Download LYON Answer True, False, or Uncertain and briefly explain why. 1

LYON
Answer True, False, or Uncertain and briefly explain why.
1. The invention of a synthetic substitute for wool will raise the price of mutton.
2. In the United States, real income per capita has risen over time, whereas the number of domestic
servants per capita has fallen. This means that domestic service is an inferior good.
3. A cartel that maximizes the income of its members should distribute output among different members so
as to equalize the average variable costs of different members.
4. A law preventing landlords from evicting nonpaying tenants will hurt the poor.
5. If apple trees were common property, then apples will be picked green and apple trees will be used for
fire wood.
6. If a consumer’s income rises in the same proportion as a Laspeyre index of his cost of living, his real
income is rising.
7. If a firm is operating in the region of falling marginal costs, it must be making losses, since marginal
cost is then less than average cost.
8. A cartel, which allows its members to buy and sell output quotes, will have a larger net profit for all
firms combined than one which does not.
9. The market price of a given share of stock does not represent the market value of that share because it is
the price of only the shares that are traded, which is established in the market. Assuming that all the
existing shares of stock were sold, then the price would be much lower.
10. “Since the elasticity measures variations in quantity (demanded or offered) divided by variations in price,
the elasticity of the demand for anything will be seven times as large for seven similar demanders as it is
for one” (Pigou, A Study in Public Finance, p. 207).
11. A trade magazine reported that it is common practice for lumber mills to grade lumber at a higher
classification than the definitions of the classification warrant. The author concludes that this practice
has resulted in the mills fraudulently collecting millions of dollars more than they otherwise would have
collected on lumber sales. Assume the first sentence to be correct and treat the second as a true, false,
or uncertain question.
Short Essay
1. There is one group who may reap permanent gains or losses from policies designed to help or burden an
industry: the owners of specialized resources. They will not have alternative uses for their resources, so
their returns will vary directly with industry output. Thus, the permanent beneficiaries of a subsidy on
zinc will be the owners of zinc mines; the permanent losers from rent ceilings will be landowners
(George Stigler, The Theory of Price, p. 184).
In spite of the above statement by a Nobel laureate, it is argued that a severance tax on Utah’s coal
would be paid primarily by Californians since a large portion of the coal is used to produce electricity for
Californians and the demand for coal to produce electricity is relatively inelastic. A tax per ton of coal
mined is an example of a severance tax.
Who would be the permanent losers from such a tax? Defend your answer. Assume that the coal is
privately owned.
2. Assume the existence of a valuable body of metallic ore whose quantity and quality are precisely known.
assume that there are no changes in technology of ore extraction and processing over time. What would
you expect to be the pattern of ore prices over time, assuming that both buyers’ and sellers’ markets are
perfectly competitive.
3. Let there be a known finite quantity of a nonrenewable resource and let it be extracted at constant cost.
If the resource has a positive value, then society’s optimal net price of the extracted resource (price
minus marginal extraction cost) will rise through time. Derive an expression for the growth rate of net
price and discuss the economics of this growth rate.
4. “A price-searcher does not have a supply curve. There is no schedule of amounts that he would offer at
alternative possible prices, and which can be juxtaposed on a demand schedule.” Explain why this is a
correct statement.
5. Russian farm officials, when visiting the United States, persisted in asking how we controlled the flow of
wheat out of existing stocks so as to ensure an appropriate supply over the year. When they were told
that no one made that decision, they insisted we were naively trying to keep secrets from them. What
was our “secret”?
6. “Open speculative markets are defended on the premise that it is better to be aware of impending events
than to be unaware of them. But for events like impending crop disasters, earlier news merely shifts
forward and thereby spreads the effects over a longer interval to no one’s benefit. People might prefer
to experience a short, intense period of less coffee in the future rather than have an earlier, longer lasting
though less intense reduction in consumption.” What does economic theory say about this?
7. As the next crop is planted, news suggests that it will be smaller than usual and that prices will be higher
when it is harvested. Immediately, futures prices rise in response to speculative demands for futures
contracts. People have a greater desire to buy futures contracts at present future prices because they
believe the higher prices during the next harvest will give them a profit. When futures prices rise, how
does this make current prices rise, even though the present stock of goods is not affected?