Download Responses to the Discussion Questions of Chapter 2:

Responses to the Discussion Questions of Chapter 2:
1. (a) People define their "needs" in terms of what they have grown accustomed to. College graduates and
Republicans have higher incomes on average than do high school graduates and Democrats, have
consequently grown accustomed to spending more each week, and so "need" more "to get by." (b) We
may safely assume that people who are "definitely" willing to spend $500 for an air bag think it might save
their life in an accident. May we infer from the study cited that more than two-thirds of these people would
rather die in an accident than fork over $1000? Of course not. An air-bag safety system is not always a
life-saving good. Most of the ones that are bought will never save a life. Those who are willing to pay
$500 but not $1000 believe that the increased probability of their having an accident which they survive
because of an air bag is great enough to warrant the expenditure of $500 but not great enough to justify a
$1000 expenditure. They don't include air bags among their needs when the price is too high. (c) People
won't discover a lot of their legal "needs" unless lawyers advertise their willingness to meet those "needs"
at an attractively low price. There are substitutes for hiring a lawyer. One is to grin and bear it. (d) Air
conditioning makes people more comfortable and maybe also more productive. But it is obvious that no
one in the world "needed" air conditioning prior to the twentieth century.
2. (a) The assertion that health care is a right means almost nothing unless the quantity and quality are
indicated. Should people in their eighties have a right to coronary by-pass operations? Should someone
who continues to consume large amounts of alcohol have a right to a liver transplant? These are admittedly
extreme cases. But they make the point that it is possible to spend enormous sums on health-care services
that provide few benefits. When those who receive the benefits do not expect to pay the costs, they can
easily persuade themselves that the benefits are something to which they are entitled by right. (b) Health
care is finally provided not by government or insurance companies but by physicians and hospital
personnel. What government and insurance systems can do is provide the funds that in turn persuade
health-care providers to accept the obligation to provide health care. Keep this important truth in mind
when thinking or talking about rights: Unless some way is found to induce the appropriate persons to
accept the corresponding obligations, the assertion that people "have" certain rights is simply false as a
matter of fact. Perhaps they should have those rights; but they do not actually have them in the sense that
they can exercise them unless the appropriate people accept the corresponding obligations. (c) It suggests
that people who go to the doctor don't necessarily "need" the services of a physician. Those who are sick
will more often care for themselves when they must pay a high price for professional care. And when the
monetary incentives change, some people will even decide that they aren't sick after all.
3. Remember that a right for someone entails an obligation for someone else. Who will have the
obligation to provide the housing to which everyone is supposed to have a right? The issues of quality and
quantity are extremely important in the case of housing, since most Americans would scorn housing that
many people elsewhere in the world would welcome joyfully. And is everyone to have this right,
regardless of their status or what they are willing to do in return? What about a 15 year old whose parents
have told him that he may no longer smoke marijuana in his bedroom and who therefore decides to leave
home and get his own place despite the fact that he has no job and no income? What about people with a
record of trashing the places in which they live and of harassing other tenants? It is possible to be very
concerned about the problem of homelessness and determined to alleviate the problem without being
committed to the idea that everyone should have a right to housing. Notice that the obligations entailed by
the rights mentioned in the First Amendment to the U.S. Constitution are all negative: they are created by
governments' not engaging in particular activities. Rights that require others to accept obligations to refrain
from particular actions are much easier to establish than rights that require others to take specific positive
actions.
4. I don't have any good evidence, but I doubt it. Young people especially are inclined to be suspicious of
educational campaigns telling them what they must do or not do for their own health, especially for their
health "in the long run." I'll wager that many high school students are more worried about acne next week
than about a heart attack in 30 years. Making it less expensive for people to eat healthful food provides an
incentive right now.
5. The substitutes for eggs in this case would include all the substitutes for omelets (no one needs an
omelet), as well as all the ingredients that complement eggs in an omelet and that can also be used as partial
substitutes for eggs, such as cheese, potatoes, peppers, and onions. The strong assertion that there are
substitutes for anything urges you to ask, What might people do to economize on a particular good if its
price rises?
6. People choose to use electricity because of its price as well as its other advantages. As the price rises,
those other advantages become relatively less important. Electricity is not used for home heating in areas
where its price is high because "by its nature" electricity generates more heat as it encounters more
resistance. But a sufficiently low price for electricity, as in areas with abundant hydroelectric resources,
will overcome this fact of nature. Natural gas competes with electricity on the basis of price in a number of
household appliances, such as kitchen ranges, hot water heaters, and clothes dryers. And, of course, people
can conserve electricity by using their electrical appliances more sparingly. There are many ways to
economize on electricity, which is why the demand for it reflects the law of demand.
7. If rural mail delivery is stopped on Saturday and as a result everyone takes a trip to town to check their
mail at the post office, more, not less, gasoline will be used. (There are substitutes for everything.) We
could prevent this by keeping the rural post offices closed on Saturday. But how would rural voters
respond to such a proposal? "Nonessential" is a much more subjective concept than the letter writer
realizes. We could probably prove quite easily that the letter writer's own uses of gasoline were all for
nonessential purposes.
8. It tells me that if the government decides to induce people to use less gasoline, it should raise the price
to them of using gasoline. Why take such a roundabout approach as the CAFE law? A direct approach is
harder to evade through imaginative substitutions. Of course, such a direct approach as increasing
substantially the tax on gasoline will anger many voters. The CAFE law seems to put the cost of
conserving gasoline on the automobile companies. It doesn't really, of course, because one can no more tax
"companies" than one can tax trees or, for that matter, gasoline—as distinct from taxing the purchase of
gasoline. People pay taxes and bear costs, not companies, trees, or gasoline. From the standpoint of many
members of Congress, the great advantage of CAFE was that it seemed to be doing something almost
everyone wanted done while artfully concealing the identities of the people who would bear the costs of
getting it done.
9. "It will hurt the poor" is a common argument against policies that would increase prices to consumers,
but it isn't always a good argument. A quadrupling of water rates will be felt only by those who use lots of
water. Poor people are not usually large consumers of water.
10. Higher prices for pork, chicken, and fish would increase the demand for beef; lower gasoline prices,
better roads, and longer summer vacations would each increase the demand for automobiles; better
programs or the introduction of access to cable would increase the demand for television sets. The law of
demand only asserts that price and the quantity demanded vary inversely when nothing else changes.
11. That's a correct use of "demand." A waning demand means the demand curve has shifted toward the
southwest. Those falling prices will be associated with less coffee consumption, though with more than
would have occurred had the price of coffee not fallen.
12. The author of that argument has confused demand and quantity demanded. A reduction in the price of
gasoline will cause the quantity demanded to increase, but not the demand. An increased demand would
indeed contribute to higher pump prices; but reducing the tax will not increase the demand, i.e., the curve.
13. Since a change in the price of substitutes does influence demand, and everything finally depends on
everything else, it's not strictly true that a change in price affects only the quantity demanded but not the
demand. This question provides a realistic example. OPEC's supply manipulations in the 1970s raised the
price of oil by enough to encourage all sorts of "technological" changes that were not reversed when the
price of oil subsequently fell. The automakers' achievements in fuel efficiency, for example, were not
forgotten when gasoline again became cheap. (a) The demand for fuel-efficient cars increased. Notice
that the demand for gasoline did not change—at least not yet. Only the quantity demanded changed. But
the story continues. (b) It probably reduced the demand for gasoline. But it might have increased it.
People who start to get twice as good mileage may decide to begin driving more than twice as many miles.
(c) The increase in the price of heating oil increased the demand for housing insulation, which in turn
reduced the demand for heating oil. As a result, people would want to purchase less heating oil than before
if the price returned to its former level. (They would not rip out their insulation!) (d) Sometimes the
demand for a good depends upon how many other people use it. Telephone service is an excellent
example. Who would want it if most other people did not have it? And so a substantial decrease in the
price of telephone service in a place where few people think they can afford it might increase the quantity
demanded by enough to make telephone service far more valuable for everyone, thus shifting the demand
curve out to the northeast. (e) This would be conclusive evidence. You can pin down the argument by
graphing it.
14. The increase in bus fares will reduce the number of riders which will increase the demand for
downtown parking. This will tend to raise the price of parking which will in turn increase the demand for
bus service. The effects are likely to be small; but here is a case where an increase in price eventually
causes an increase in demand.
15. (a) Some people will be more eager to purchase a whiskey if it has a reputation for being expensive,
because by serving it they will be able to make an impression on their friends and associates. But those
who buy Maker's Mark because it has a reputation for being expensive will buy more if they can get it at a
lower price. Secret price reductions would increase the quantity demanded because they would not reduce
the prestige of the good. (b) They aren't merely purchasing food or the pleasure of a dinner out. They may
be trying to purchase some political influence that they couldn't get by taking their guests to a less
prestigious restaurant. (c) Tourists often purchase such items as gifts, and they don't want to give
something cheap. They may also doubt their ability to assess the quality of the jewelry, and so use its price
as an indicator of its quality. The law of demand still holds. More bottles of Maker's Mark, more dinners
at Jean-Louis, and more turquoise jewelry will be purchased at lower prices, other things remaining equal.
16. People may interpret a price cut as the first in a series of imminent price reductions. Since future
goods are substitutes for current goods, this (expected) fall in the price of a substitute may cause the
demand curve for current goods to shift southwest by enough to more than cancel out the effect of the
decline in the price of current goods.
17. (a) Better substitutes mean a more elastic demand. (b) People who don't pay any attention to a 50
percent increase in the price of aspirin when tablets cost less than a few pennies each might notice a much
smaller percentage increase if aspirin sold for 15 cents or more per tablet. (c) Do people ever decide not to
have a prescription filled or not to have it refilled because of its price? And many physicians pay attention
to relative prices when writing prescriptions. The demand for prescription drugs may be more elastic than
we commonly suppose. (d) Nothing is a substitute to a potential buyer who isn't aware that it's a substitute.
The more we know about alternative goods, the more elastic our demand for any particular good. (e) The
alchemy of modern scientific technology sometimes seems capable of producing a close substitute for just
about anything. And close substitutes imply elastic demand curves. (f) Demand curves become more
elastic when buyers are able to reach more suppliers at a lower cost.
18. (a) An inelastic demand means people will pay more of their income in order to smoke. Moreover, a
higher tax will probably reduce the purchase of cigarettes by more than it reduces smoking, because after a
large tax increase some smokers will puff their cigarettes down to shorter lengths before discarding them.
(b) Government raises more revenue by increasing the tax on purchase of a good whenever the demand is
inelastic. (c) They want the demand to be elastic when the goal is to reduce smoking, but they want it to
be inelastic when the goal is to raise revenue. Alice found people like that in Wonderland.
19. North Carolina, Virginia, and Kentucky grow large amounts of cigarette tobacco and have historically
kept the tax on cigarettes low to avoid reducing the market for a product sold by influential citizens and
voters. These states also have tended to display less anti-smoking sentiment. It seems that anti-smoking
sentiment is the cause of both lower taxes and less smoking.
When we look only at states that are less tolerant toward smoking than these three, we don't find evidence
that raising the cigarette tax does much to reduce teenage smoking. Are you surprised? Teenagers learn to
smoke from their peers, which means that attitudes toward smoking are very important.
20. I don't think the alleged criterion works well at all. There are many goods that no one would classify
as necessities that have quite inelastic demands (cigarettes and liquor, for example) and other goods with
very elastic demands that some would want to call necessities. Water nicely illustrates part of the problem.
The demand for water—almost everyone's first choice as a necessity—may well be relatively elastic. At
low prices, people use it with reckless abandon; at very high prices, they would use it quite sparingly.
Whether it's a necessity or a luxury for people depends crucially on the margin at which they happen to be.
Another problem is that whether the demand for a good is elastic or inelastic and whether it's a luxury or a
necessity depends on how broadly or narrowly we define the good. Food is a necessity. But beef is not,
nor is lettuce or green beans or pumpernickel bread. But the demand for pumpernickel might be quite
inelastic at its current bakery price.
21. If the price rose 400 percent in response to a 25 percent reduction in the quantity available for purchase
(a 75 percent reduction in one-third of the total is a 25 percent reduction in the total), that implies a price
elasticity of demand of 1/16 or .0625. It was so low because most coffee drinkers were willing to pay a lot
more rather than reduce their coffee consumption. They had no good substitutes for coffee. Were they
"addicted" to caffeine? Sufficiently large price increases often cure addictions.
22. The demand for lettuce is not very elastic. Why? Perhaps because the price of lettuce makes up only a
very small part of the cost of a sandwich but a large part of the pleasure for lettuce lovers. Also, restaurants
with salad bars might not have wanted to make extensive changes in their operations and so might have
been willing to pay a lot more to obtain their usual quantities.
23. This question points to a problem that arises in the comparison of percentage changes when changes
can occur in both directions. The government's misleading claim stemmed from the fact that the smaller
number was used as the base in calculating the increase, and the larger number was used as the base in
calculating the decrease. The next question suggests a way of handling this ambiguity in the case of the
percentage changes in price and quantity that we compare to calculate elasticity.
24. (a) The answer will depend on how it is calculated. If you use the larger price and the smaller quantity
as the bases in calculating the percentage changes, you will exaggerate the elasticity. You will
underestimate it if you begin from the lower price and larger quantity. (b) The simplest way to control for
the distortion that results from an arbitrary decision to begin with the higher or the lower price, especially
when the percentage changes are quite large, is to use the average of the two prices and the average of the
two quantities as the base in calculating the percentage changes. (c) The coefficient is one. (d) Since total
dollar expenditure on these items does not change when the prices change, the demand must be unit elastic
between the two points. (e) By the method suggested here, the increase and the decrease in the capacity of
the Viaducto were both 40 percent: two lanes divided by five lanes in each case.
25. (a) A price hike from $20 to $28 is a 33 percent increase: a change of $8 divided by the average of the
two prices, which is $24. (We use the average in the case of such large percentage changes to avoid the
bias that would otherwise be introduced by an arbitrary decision to begin with the lower or the higher price.
For an explanation, see the preceding two questions.) So more than one third of telephone users would
have to give up their service for the demand to be elastic. (b) I would be surprised if even 5 percent of
users gave up their phones to avoid a 33 percent rate increase. If I'm correct, the price elasticity of demand
is about .15, a very inelastic demand.
26. (a) $24. (b) 18 thousand cases. (c) It would be 30 thousand times $8 or $240,000. That's less than
18 thousand times $24, or $432 thousand. (d) Since total dollar expenditure moves in the same direction
as price between all prices below $24 and in the opposite direction as price between all prices above $24,
demand is inelastic below and elastic above $24. (e) This anticipates issues that we will look at in several
later chapters. Think how hard it would be to create and enforce such an agreement among all the
strawberry producers in the United States.
27. The value to lumber sellers would be greater—price times quantity sold—but the total value received
by lumber buyers would decline. The value received by them is not price times quantity. It's closer to the
area under the demand curve. Here is a simple example for anyone who can't get started in the morning
without a cup of coffee. At a price of $.75 per cup, I would buy two cups of coffee. At a price of $2 per
cup, I would buy only one. I would be paying more for one cup than for two; but I would derive less total
satisfaction from one than from two.
28. The British economist Alfred Marshall (1842-1924) started us on this track, apparently because he
thought that the quantity (supplied) was the key variable. But we can use the issue to point out that
economies are systems of mutual determination. Price is no more the independent variable than is quantity.