Part 1: (5 points) Consider Palomar College as a business. (If you are new to Palomar College, consider instead your high school or any other business with which you are familiar.)
1. For Palomar College, what would qualify as the natural resources?
2. For Palomar College, what would qualify as the labor?
3. For Palomar College, what would qualify as the capital?
4. We have defined opportunity cost as the value sacrificed whenever a decision is made. You have made a decision to attend Palomar College this semester. Make an estimate of the total opportunity cost of your decision. This will depend on how many units you are taking and how many days of the week you attend. Be sure to consider the value of time spent studying.
My Total Opportunity Cost is $_______________________.
Based on the following calculations:
5. According to Adam Smith, "He...neither intends to promote the publick (sic) interest, nor knows how much he is promoting it...He intends only his own gain, and he is in this, as in many other cases, led … to promote an end which was no part of his intention." In other words, in pursuing one’s self interest, one acts to promote the good of society.
In the movie Wall Street, Gordon Gekko (Michael Douglas) says the following: “Greed … is
good. Greed is right. Greed works. Greed comes through and catches the essence of the evolutionary spirit. Greed in all its forms -- greed for life, for love, for knowledge, for money --- has marked the upward surge of mankind and greed will …. save that malfunctioning corporation called the USA.”
Is there is difference between “acting in one’s self-interest” and “being greedy”? If so, what is the difference? Is greed good?
Part 2: (5 points)
6. Private industrial timber companies own 15% of all timberland in the United States (9% in the West). At some point, the trees are cut, transported to a mill, processed into either paper or lumber products, and then sold. Assume that the trees are already planted. Two costs will be incurred before the trees are to be cut. First, in ten years, there must be a commercial thinning. This means that workers will be hired and machines purchased to reduce the amount of undergrowth so that nutrients can be concentrated in the trees. Second, in ten years and again in twenty years, the trees will be chemically fertilized through aerial spraying. The trees will grow very quickly for 50 to 60 years. After this, they grow slowly. The slow growth produces a wood that is free of knots and sap and therefore sells for a much higher price in the market.
Use the principles of rational decision-making from Chapter 2 to explain how a timber company would go about making the decision as to the best time for it to cut the trees. (You do not have to make the decision. Just explain how one would go about making this decision.)
Continued on Page 2
Part 3: (5 points)
1. In the chapter it was argued that the demand for airline travel was relatively elastic. Explain why this would be so using the three factors discussed in this section.
2. In 2007, Governor Schwartzeneggar lowered the fees at community colleges from $26 to $20 per unit. Is the demand for community college courses relatively elastic or relatively inelastic? Use the three factors to explain why. Based on your answer, what would happen to the revenues of the community colleges?
3. In each case, state whether you believe the demand for the product is relatively elastic or relatively inelastic? Then, provide reasons for your conclusion.
Part 1: 5 points 1. State in your own words what each of the following phrases means. To do this, you must explain what the number 3 actually tells you.
1. The income elasticity of demand for automobiles is +3.
2. The cross elasticity of demand between automobiles and gasoline is -3.
2. In each of the following cases, state whether there is a movement along the demand curve for American automobiles, the demand curve for American automobiles will shift to the right, or the demand curve for American automobiles will shift to the left:
1. The price of gasoline rises to $4 ____________________
2. The prices of American automobiles rise ____________________
3. The prices of Japanese automobiles rise ____________________
4. Interest rates paid to borrow money to buy automobiles
fall to zero ____________________
5. Buyers' incomes fall ____________________
6. Buyers find that American automobiles are
of higher quality ____________________
7. Mexican automobile buyers are now able to
buy American automobiles ____________________
8. Buyers expect that the price of American
automobiles will rise next year ____________________
Continued on Page 4
Part 2: 5 points Read the article “Off the Record” by Robert Sandall below on Pages 4 to 8. Then answer the questions below on Page 8.
There is a story doing the rounds in the US that says a lot about the
state of the music business. It concerns a young rock band who decided
to stop selling their CDs at concerts. Selling CDs has, for many years,
been a good way for an act to reclaim the margin that would otherwise
have been snaffled by a retailer. But it made no sense to this band once
they discovered that by selling CDs for $10 they were cannibalising
sales of their $20 T-shirts.
There are two points to note here. First, that a simple garment with a
logo stamped across it, probably manufactured for pennies in a
pristine, highly wrought music recorded in a state of the art western
studio. Second, most bands, however successful, now make their money
from live work and the merchandising opportunities that go with it,
rather than from recordings.
The record companies know this, which is why when EMI re-signed Robbie Williams in 2002, the £80m deal guaranteed the label a share in the profits generated by Williams's tours (a British pound is worth $2). Such spinoffs are often now make or break issues in contractual negotiations. Gerd Leonhard, a music business consultant, predicts that by 2010, recorded music sales will make up only 30 per cent of a successful label's revenues. The rest will be generated by artists' extra-musical brand extensions. Like those $20 T-shirts.
The artists are getting wise to this new value chain. One of the hottest new names to emerge recently, the rave metal band Enter Shikari, have refused to sign any of the deals they have been offered, instead releasing their debut album Take to the Skies on their own label, Ambush
Reality, in March. In the past, these tiny, so-called "indie," labels have usually been funded by majors anxious to covertly purchase credibility for their products with a young audience. The celebrated label Creation, home to Oasis and other Britpop stars in the 1990s, was owned entirely by Sony. Had it not been, the marketing spend which turned Oasis into a huge international draw would not have been available.
But this is not the case with Ambush Reality. The marketing of Take to the Skies was undertaken largely by the band themselves, who have played nearly 700 gigs since forming in St Albans in 2003. Word of mouth, coupled with the inevitable presence on MySpace, has done the rest. In November 2006, they became only the second unsigned band (after the Darkness) to sell out the 2,000-capacity Astoria in London. Five months later, Take to the Skies entered the British album chart at number four. In May, Enter Shikari started out on their first American tour.
They have set an inspirational example, not least by their single-minded prioritising of their performances. Groups used to tour, often at a loss, to stimulate sales of their latest album. Now it's the other way around. Hence the widely reported decision earlier this year by the Crimea, a band previously signed to Warner Bros, to release their new album as a free download. The band explained this not as an anarcho-hippie gesture in support of the principle that music ought to
be free, but as a sensible promotional tactic. Their hope is that by disseminating their music online, they will expand their fan base and increase their returns from touring. Having seen the small size of the checks they got from Warner, they know where not to look for their future income.
This view is shared by a far more famous former Warner artist: Prince. Anyone attending his shows at the London O2 arena in August will receive a free copy of his latest CD, Planet Earth, as did anyone who bought the Mail on Sunday on 15th July. Prince's new label, Sony/BMG, which did not know about the deal, has withdrawn the album from British shelves. "Record sales as we know them are in long-term decline," says music business analyst Keith Jopling. "Whereas the wider music market—live, merchandising, streaming video and music social networking—is in rude health. After seven years of gradual change, we are about to see a major shift. Record companies are, at last, in a hurry to transform themselves into proper consumer marketing companies."
The catastrophic slide in the value of recorded music, and particularly in the price consumers are prepared to pay for it, has been felt hard on the high street. HMV announced in June that its profits had halved over the past year. Soon afterwards, the discount CD chain Fopp went out of
The industry that for years appeared to possess a licence to print money is reeling. The "big four" labels—Sony/BMG, Warner Music, EMI and Universal—have in recent years embarked on cost-cutting operations leading to major culls of staff: EMI's recorded music division has shrunk by almost half since 2001, from 9,388 employees worldwide to 4,818 today. Meanwhile, a senior industry executive reports that of this year's breakthrough British acts, just one, Mika, will make money for his record company. This decline in fortunes has been noticed in the financial markets: EMI is being bought up by private equity group Terra Firma, for £3.2bn.
Almost as soon as the offer was accepted, Terra Firma were reported to be in discussions with Warner to offload EMI's recorded music division. The side of EMI that interested Terra Firma was its song publishing arm, the world's largest and a profitable performer. It is regarded as a
safer bet because the exploitation of song copyrights is not subject to the same feasts and famines as the hitmaking process. As well as receiving around 14 per cent of the profit on any CD sale,
the publisher has its fingers in other pies, such as licensing fees for films, ads or any of the other myriad outlets which now employ music. Once upon a time, EMI's publishing arm accounted for about a third of the market value of the whole group. Now it's the only part that's worth anything
to the people who venture their capital. It is no coincidence that Terra Firma's offer valued EMI at about a third, in real terms, of what it nearly fetched ten years ago when a sale to its competitor Universal was mooted.
That decline roughly mirrors what has happened over the same period to the retail price of
new—as opposed to catalogue reissue—CDs. When EMI's subsidiary Virgin put out the Spice Girls debut album in 1996, it sold for around £13 in Britain, from which the company cleared more than £5 in profit. New CDs now seldom cost more than £9, from which the label can expect to make £2, if it is lucky.
Although Britons still buy more CDs per head than anyone else—2.7 in 2006—the market for recorded music is in rapid decline. In the first quarter of 2007, the market for the top-selling 200 CDs in Britain shrank by 20 per cent compared to the same period in 2006. In the US, CD sales in 2007 are down by 15 per cent, in France 25 per cent, in Canada 35 per cent. The German market, once the largest in Europe, is now no bigger than that of the Netherlands.
The market for digital downloads was worth around $981m in the US last year, around a tenth of the value of the CD market. Yet the labels' great hope is that the slump in demand for physical formats will be offset by growth in the download market. This looks wildly optimistic. The latest figures from the US reveal that while paid-for downloads are increasingly popular—up 74 per cent in 2006 on the previous year—the surge in demand is slowing. And while the total value of music sales across all formats remained more or less static in 2004 and 2005, it declined by more than 6 per cent in 2006. The trade body of the American record industry, the RIAA, optimistically predicts that by 2011, the global online music market will be worth $6.6bn; three times what it
Yet however it finds itself in 2011, the underlying truth is that recorded music, on or offline, has moved from being a high-margin, "high-end" product to a low-margin, low-prestige commodity. The album, for 35 years the basic, pricey unit of the industry—such a handy way of
getting fans to shell out for ten songs when they might have wanted only three or four— increasingly seems, for young consumers, a clunky, old-fashioned and uneconomical way of building a music library on a portable MP3 player.
Far better to download songs; at the iTunes music store, tracks retail for 99 cents in America and 79p here. In Britain, at the end of the 1990s, CD singles sold for £4. Of that, the artist received about 50p, while the record company took as much as £1. Under the new web-style
arrangement, the artist is lucky to get 10p, and the company might gross 30p.
This destruction of the value of individual recordings explains why, even if we were to carry on buying recorded music in the quantity we did at the end of the last century, the prospects for suppliers would still be bleak. However high the record companies worldwide pile their audio
products in future, the only way they will be able to sell them is cheap. In Britain, the 10 per cent of singles still sold on CD now retail for just £1.49.
Record company insiders are aghast at the demise of what was, for the last two decades of the 20th century, their golden goose. And some of them know that they were partly responsible for killing it. Arriving on the market in 1982, just after record sales began to revive following a three-year downturn, the compact disc ushered in the biggest boom in profits the record companies had known since 7" singles gave way to 12" LPs in the late 1960s. The CD persuaded many music fans to replace their vinyl collection with digital copies of music they had already paid for. And the rise of the CD permitted record companies to double the price of their basic product without incurring a huge uplift in costs. Even allowing for the royalty paid to the joint inventors of
the CD—Philips and Sony—the discs were soon being manufactured for little more than it cost to crank out vinyl records on ancient presses. Initial anxieties that consumers might be resistant to the more expensive format proved unfounded. Research revealed that music fans were more worried about the cost of acquiring a CD player than by the price of the discs. Paying £12 (£30 in today's money) for an album that, nearly everybody agreed, sounded better and was easier to manipulate than a vinyl LP, didn't feel steep in the mid-1980s. In 1994, the CD supplanted the cassette as the most popular platform for recorded music in western markets.
Yet in some ways the CD contained the seeds of its own destruction. One of the few industry moguls to raise his voice against the digital format in its early days was the late Maurice Oberstein, an American who was latterly head of the Polygram UK (later Universal) label. "Do you realize we are giving away our master tapes here?" he asked at an industry event. At the time, everybody was too busy counting the cash to listen. But as the advent of recordable CDs kickstarted a black economy in counterfeits in the 1990s, Oberstein was proved right.
Anybody who owned a CD could indeed use it as record companies had traditionally used master tapes: to clone thousands more, and quickly, using kit available on any high street. And at home, CD burning hardware on computers made it simple to produce copies in seconds. Developing markets in South America and southeast Asia collapsed under the weight of cheap copies. More damaging was the loss of the German market. Within the space of five years, the 82m Germans turned into a nation of CD copiers, paying pfennigs for albums that once cost 40DM.
Still, the market in the rest of the west, while not exactly booming, did hold up. The next development to shake up the music industry was the emergence in the late 1990s of illegal "file-sharing" websites, such as Napster. Online piracy, often identified by the media as the wrecker of
the CD business, did seem a big threat at the time, although it was difficult to find hard data to support the claim that it damaged sales. Rather like the "Home Taping is Killing Music" campaign mounted by record companies in the 1980s, the arrival of illegal file-sharing coincided with an increase in legitimate sales of recorded music in the three largest markets: America, Japan and Britain. This supported the file-sharers' defense that their activities were no more harmful to music sales than the arrival of free radio airplay in the 1930s.
Instead, it has been the iTunes era of the 21st century—the creation of a growing legitimate online trade in cheap music—that has coincided with the drop-off in CD sales. The burgeoning popularity of portable MP3 players, notably Apple's iPod, seems to be turning the compact disc into the 21st-century equivalent of shellac—the precursor to vinyl.
Yet the music industry itself must take some of the blame for the decline of the CD. For the past 15 years, free covermounts on magazines and newspapers, licensed or even paid for by record companies, have diluted the perceived value of recorded music in general and CDs in particular. The practice of dumping free music CDs on the newsstands peaked in 2004, when 454 were licensed in Britain. It may seem odd that at the same time the industry was trying, and failing, to maintain a £10 price point for its premium CD products. But for years, record companies clung to the view that covermounts were a promotional benefit to them and their artists. Just as they allowed MTV to build its business by supplying it with free videos, they did newspaper and magazine publishers a huge favor on what turned out to be a hunch. They maintained this position even after their trade body, the BPI, showed that the only beneficiaries of such giveaways were the publications carrying them. In the mid-1990s, Mark Ellen, editor of Q,
Britain's leading rock title, described a CD giveaway as "like pinning a £10 note to the cover." When the Sunday Times gave away a free CD of old Oasis songs in 2000, it registered its highest circulation ever. In the following weeks, the BPI noted, retail sales of Oasis albums actually declined. But now even newspapers and magazines seem to have lost their appetite for covermounts. Last year, Q discontinued them on the grounds that the cost of manufacturing the discs was no longer justified by a spike in circulation. No clearer sign exists that, at least for
musically savvy Q readers, you can't give CDs away.
Labels now tend only to use covermounts to showcase the music of new or developing acts. But old habits die hard. In April, EMI licensed Mike Oldfield's album Tubular Bells to the Mail on Sunday. The company charged Northcliffe Newspapers £200,000 for the right to dispense 2.3m CD covermounts of Britain's 11th bestselling album ever. The deal valued Oldfield's classic—the LP that launched Virgin as a successful record label in 1973—at a little over 8p a copy. This led the head of Woolworths, one of the largest of the dwindling band of CD retailers in
Britain, to ask: "And how many copies of Tubular Bells do you think we will sell this week?"
It is difficult to prove that the rising popularity and price of live music has been directly affected by the superfluity and cheapness of the recorded stuff. But it seems more than a coincidence that just as fans are spending less on the tunes they listen to at home, they will pay unprecedented sums to hear them in concert. Ticket prices, especially for A-list artists, have soared.
Back in the 1980s, a seat at a concert by a superstar cost about the same as one CD album. By contrast, last summer you could have bought Madonna's entire catalogue for less than half of what it cost to see her perform at Wembley Arena. The best seats in Madge's house went for £160. With the Rolling Stones at Twickenham last August, a decent view would have set you back £150, or £350 for a seat on the side of the stage. To put this in historical perspective, when the Stones played Wembley in 1990, they took some stick for charging £25, top whack. Now that demand for live music is on the up, nobody bothers to complain about what it costs any more. Euphoria at the news earlier this year that the Police had reformed obliterated all concerns that it would cost £90 to see them play at Twickenham in September.
This is not a local phenomenon. The $690 (£345) it cost to watch Elton John at Las Vegas in May set a new record for an American rock show. In Hong Kong last year, Robbie Williams charged £180. Even the less prosperous citizens of Chile were asked to pay £80 to watch Coldplay in Santiago's Espacio Riesco, a considerable sum in a city where the average monthly salary is around £250. Ticket inflation with smaller bands is less intense. But even a relative unknown like the American singer-songwriter Laura Veirs charged £15 for her London show at Bush Hall this July. More telling is the ubiquitous presence of touts outside low-key venues where no secondary market for tickets existed ten years ago.
Attendance at arena rock shows grew by 11 per cent in Britain last year, and looks set to rise again in 2007. The bigger the concerts, the more we seem to like them. Hence the explosion in the festival trade. In 2007, there are 450 such large-scale gatherings scheduled, ranging from
the recent Glastonbury festival to the one-day Underage festival in Hackney on 10th August, which claims to be the first to be aimed exclusively at 14 to 18 year olds. A rediscovery, or a renewed appreciation, of the communal source of music-making—and listening— must lie near the root of this upending of the music business. As personal stereos and MP3 players have grown in popularity, so has an appreciation that music isn't just something that goes on between your ears. The guitarist of the American hardcore band Anthrax expressed this rather neatly: "Our album is the menu," he explained. "The concert is the meal."
In his book e-Topia, William Mitchell relates the increasing value of shared experience to the isolating nature of electronic or online virtual worlds. Being in the same place at the same time as a live performance, music fans appear to have decided, is the rarest and most precious presence of all.
Now Answer the Following Questions: 1. Use the demand and supply graph (showing relevant shifts) and also the concept of the price elasticity of demand to illustrate why the band in the first paragraph would choose to stop selling CDs at its concerts.
Quantity of T-Shirts
2. In the reading, the marketing decisions of Shakiri (to market their own CDs), Crimea (to give away their CD as a free download), and Prince (to give a free copy of his latest CD) were explained. Use the graph below to explain the reason for this policy, showing the relevant shifts. Label both axes.
Price of _____
____________________________________Quantity of ______
Continued on Page 9
3. Use the demand-supply graph (and make the appropriate shifts) to explain why “recorded music, on or offline, has moved from being a high-margin, high-end product to a low-margin, low-prestige commodity”.
Price of Recorded Music
Quantity of Recorded Music
Explanation for the Change:
4. Use the demand-supply graph (and make the appropriate shifts) to explain the results of the cost-cutting measures taken by Sony/BMG, Warner, EMI, and Universal.
Price of Recorded Music
Quantity of Recorded Music
Continued on Page 10
5. Show on the demand-supply graph (and make the appropriate shifts) the result of the change in the demand for live concerts.
Price of Concerts
0 Quantity of Concerts
Why has this change in demand occurred, according to the article?
Part 3: 5 points 1. As we will see later, free markets commonly lead to excessive pollution. One way to reduce pollution (and carbon emissions that lead to global warming) is to force polluters to undertake activities that will reduce their pollutants. These activities are costly. The question concerning us is: who actually will pay for the costs of reducing pollutants? One example is the industry responsible for the production of electricity. The companies in this industry use coal to manufacture electricity. Because they are air polluters, they were forced by the United States government to install pollution control equipment. This equipment represents a cost of production. The companies in this industry tried to recover this money by raising the prices of its electricity to consumers. Whom do you believe will bear the incidence of these costs: the consumer as higher prices or the company as lower profits? EXPLAIN WHY, using the graph.
Quantity of Electricity
Continued on Page 11
2. A recent article estimated the following for restaurant meals:
The price elasticity of demand = 0.188
The price elasticity of supply – 6.47
The equilibrium price averaged $10.47 per meal (in 1992 prices)
The equilibrium quantity was 8.14 billion meals per year.
If there were a $1.00 per meal tax, the article estimated that the new equilibrium price would be $11.44 per meal and the new equilibrium quantity would be 8.01 billion meals. Show these facts in the graph below.
Quantity of Meals
Who bears most of the burden of the tax on restaurant meals? What percent of the tax
do they bear? Using the analysis of the chapter, why do you think this is so?
Continued on Page 7
Part 4: 5 points 1. According to the 2002 Farm Bill, cotton farmers are guaranteed a price of 72.24 cents per pound of cotton. They get a direct payment of 6.66 cents, a guarantee of 52 cents, and then counter-cyclical payments to raise the total to 72.25 cents (counter cyclical payments are made only if the market price is below 72.24 cents.). As of the middle of 2004, the world market price of cotton was about 38 cents per pound. Textile producers who buy the cotton are limited by the government in the amount they can import from other countries. Since they are forced to buy American produced cotton at higher prices, the government gives them a subsidy to cover the difference in cost. Analyze the results of these provisions of the 2002 Farm Bill, showing the results on the demand – supply graph.
Continued on Page 12
2. Because of the program explained in question 1, what happens to the amount of cotton grown in the United States? Since some of this is exported, what happens to the world price of cotton? What effect would this have for poor African cotton producers?
End of Assignment 2
Economics 102 Name_________________
Extra Credit Homework Assignment (May Not be Assigned)
Form into groups of two to three people.
Pick out the stock of a particular company (any company). Find the value of the stock of that company in the most recent week. You will find this information either in a newspaper or on the Internet. Then, find the value of that stock one year ago (or as close to that date as you can).
The company is _____________________________________________
Value Now $_____________
Value Then $_____________ on ____________ (date)
You will need to do some research as to what has been happening concerning this company. You know that the price is affected by the demand for and the supply of that stock. Demanded are those who wish to buy the stock. Suppliers are those who own the stock and are considering selling. There are six possible determinants of the demand and four possible determinants of the supply. Based on your research, explain what might be responsible for the change in the price you have discovered. Show your reasoning on the graph below.
Price of the Stock
0 Quantity of the Stock
Economics 102 Assignment #3 (10 Points) Name_______________________
Part 1: 5 Points The following are the shares of sales of tobacco for the main tobacco companies:
American Tobacco 11% *
Liggett and Myers 2% 2%
Lorillard 10% 8%
R.J. Reynolds 33% 26%
Philip Morris Co. 31% 46%
Brown and Williamson 14% 18%
* Brown and Williamson acquired American Tobacco. The 1995 share for American is included in the Brown and Williamson share.
Calculate the concentration ratio and the Herfindahl Index (HHI) for 1980.
Calculate the concentration ratio and the Herfindahl Index (HHI) for 1995.
Based on your answers to questions 1 and 2, plus a perusal of the data above, draw a conclusion as to what happened to the competitiveness of the tobacco industry between 1980 and 1995.
Use the Merger Guidelines explained in the class to analyze the merger of Brown and Williamson with American Tobacco. Based on our interpretation of the Guidelines, should the merger have been allowed? Why or why not? She calculations.
Continued on Page 15 Part 2: 5 Points In the class, there were several functions of government noted under laissez faire. For each of the following, state whether the particular function is acceptable under laissez faire. If so, under which of the functions is it acceptable? Then, state why the government should provide this function. 1. Government provides public health – an agency that tries to prevent outbreaks of
communicable diseases _____________________(function)
Government imposes tariffs (taxes) in steel products
made in certain other countries _____________________(function)
3. Government pays welfare (TANF) for single
mothers with small children. _____________________(function)
4. Government owns and controls Yosemite
National Park _____________________ (function)
5. Government now requires that all food packages state
the amount of protein, calories, cholesterol, etc . _____________________(function)
6. Government builds superhighways and makes access
to them available without charge ____________________(function)
7. Government provides low-interest loans to victims of
hurricanes, earthquakes, and other natural disasters __________________(function)
8. Government requires that I do not have a commercial
End of Assignment 3 Economics 102 Assignment #4 (20 Points) Name_______________
Part 1: 5 points Choose One Only of the Following (Answer on the Back of the Page) 1. The chapter describes the U.S. Forest Service. A similar bureaucracy, the National Park Service, is part of the Department of the Interior. It manages some 400 national parks and 87 million acres. The most famous are Yellowstone and Yosemite. Others you may be familiar with are the Grand Canyon, Sequoia - Kings Canyon, Death Valley, and Cabrillo Monument on Point Loma. The National Park Service has a budget of about $1.5 billion, funded by Congress. Below are some of the criteria by which the National Park Service is run. What do you believe will result from these criteria? WHY?
(1) The total amount of money appropriated by Congress is divided among the parks according to the number of visitors in each park.
(2) Congress specified that charges to users of the park be low. The average park charges users about $0.60 per visitor day. It has been estimated that the market value is actually $14 per visitor day. The Park Service is only allowed to keep a small part of the fees collected by the parks.
(3) There are about 500 businesses that have concessions in the national parks. They run hotels, stores, restaurants, tour guides, etc. At present, they pay about 2.5% of their sales receipts to the Park Service for the right to operate in the parks. Payments of 10% to 15% are commonly charged in other activities. The Park Service is not allowed to keep any of the concession receipts.
2. Many of the national parks are facing severe ecological damage. In addition, maintenance has been deferred in many parks, leading to roads, sewage, and buildings in disrepair. (In Yellowstone, 90% of trails and 80% of roads are in need of repair.) Yet, while this has been occurring, 33 new areas were added to the national park system. And hundreds of millions of dollars were spent on visitors' centers (each about the size of three large homes and costing about $8 million). Use the principles of Public Choice to explain what would seem to be inefficient spending occurring while other, more important, spending is not done.
3. Consider grazing range land of the West. Since the 1930s, this land has been government property. The agencies that manage these lands (over 20% of all land in California) are the Bureau of Land Management (BLM) and the Forest Service. Nationally, nearly 7 million cattle, sheep, and horses authorized to graze on public lands. To be able to do so, the owner must get a grazing permit or lease from the government agency. There are only 27,000 individuals, partnerships, or corporations in the United States that have such permits.
(A) It has been estimated that ranchers pay the government a fee to graze their animals that is about 1/10 of the fee that would be charged in a free market. The government loses an estimated $120 million per year (spending $150 million but receiving only $30 million in fees). Use the principles of Public Choice to explain why this subsidy to ranchers would occur?
(B) About half of the fees that the ranchers do pay are used by the government agencies for range improvements. Use of these monies is under the discretion of the agencies and is not closely monitored by Congress. Most of these improvements end up costing far more than they are worth either to the ranchers or to the government. Use the Principles of Public Choice to explain why this overspending would occur.
Continued on Page 17
(C) Those who graze their animals on the public land must graze all the animals required in their permits. If they do not, they lose the permit (use it or lose it). Losing the permit would reduce the value of their privately-owned ranch. (Indeed, only those who own ranches adjacent to public lands are able to obtain permits!) They cannot sell their permits to those who might want to use the public lands for recreation. What do you believe would result from these incentives?
Part 2: 5 points 1. Assume that the only purpose of earning income is to buy and enjoy goods and services. Some people have claimed "the total utility of the people in the society would be increased if income were taken away from very rich people and given to poor people". Use the law of diminishing marginal utility to explain how one might argue that this statement is true.
2. San Diego County has 17 coastal wetlands. Some you may be familiar with include the Batiquitos Lagoon, the San Elijo Lagoon, and Mission Bay. These coastal wetlands provide flood protection, habitat for wildlife (especially migratory birds and marine life), protection of the shoreline, protection against water erosion, recreation activities, and many other benefits. Many of these wetlands have been degraded. In order to manage them properly, it is necessary to evaluate the both marginal benefits and the marginal opportunity costs.
The reading for this class discussed methods for evaluating the marginal benefits of a beautiful view, peace and quiet, a national park, and biological diversity. Based on your reading, explain how you would go-about trying to evaluate the marginal benefits of each of San Diego County's coastal wetlands.
Part 3: 5 Points Ethics Questions Choose one only of the following and try to explain the result. Answer on the Back of the Page. A. In a game with two players, one player (called the dictator) is given $10. He or she is then asked to give some part of it to the second player. He or she can keep the rest. In actual experiments, the dictator usually gives anywhere from 20% to 60%. How does one explain that the dictator does not keep it all? What does this tell us about the assumption of “economic man”?
Continued on Page 18 B. In another game, there are two people, the responder and the proposer. There is $10 to be divided between the two. The proposer offers a certain percent to the responder. If the responder accepts, each keep the percent agreed upon. If the responder rejects the offer, both get nothing. In experiments all over the world, most proposers offer 40% to 50%. Most responders reject if the offer is under 30%, even though they now get nothing. How do you explain this result? What does this tell us about the assumption of “economic man”?
C. In another game, there are ten players. Each is given $1 for each of ten rounds. On each round, each player can contribute any portion of the $1 to a common pool (anonymously). The money in the common pool is then divided by two and each player gets that much money. So if each player puts $1 into the pool, there will be $10 there. Divided by two, each player would receive $5. If this is done ten times, the player would have $50. If one player keeps the entire $1 and the other players contribute, that player would end up with his or her $10 plus $45 from the common pool, or $55. Thus, each player has an incentive not to contribute, if the others do. But if no player contributes, each player ends up only with their $10. In actual games, few people contribute nothing. Most people contribute about half of their money to the common pool. How do you explain this result? What does this tell us about the assumption of “economic man”?
D. Experiments have shown the following results. (1) People exhibit substantial generosity, even toward strangers. (2) People are more willing to share what they have acquired by chance than by personal effort. (3) People consider it unfair to free ride on the contributions and efforts of others. (4) People often punish free riders at substantial cost to themselves. How do you explain these results? What does this tell us about the assumption of “economic man”?
Part 4: 5 Points 1. Let us consider an orange grove. When the grove began in the 1950s, the orange trees were planted. Today, you have purchased the grove. The trees must be watered and fertilized. You have drip irrigation on timers to take care of the watering. You hire workers to do the fertilizing. Workers also keep the area clear of competing vegetation, using a small tractor. Workers also remove trees that have died and plant new ones from seedlings. The main chore for the workers is the picking of the oranges and the hauling of them to the processor. There are some buildings needed to keep the tractor and other equipment.
This is a reasonable description of an orange grove. Let us examine the costs. Let us assume that we hire six full-time workers (or the equivalent). Each is paid $12,000 per year ($1,000 per month), making the labor cost equal $72,000. The company has buildings. It has machinery, such as the tractor, the trucks, saws, shovels, and so forth. Our measure of cost here is the part of the building and machines used up during the year (called depreciation). Let us assume that the cost of all of this capital for the year is $16,000. Let us assume that the owner paid $400,000 for the grove and the capital; this money could have been earning 5% interest. We shall assume here that owner does not work in this business.
The explicit costs of owning the orange grove are $_______________________.
The implicit costs of owning the orange grove are $_______________________.
The variable costs of owning the orange grove are $_______________________.
The fixed costs of owning the orange grove are $_______________________.
The total economic cost of owning the orange grove is $___________________.
If we assume that we sell 180,000 pounds of oranges during the year at a price of $0.60 per pound, the grove would receive a total revenue of $108,000. We would say that the economic profit is equal to $___________. What does this mean?
Part 1: 5 Points 1. Assume again that you are the owner of an orange grove. The orange grove has its land, buildings, and machinery. These are the fixed factors of production. Let us focus on only one of the variable factors of production: labor. The following table describes the relation between the number of pounds of oranges sold per year and the number of workers hired. Assume that all oranges are the same. This relation is known as a production function.
Number of WorkersNumber of Pounds Per Year
In the table below, calculate the average physical product and the marginal physical product