The Floating University

Review Questions

(1.) What exactly do prices signal?  When does a higher price signal higher quality? What prevents sellers from trying to fool buyers with higher prices? Think of markets where prices are not published. Perhaps you apply for a job but the salary, which is to say the price of your labor, is not predetermined. Think also of an informal market in a country where bargaining is expected, so that one does not have a good idea of the price of a rug or animal or car that is being sold. In what ways might this market work less well – or better – than one in which sellers announce prices and stick to them?

(2.) So what is a monopolist?  Are there really any examples of monopolists in the real world?  After all, every seller has some competitors. The only doctor in town must compete with doctors from other cities who could encourage patients to fly to them. The only baseball team in town faces competition from television broadcasts of other games, or live games involving other sports. Is there a good working definition of monopoly that fits the example in the lecture, and generates deadweight losses?

(3.) What is speculation?  You might look for an article “My Son, the Speculator,” written long ago by the economist, Abba Lerner. What role does the speculator play when he or she is able to buy something that others do not seem to want and then “hoard” it in order to resell the good when it is in great demand?  You might try to develop a numerical example to show how consumers gain from this activity by the speculator. On the other hand, what if the speculator is the only one in the business, or the only one who predicted the market correctly, so that when it is time to sell the speculator has a monopoly on the item in question?

(4.) The lecture’s examples suggest that the cost of supplying air travel between two cities drops and then eventually rises. Can you think of some industries, or goods, where the cost for a firm that produces additional goods probably keeps dropping and never goes up?  And then for most firms, where costs eventually rise as output increases, why is that? What is the “cost” to you of taking additional courses, assuming your college would allow it at no charge?  Does this cost rise as you have more and more courses?  What is the college’s cost of having additional students? Is that an increasing marginal cost?
(5.) Try an experiment:  Gather up many coins and put them in a bag without counting the total. Now gather some friends or classmates and auction off the bag and its contents. What kind of auction will you use? Don’t let anyone count what is in the bag, though they might all have a quick look. Do you envy the high bidder who gets the bag in a standard auction?  You could try this several times, with different amounts in the bag.

(6.) Why don’t sellers use pay-all auctions?  Do auctions ruin some of the great features of prices?

(7.)  Imagine that if movie tickets were $10, you would go to five movies in a given year. You might go to more movies if the price were lower, and of course fewer movies if the price were much higher. What if instead of prices changing, you inherited a few thousand dollars?  How would that change your “demand” for movies? And what if, instead, the prices of other things you tend to purchase dropped or increased? Does any of this give you an idea about why movie theaters tend to charge the same price for all movies they show – and the same price whether the movie has just come out or has been in the theater several weeks?