Lecture 5 Quiz

Model Answers Submitted By Students

  1. Your boss asked you to work overtime. Is that a short-run or long-run solution for him?

It is a short-run solution for him to ask you to work overtime. You are not always going to work overtime. Working overtime is a quick solution for your boss when he needs someone to work. (Jessica H.)

  1. You just hired a new employee at $1000 per month, and he boosted your production from 100 widgets a month to 118 widgets a month. Widgets are selling for $50 apiece. Compare your marginal cost (MC) and marginal revenue (MR) of that hiring decision. What should you do?

Since the new employee is generating an extra $900 income and being paid $1000 a month is costing you $100 a month to have this employee, you should fire him. (Kevin H.)

The best thing I could do in this situation would be to decrease his salary to somewhere around $750-800/month and tell the employee that he will receive raises respective to his production. (Michael N.)

  1. Say you open a new store next to Wal-Mart, and are profitable with ten employees. You decide to double your size and number of employees. Will you double your profit? Discuss.

Doubling the size of your business may or many not double your profit. If there are many tasks that need to be done than you may increase your efficiency by doubling your employees. If the demand for your products are also high, then you may double your revenue because of an increase in production levels. Your biggest problem is that you are right next to Wal-Mart. Since this puts many odds against you, your profit is most likely not going to double, but you still may bring in extra income. (Chris R.)

… To receive a higher total revenue the marginal revenue of the extra widgets that can be sold because of the larger space must exceed the marginal cost of the extra employees, building space, and other new and larger transaction costs from the increase in size. (Kris T.)

Due to diminishing marginal returns, you will not get double the profits by hiring double the workers and doubling the size. There are only so many customers that will come anyway. … Besides, knowing that you opened the store next to Wal-Mart, I’m skeptical in even keeping the store open. (Phyllis S.)

The profit would not [necessarily] be doubled. You’d have to pay your new employees and there are no guarantees that being bigger will increase business. … (Lisa H.)

This question depends largely on the elasticity of the demand curve of the goods you sell. … Operating on a larger scale, you would be able to sell the same high quality goods at a significantly lower price. If the goods you sell have a highly elastic demand curve the lower price should at least double your profit. … (Chris J.)

  1. Your widget company has the following costs: Producing 10 widgets, your costs are $2000. Producing 8 widgets, your costs are $1800. Producing 6 widgets, your costs are $1500. Producing 4 widgets, your costs are $1200. Producing 2 widgets, your costs are $800. Producing 0 widgets, your costs are $400. What is your fixed cost? MC for widgets 7 & 8? Average costs for producing 4 widgets?

My fixes cost is $400. My marginal cost for widgets 7 and 8 is $300. The average cost for producing 4 widgets is $300/widget. (Rebecca B.)

My fixed cost would be $400. The MC for widgets 7 & 8 would be $150 [apiece]. The average costs for producing 4 widgets would be $300, unless you deducted fixed costs and the average costs would [then] be $200 per widget. (Cara M.)

  1. A regulator had to choose new regulation A or B: (A) imposed substantial new transaction costs on consumers, while (B) did not. Which does the Coase Theorem tend to prefer?
  1. According to the Coase Theorem, minimizing transaction costs maximizes economic activity. (Ben S.)

The Coase Theorem would prefer (b) which does not impose transaction costs on consumers. (Matt P.)

  1. Define economic efficiency. Give an example of something that is efficient, and something else that is not.

Economic efficiency is getting as much output as possible for the minimum input. Something that is efficient is an assembly line. Something that is inefficient is the public school system. (Tim S.)

… Perhaps the only certain example of something physical that is efficient is the only existing perpetual motion machine: the universe itself, made efficient by the Law of the Conservation of Energy. … (Chris J.)

Efficiency: maximum output for minimum input. Something that is efficient would be Ford motor company making a car on the assembly line. Something that is inefficient would be Aston Martian making a car by hand. (Scott J.)

… Something inefficient would be any old worn-out tool. For example, recently I was cutting down some trees and trimming some branches with an old dull saw when I realized the high opportunity cost and inefficiency involved. I then had my mother drive me a short distance to a local store where I purchased a new saw for $13.99. I now am working at about twice the pace and am saving lots of time. (Brandon M.)

An example of something that is efficient would be electricity. (Anthony B.)

  1. Ronald Coase says that transaction costs are the costs of using the market. Explain your view of that phrase, with examples.

I totally agree with this theory. If you go out to eat at a nice place then you have to tip the waitress and [pay] other transaction costs …. (Zack S.)

  1. Suppose a New York Times editorial complained about the gap between the rich and poor, declaring that the gap is impeding economic recovery. Suppose it claimed the economy would grow quicker if the gap were smaller. In the absence of transaction costs, is that correct?

In the absence of transaction costs and according to the Coase Theorem, the size of the gap would not matter. The Coase Theorem states that in the absence of transaction costs, the level of economic activity is the same no matter who has the rights or owns the property, and because economic recovery is based on upon the buying and selling (economic activity) of goods and services (property) the size of the gap would not affect economic recovery. (Chris B.)

In the absence of transaction costs, the claim that the gap between the rich and the poor is impeding economic recovery is fallacious. As the Coase Theorem states, it doesn’t matter who owns what. In the absence of transaction costs, it doesn’t matter if the owner of a property right is the richest man in the world or the poorest. The amount of economic activity that takes place depends on the items that are being sold, not who is selling them. Consequently, the size of the gap between the rich and the poor is a non-issue regarding the speed at which the economy will grow or recover. (Eric J.)

No, … the Coase Theorem says that in the absence of transaction costs, it doesn’t matter who has the money. For example, if the income of most wealthy persons were to magically go down …, [and] the income of most of the lower class would tend to go up … [and the] same money w[as] still … there; the economic level would stay the same. (Sarah B.)

  1. Each year Forbes magazine lists the wealthiest persons. Assume for the moment a world without transaction costs. What is the significance of that list? Will the ideas of people on that list be more influential?

There would be no significance to that list. The only advantage wealthy people really have is that they can pay more transaction costs than those with less money. If you have a brilliant idea, you need someone to pay so that you can get that idea out. … If there were no transaction costs though, you wouldn’t need to pay to get that message out. … And you don’t have to be wealthy to be richly educated in order to have a brilliant idea. Ronald Coase proved that quite nicely. (Sarah C.)

In a world without transaction costs the list would have little more significance than a list of the poorest people in the world. The ideas of the wealthiest people in the world would be no more influential than those of the poorest people in the world because in the absence of transaction costs the poor would be able to communicate their ideas just as well as the rich. (Chris J.)

The list would be completely pointless. Without transaction costs, it wouldn’t matter who had the property or resources …. (Mary Rose B.)

None, because in a world without transaction costs, the same amount of goods will occur regardless of who owns it. No, because their significance on the list is zero. (Kirstin L.)

The rich can afford transaction costs but the poor can’t. In the absence of transaction costs the poor don’t have to be able to afford them, so their ideas will be heard anyway and … the list of the wealthiest people will be pointless …. (Alyssa G.)

  1. John Kerry needs votes from environmentalists and donations by internet users. So suppose he announced a program to transfer all ownership rights in trees from logging companies to people who easily sell goods over the internet (say on Ebay). Should this thrill the tree-huggers?

This would not make the environmentalists happy, because these people could then sell the rights to the logging companies. This is an example of the Coase Theorem at work. No matter who owns the rights to the trees, they will still be cut down. (Daniel L.)

Some would say yes, because the logging companies don’t have the rights anymore, but I think the answer should be no because people who sell goods over the internet can sell them to anyone who as the money. (Sarah S.)

  1. The Fifth Amendment says nor shall private property be taken for public use, without just compensation. How does that benefit the economy?

This helps to allow real estate to retain its high value. People are more likely to go around looking for a new house and or not move to another country when they feel that they can move without their land suddenly being taken away from them. It will also cause the owner of the house to invest more in his or her house, thus buying the goods from the economy to improve the house, thus helping along the economic structure. (Charles A.)

It benefits the economy by keeping more land under private ownership. Private ownership is more productive than government ownership because without government regulation it is easier and more cost effective to do business. (Joshua H.)

  1. The pen is mightier than the sword. Assuming that the sword is used mainly to seize property, explain economic justifications for that statement.

Property is going to be used in the most profitable way possible anyway, so all that changes in war is the ownership of the property, and war is an extremely inefficient way of conducting transactions (it might even be considered a transaction cost). It is better to try to convince the other person to act in a way that you approve by selling you the property because the transaction costs and price will almost certainly be far less than those of going to war for the property. (Joseph S.)

[P]ersuasion and other such things are usually stronger than brute force. (Greg J.)

I think that you can get a lot more with written permission or legal papers (pen) than with force (sword). Abraham Lincoln once said, “Ballets are more powerful than bullets.” I think that this proves my point. (Abigail L.)

The pen is mightier than the sword. While the sword can only be used to seize, kill, and destroy, the pen can be used to persuade, educate, and invent. Because of the destructive nature of the sword, the sword is wholly dependent upon what has or will be constructed. The sword can not sustain itself without seizing the property of others, and therefore is inherently dependent upon the pen. If the sword tries to take too much, then the people will despair, and cease producing, causing the sword to starve to death. On the other hand, the pen is not even limited to producing goods. The pen can also be used to persuade the people. For example, the pen can be used to convince the people to revolt, and kill the bearer of the sword, or to stop producing any more than they absolutely need to survive and by doing so to starve the sword to death. (Eric J.)

The pen is mightier than the sword because the sword is used for seizing things, but the pen is used to stop the sword. The pen can control the sword, but the sword cannot control the pen. In the economy, the pen controls all that goes on. … (Patricia H.)