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Wednesday, 20 March 2013

Microeconomics Question

Discussion Questions 

Post 1 original response for 
each chapter covered during the week (2-3 posts) by Friday at 11:59pm EST.  Post a minimum of 3 responses to other students’ original responses (3 posts) by Sunday at 11:59pm EST.  Please review the syllabus for more information.

Students should use correct citation methods where appropriate.  APA is the preferred style in the College of Business, but students may use any citation method they prefer.  Note: A URL alone is not a correct citation method, and posts copied and pasted from sources will be officially recorded as plagiarism. Late research assignments and emailed submissions will NOT be accepted for credit. Each submission will be checked for plagiarism with SafeAssign in Blackboard.In accordance with university policy, all forms of plagiarism will be reported to the School of Business as a violation of the academic dishonesty policy.

1.       Price Elasticity and the War on Drugs:

The War on Drugs is a controversial issue.  Two general approaches aimed at reducing illegal drug use are: 

1) Increasing law enforcement spending to reduce the production and sales of drugs – this is a supply-side approach. 

2) Increasing spending on drug awareness in public schools and increasing funding for drug rehab centers – this is a demand-side approach. 

If only policy 1 is adopted, the supply curve will shift left (upward).  This would cause the equilibrium price of drugs to increase.  If only policy 2 is adopted, the demand curve will shift left (downward).  This would cause the equilibrium price of drugs to decrease.  For both policies, the equilibrium quantity of drugs purchased would decrease.  However, what might be a negative unintended consequence of higher drug prices if only policy 1 is adopted? 

If the demand for illegal drugs is found to be estimated as relatively price inelastic (versus relatively price elastic), how effective is policy 1?  Why might the demand for illegal drugs be relatively price inelastic?  What is your personal opinion regarding each policy and the so-called War on Drugs?

2.       Increasing, Diminishing, and Negative Marginal Product:

The textbook discusses the concept of diminishing marginal product.  Review the PPT slides for chapter 13 and read about increasing and negative marginal product.

Think of a real-world example of increasing marginal product, diminishing (decreasing) marginal product, and negative marginal product.  Here is an example from my personal experience in the restaurant business: 

Professor Lagalo’s family owns a restaurant in Michigan.  One corner of the kitchen has a salad station and a dessert station.  Each station has its own piece of equipment (two pieces of capital total).  During a dinner rush, it is very difficult for one worker to efficiently operate both food stations.  Adding a second worker to this area of the kitchen increases marginal product substantially; the second worker adds more value to production (at the margin) than adding the first worker.  Adding a third worker helps to assist the other two, but the marginal product (increase in total product) is lower because capital and floor space is fixed.  Occasionally, management makes a mistake by adding a fourth person to the salad and dessert station.  This is problematic for the first three workers because there is literally no room for the fourth worker.  By adding a fourth worker, marginal product actually becomes negative and output is lower with four workers than with three.  In this example, it only took a fourth worker to reach negative marginal returns.  In a factory setting it would likely take a larger number of workers to reach negative marginal product, but the overall principles regarding marginal product are the same.

This example is very similar to the way Subway Restaurants are set up.  The next time you are at a Subway ask an employee what is the most number of people that work behind the line.  The answer will probably be 3-4.  More is better in terms of inputs doesn’t apply when marginal product is negative because output becomes lower.  Reality check:  Would it be feasible for a Subway manger to schedule 10 employees to work during the same shift?  Would food come out faster, or slower, with 10 workers behind the line?
3.       Short-Run Decisions vs. Long-Run Decisions:

Firms have two decisions in the short-run:
 a) Produce (Q>0), or
 b) Shut down (Q=0)

Firms also have two decisions in the long-run:
 a) Produce (Q>0), or 
 b) Exit (leave the market and produce something else)

The automaker General Motors (GM) incurred heavy losses (negative profits) leading up to its bankruptcy in 2009.  If GM was earning losses, why did it choose to produce in the short-run instead of shutting down?  What happened to GM in the long-run?  Did GM continue to produce or exit the market?  Why? 

The recording artist K-Fed was married to Britney Spears and is the father of her children.  K-Fed organized a tour in 2006 to promote his solo album Playing With Fire.  Unfortunately for K-Fed his ticket sales were weak and many performances were cancelled.  Why do you think K-Fed’s promoters decide to “shut down”?  What happened to K-Fed in the long-run?  Did K-fed continue to produce (i.e. make music and tour) or exit the market (try something else)?  Why? 

 1) GM received a large bailout from the U.S. federal government.  Many firms in GM’s financial position would have exited the market (i.e. gone bankrupt).
 2) K-Fed couldn’t even give his concert tickets away for free.  Look it up if you don’t believe me.

4.       Short-Run Decisions vs. Long-Run Decisions:

Go online and research antitrust laws.  What is the difference between the Sherman Act (1890) and the Clayton Act (1914)?

By the end of 1995, Netscape’s share of the Internet browser market grew to 90% by continually upgrading its product to include new features such as e-mail and video capabilities.  Shortly thereafter, Microsoft introduced and distributed a new version of its operating system that included its Internet Explorer (IE) browser at no cost.  

In addition, Microsoft allegedly imposed several restrictions on original equipment manufacturers (OEMs), Internet service providers (ISPs), and Internet content providers (ICPs) with the intention of:

 (a) Ensuring that almost every new computer had a version of Internet Explorer, and
 (b) Making it more difficult for consumers to get Netscape on new computers. 

On May 18, 1998, the government filed a complaint in court against Microsoft.  Based on what you have learned in this chapter and the PPT slides, briefly discuss the merits (if any) of the government’s complaint against Microsoft.  Was Microsoft potentially violating the Sherman Act or the Clayton Act?

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