFL that tried to compete against it many years ago, but it failed. In the 1960s, there was an "AFL" that did successfully compete against the NFL, and they merged to form what we call the NFL today.

Competition and Innovation

Perfect competition helps being out innovation, as participants seek a clever way to outdo the others. Competition can often motivate and bring out the best in everyone.

Consider the remarkable, true story of Dick Fosbury.

Dick Fosbury was a skinny young man having apparently little athletic ability. But the beauty of perfect competition is that it brings out the best, and the best is not always the person who others expect to win.

Fosbury's athletic event was the high jump, and he was determined to do his very best and win, no matter what anyone else said. Trouble was, he was such a poor jumper that he "clear" (leap over) only about 5' 3" high. This was, nowhere near what was needed to win any competitions. Not giving up, he worked tirelessly, trying all known techniques for jumping over a bar. Still, he could not improve to the jumping height he needed to win.

He did not give up. The high jump event, like most sports events, is perfectly competitive. There are (1) many participants, (2) athletes who serve as perfect "substitutes" for each other, (3) perfect knowledge in the market (everyone knows what the rules and conditions are), and (4) perfect mobility of resources (everyone has the same access to training opportunities).

Motivated by the opportunity of perfect competition, Fosbury developed a revolutionary style of high jumping. He started jumping back-first over the high bar. Though lacking in athletic gifts of his competitors, the young man improved his jumping ability by a foot, and then even more. He began to win.

His peculiar style attracted mockery and name-calling, as people derided his technique as the "flop". But he showed he did have a special characteristic that others lacked: he did not allow the mockery to bother him. He continued to jump in the direction opposite to all his competitors. With his unique invention of jumping back-first, he won the national college high jump event. But experts still considered his success to be a fluke and his approach to be a joke. They still refused to take Fosbury or is "flop" seriously.

When it came time for the Olympics in 1968, no one considered the young man to have a chance, and more athletic competitors were favorites to win the high jump event. But remember that this is perfect competition, and it does not matter what the experts say.

The whole world was riveted to the television screen as Dick Fosbury flawlessly cleared every height as the bar was raised again and again. When the bar was finally raised to an Olympic record height of 7' 4 1/4", only the young man and his "flop" were able to jump over it. He won the gold medal.

Immediately everyone else, including those who had mercilessly mocked him, began praising and imitating his style. To this day it is known as the "Fosbury Flop."^[3]

Review: Cost Measures

Let's pause for a moment and review some concepts from the last class. Imagine you are the owner of a firm. You want to understand all your costs. There are seven basic types of costs for a firm, also known as "cost measures:

marginal cost (MC)
total cost (TC)
average total cost (ATC)
fixed cost (FC, which is also the total fixed cost because there is nothing to sum)
average fixed cost (AFC)
total variable cost (TVC)
average variable cost (AVC)

The average of a type of cost is simply the total of that cost divided by the output (number of units) produced by the firm, also known as "Q". Stated another way, the average of a type of cost is the total cost per unit produced by the firm.

Hence:

ATC = TC / Q, where ATC is the abbreviation for "average total cost," and TC is the abbreviation for "total cost," and Q is output.

AFC = FC / Q, where AFC is the abbreviation for "average fixed cost," and FC is the abbreviation for "fixed cost," and Q is output.

We can also relate the different costs by using simple reasoning. The total cost is, of course, all the costs added together. It is the sum of the fixed cost plus the variable cost:

TC = FC + TVC

Exam questions can require manipulation of the above equations. For example, a question can give you the total cost as $1000 and the fixed cost as $700, and then ask you what the total variable cost is. Simply use the equation above:

TC = FC + TVC, and thus TVC = TC - FC, and hence TVC - $1000 - $700 = $300

Next suppose a question states that the total cost (TC) is a function of output (Q) as follows:

TC = 5Q + 200

The question may then ask, what is the fixed cost (FC)? The answer requires realizing that the fixed cost is defined as the cost when the output (Q) is 0. Plug in 0 into the above equation and solve for FC:

FC = TC(when Q=0) = 5*0 + 200 = $200

Often an exam question will give you a table of units produced in the first column, and total costs in the second column, and then ask you to use the table to calculate all seven of the above costs. Here is a simple guide:

FC is the cost when Q=0
AFC is FC/Q, and the question will give you Q
TC is the total cost for each Q, and the question will give you Q
ATC is TC/Q
TVC is TC - FC
AVC is TVC/Q
MC is the difference in cost between the specified Q and the good produced before it

In perfect competition, firms sell more and more Q until MR (marginal revenue) falls to the level of MC (marginal cost). Stated another way, firms sell at the point where MR = MC. Do not confuse MC with AVC; there are different concepts and it is tricky to relate one to the other. MC does equal AVC for the first unit produced (Q=1), but probably not for any other units. In addition, the difference between TVC's for unit Q and Q-1 is equal to the MC, and from that you can derive a relationship between AVC and MC (see honors analysis below).

Master the above and you will both ace exams and be able to run a successful business. Experienced business managers state that profitability is made by reducing expenses. This has certainly been true for Wal-Mart. It is constantly driving costs down with its suppliers. Remember: a penny saved is a penny earned. Actually, due to taxes, saving a penny is sometimes worth more than a penny earned.

Honors Only: Applying Cost Measures to Perfect Competition

When there is perfect competition, what can we learn from the cost measures? By applying logic to the assumption that there is perfect competition, we can learn a great deal.

Example Question: Suppose the price of a widget produced by a firm in perfect competition is less than the minimum average variable cost (AVC) in the market. What will the firm do next in the short run?

Answer: Realize that the question is asking about the short run, so building a new factory or changing fixed costs is not possible. There is not enough time. Instead, the question is asking what can be done as a "quick fix" to the problem. What is the problem? The problem is that the price is LESS than the lowest average variable cost (AVC). Now we know that that a firm is losing money when the price, or marginal revenue, is less than marginal cost. A firm does not want to sell anything at less than marginal cost, because it loses money on it.

But how does marginal cost relate to AVC? The relationship is tricky. When Q=1, MC=AVC. But that does not solve our problem above. So let's read the question again carefully, which is so important in Economics. The question says that the price (which is marginal revenue (MR)) is less than the MINIMUM AVC. That means that MR is ALWAYS less than AVC, for all output Q.

So let's compare the profit or loss of the firm at two points: when Q=0 (and thus AVC=0), and when Q>0 (and, as stated in the question, P<AVC, and thus MR<AVC). The firm is losing money for every Q>0, because it is spending more on AVC than it is bringing in as price or marginal revenue. The firm can reduce its loss by making Q=0. In other words, the firm is better off by completely shutting down.

Easy Question: What is the firm's profit or loss when Q=0 in this problem? This is an honors homework problem.

Hard Question: Prove mathematically that MC>MR for all Q>0 in this problem. This is the most challenging honors homework problem this week.

Obstacles to Reducing Costs

Can you think of obstacles to controlling and reducing costs in a business? Here are three reasons why costs increase more than you might expect as an owner of a firm:

1. In the short run, you have diminishing marginal productivity. Additional employees are not likely to be as productive as your first employees, for example. Diminishing marginal productivity results in higher average variable costs (AVC), because AVC = TVC/Q and your TVC (total variable costs) are increasing faster than your output Q when there is diminishing marginal productivity.

2. In the long run, you may have decreasing returns to scale. Note the difference between returns to scale, which is a "long run" concept, and marginal productivity, which is a "short run" issue. In the long run, the bigger you become, the more difficult it is to manage all your "inputs" (workers and inventory and every supply and service you need to run your company). Waste can easily get out of hand.

3. In the long run, your firm may also see rising prices for your inputs. Your suppliers increase their prices periodically. Inflation can hit you hard as the CPI increases from year to year. Scarce resources may become even scarcer, unless you can find substitutes for them.

It's not easy to run a business, which is why 9 out of every 10 new businesses fail, and most success businesses eventually fail also. But if you can control and reduce your costs, as Wal-Mart does, then you can succeed.

Gresham's Law

Exam Tips

We will have our midterm exam in two weeks (during class #9). Here are the topics that will be on the exam, with an approximate weighting similar to the CLEP exam for college credit:

10%: The basics (defining economics, also scarcity and opportunity cost)
20%: Supply and demand
15%: Elasticity
15%: Utility, indifference curves
30%: Decisions by a firm (cost measures, marginal product, short and long run, returns to scale, MR=MC)
10%: Miscellaneous, including consumer surplus, efficiency, transaction costs, Coase theorem

On any multiple choice exam, you can improve your score significantly by improving your test-taking skills. This includes:

reading the question carefully, and rereading if necessary; never miss a question due to misreading it
eliminating incorrect answers before choosing the correct one
not leaving any questions unanswered if no points are deducted for wrong answers (neither the CLEP exam nor my exams deduct for wrong answers)
preferring answers that are worded in a way that fits the question as a key fits a lock
disfavoring answers that have sweeping or broad terms in them, like ALWAYS and NEVER
avoiding changing answers away from your first impression, unless you have a good reason to do so.

Many questions on a multiple-choice exam can be answered correctly even though you didn't know the right answer beforehand, if you follow the above test-taking skills. One of my former students was told he would not have to take a particular exam in college, and he did not study for it, but was then surprised when the teacher made him take it anyway. Using these test-taking skills that he learned in my courses, he obtained the highest score -- higher than many students who studied many hours for the exam.

More

<"green" energy: windmills in Penn. and W.Va., solar panels: are they efficient or a waste? Takes 10 years to recoup the cost of installing solar panels on a home>

Free enterprise is based on competition bringing out the best in business and the lowest prices for consumers. If a price is too high or a business too inefficient, then competition is what brings a competitor along to do better.

Opponents of competition say it is wasteful to have multiple people or companies produce the same thing. Or they do not like the way that competition causes someone to lose. Many parents oppose competition in school, because for every winner there is a loser, and that might be their child. Actually, in difficult competitions there can be dozens of losers for every winner. Tournaments, for example, have one winner but many losers.

However, the same people who oppose competition in business or school can be found watching professional sporting events like the Super Bowl, or entertainment competitions like American Idol. If they are having a medical operation, wouldn’t they want the doctor who had the best grades and track record? Or if they are flying on an airplane, wouldn’t they want the pilot who did the best in flight school and on the job? If competition there is acceptable, then why not in business and school also?

Competition, in fact, yields enormous benefits for the losers as well as the winners. Competition is a great motivator. It is also an essential part of the “invisible hand” that channels work and supplies towards their most useful purposes. Competition increases efficiency. Competition encourages innovation. It allows to people to do what was thought to be impossible. Whenever we are beaten by a competitor, and all of us experience that many times, we are left to ask ourselves why our competitor was better than we were. Next time, we can do better.

The U.S. Constitution itself can be understood as system using competition for power to prevent anyone from becoming too powerful. It established three separate branches of government to serve as checks and balances on each other. No individual or branch can grab too much power because the system protects and promotes competition.

The system of political competition has worked well. When Chief Justice John Marshall expanded Supreme Court power so much that it invalidated a Georgia law applying to Indian land, President Andrew Jackson refused to enforce the Court’s ruling. A century later President Truman ordered a government takeover of the steel mills, and the Supreme Court asserted its power and blocked him. The competition for power prevents any branch from growing too strong.

The benefits of competition extend even to political campaigns. The presidential race in America is increasingly competitive. So competitive, in fact, that no presidential candidate has won even 50% of the vote from 1992 through 2000. The intense competition tends to keep the power in the hands of the people. A dictator who does not have to face reelection has far more power than an American president does, thanks to this political competition in America.

Competition is also a great way to motivate yourself. Virtually no one likes to work or study. But people dislike losing even more. Look around at achievements by others and then ask yourself: why not me? Sometimes, the achievers are those who overcome the greatest obstacles. At my local grocery store, the fastest checkout clerk has only one good arm. Yet he is more efficient than all the other clerks who have two good arms. Frequently the best athlete is the one with less God-given skills than others. Rather, the best athlete is often the one who tries the hardest, both in practice and in the game. The same is often true for the best student and the best business.

In business, the major beneficiaries of competition are the most efficient companies and the consumers. The more competition by grocery stores in town, for example, the lower their prices are likely to be for the consumer. The most efficient grocery store (including considerations like location) will likely be the most profitable and the one that lasts the longest. Businesses know that they have to work hard to beat their competition. Without that competition, it would be very unpleasant for us to shop for goods and services. Communist countries have little competition and many unsatisfied consumers.

Businesses themselves, however, often dislike competition because it can reduce their ability to earn profits. To protect consumers, federal laws limit the ability of businesses to reduce competition.

Homeschool Dinner Event

To illustrate the practical aspects of microeconomics, consider a dinner event we held in 2004 and 2005. The goal was to maximize attendance while making a small profit.

Each student in the class should consider the various committees needed to help accomplish this goal.

On the “supply side”:

1. Selection Committee. This includes choosing the location (probably a church facility), a caterer (probably nearby), and a date (probably a weekday). 2. Presentation Committee. This includes planning the evening program (designed to be informative about homeschooling) and picking an outside speaker. 3. Event Committee. This includes designing and printing a written program for guests, and supervising the service of food to guests.

On the “demand side”:

1. Ticket Sales Committee. This includes setting the prices, marketing the event, and selling the tickets. 2. Program Sales Committee. This includes seeking business, church and individual sponsors, in exchange for featuring them in the written program. 3. Door Committee (managing the door at the event itself: taking and selling tickets, collecting late payments, and making sure the customers are happy).

Consider for a moment how competition can be very beneficial to this effort, particularly on the “supply side.” To maximize the benefits of competition, the goal is to strive to satisfy the conditions of perfect competition.

In choosing the caterer, for example, you can reduce your price by considering several competitors. Ask each caterer for a bid, and then compare them. Look for ways to persuade them to reduce their price. Offer, perhaps, to do some the work to save their labor. See if a discount is available for prompt payment, or even payment in advance. See if costs can be reduced by holding the event on a weekday rather than a weekend.

Choosing a speaker requires an element of competition also. If you fix your mind on one person and do not consider alternatives, then you are unlikely to obtain your best speaker at the lowest possible cost. Again, entertain several different possibilities. Consider why a speaker may want to talk to a group of homeschoolers. Advantages are the youth, intelligence and motivation of the audience. Perhaps the speaker could make more talking to a general audience, but he or she will not have as much influence. Realize that out-of-town speakers will have greater expenses for travel and opportunity costs.

Printing costs for a program can be reduced by using competition also. Copying costs vary widely among stores. Shop around. Quality is an issue here also, as not all types of copies are perfect substitutes for each other.

On the demand side, an opposite perspective must be taken. Here you want to reach the highest possible price in selling tickets or spaces for sponsors in the program. Good salesmen or sellers are often the opposite of good buyers. The roles are the inverse of each other.

What would entice someone to attend a dinner? How can you make the event look as attractive as possible? How should price discrimination be used to maximize the income? Here are the prices on a fancy fundraising pro-life dinner dance at a nice hotel that I just received in the mail:

Table Host (for ten): $2000 benefactor: $1000 per person patron: $500 per person sponsor: $250 per person supporter: $150 per person Can’t attend but enclose donation of _______

It is trying to raise money for a good cause, and sets its prices on the high side. A popular, conservative congressman is the guest speaker. Do you think this pricing maximizes the amount raised for the worthy cause? Does this use price discrimination?

The "Marketplace of Ideas"

Harmful Goods and Services, and Addictions

The colony of Virginia survived and thrived by turning to tobacco and slavery. Much of the economy, even today, is based on vices and harmful activities. This is sad but true. The largest building west of the Mississippi, which includes all of California and many other states, is located in Las Vegas, built on gambling. In fact, Las Vegas has far more hotel space than any other city in the United States, including even New York. The people staying in those hotels are hurting themselves and losing their money through gambling, which may be an addiction for them.

Abortion is a very harmful activity that exists because some are making millions of dollars from it, and giving some of that money to politicians who support them. Smoking exists because tobacco companies earn big profits from it, even though it kills many people each year. Beer is destroying people’s livers but making billions of dollars for beer companies.

Go into a typical convenience store and you will find that they do a brisk trade in cigarettes, pornography, alcohol and lottery tickets. Those four categories probably account for most of their profits. The people paying for those goods are both losing money and hurting themselves.

In the “underground” (illegal) economy, drug trafficking accounts for an enormous amount of commercial activity. Drugs are extremely hurtful, but drug dealers make money out of getting people addicted to drugs and paying money for them. Often people die of overdoses from drugs.

What do these harmful economic activities have in common? They exploit addictions. The prices on these goods and services can be increased much more easily than on anything else. Someone addicted to drugs is still going to try to buy it even if the price increases by 10%, 20%, 50%, or 100%. The same can be said for gambling, pornography, alcohol and almost every other vice. They are profitable to sellers who exploit the addiction. Buyers lose their money and ultimately their lives.

Imbalance in Information

Imbalances in information are a reason for the delay in pricing to reach equilibrium. Buyers do not immediately realize when they can obtain the same good more cheaply another way. For many years people continued to pay high costs for renting telephones after it became legal to buy inexpensive ones. The effects of competition are not often felt overnight. A lower-priced competitor has to educate the public of the availability of its goods, and that takes time.

There is also a more permanent imbalance in information between the buyer and seller of a good. The seller always knows more about his good than the buyer does. The seller does not want to disclose the disadvantages, weaknesses, defects, and outright dangers of his good. The buyer has to beware in paying money to the seller for a good: caveat emptor (Latin for “let the buyer beware”).

Tobacco companies did not want to disclose that cigarettes cause cancer. Abortion providers do not want to disclose that abortions can cause infertility (inability to have children) or severe premature birth and health problems in future children, breast cancer, and psychological problems. There would be far fewer abortions if full disclosure of their harm were made prior to performing the service, and if taxpayer money was not used to fund the service.

Disclosure of harm is a problem for used car dealers who do not want to tell buyers that a car is a lemon (i.e., constantly needs fixing). Food manufacturers do not want to disclose all the fat and artificial ingredients in their products.

Governmental regulations require some of these disclosures (but not for abortion in New Jersey, which is one reason why New Jersey has more abortions than other states that do require full disclosures). Mandatory disclosure about goods and services may be the best and only effective type of governmental regulation. Food packaging now must state what the ingredients are and how much fat is contained. The buyer doesn’t have to guess about this information. The buyer must still beware, but can do so with more information than before.

13. Should sellers of goods or services required to fully disclose to the public the harm that their goods or services causes? Discuss, providing a specific example of a harmful good or service.

Assignment

Read and, if necessary, reread the above lecture. Then answer __ out of the following __ questions:

1. One of the best motivators in business and in life is ___________.

2. Define what perfect competition is.

4. Do you think the converse of Gresham's Law is true with respect to speech and conversation, such that good speech or conversation (such as discussing the Bible) drives out bad?

old questions:

2. Describe how you can use competition to help motivate yourself to accomplish a goal.

3. Until Conservapedia.com began, Wikipedia.com did not have any competition. What often happens to a firm or service when there is no competition? Why?

4. Suppose you own a widget factory having fixed costs of $10,000. In addition to the $10,000, you have variable costs of $2,500 for each widget you make. Worse, the factory can make only 3 widgets in an entire year! Your widget sells for $5,000. Someone offered to buy your factory for $10,000. Should you sell it?

5. One day, you visit Wal-Mart to see if you can sell it some widgets. Wal-Mart said it has good new and bad news. The good news is that it wants high volume. The bad news is that it wants a price so low that your MC=MR for every unit sold to it. Should you agree? Explain.

6. Suppose you own a company that has marginal cost (MC) = $9, average total cost (total cost divided by total output) = $11, average variable cost (average cost of variable inputs, like labor and materials) = $5 and price of the sold good (P) = $8. Should you make any additional goods at these numbers? Should you shut down your company?

7. Suppose you are running a dinner event at a free facility that has 24 tables seating 8 apiece. Your marginal cost (MC) is $15 per person. Suppose your speaker costs $3500 in fees and expenses. Suppose your demand curve is this: at price P=$15, quantity Q=200; at P=$35, Q=120; at P=$50, Q=70; at P=$60, Q=40; at P=$150, Q=7. How would you price and market your tickets?

new questions:

Honors

Answer any __ out of the following __ questions:

8. What is the firm's profit or loss when Q=0 in the honors discussion above? (Answer simply in terms of another cost measure.) Is the firm profitable?

9. (Challenging, with extra credit) Prove mathematically that MC>MR for all Q>0 in the honors discussion above. (Hint: define MC in terms of the change in AVC, and then regroup the terms and draw conclusions about them to show MC>MR).

old questions:

8. “One of the greatest benefits of competition is accountability.” How?

9. Describe an industry where you think competition is nearly perfect, and another industry where competition is far from perfect, and explain why for both.

10. Is competition always a good thing?

11. The account of the multiplication of the loaves by Jesus is unique in the way it is included in all four Gospels, and is even mentioned twice in Mark. Read the account, as in Matthew 14:13-21. Does that account change your view about scarcity, and whether scarcity really exists? Even if it does exists, is its significance exaggerated by a lack of faith?