No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Five: Supply & Demand: Markets at Work 122 CHAPTER FIVE: QUESTIONS FOR REVIEW 1. Our analysis concludes that buyers compete against buyers, and sellers compete against sellers. Evaluate this 2010 salary negotiation of Derek Jeter and the New York Yankees in light of that conclusion. 2. If markets are simply, in the words of Adam Smith, an outcome of man’s natural inclination to “truck, barter and exchange,” would a communist utopia lead to the end of markets? Evaluate. Hint: Do a web search on black markets in communist countries. 3. The U.S. government has subsidized corn ethanol production for years, driving up the price of corn. a. Evaluate what happens to the demand for corn when the government initially provides subsidies to ethanol producers. Illustrate with an S&D curve framework. b. Explain what information is conveyed in the rising prices to consumers and producers, and how they will respond. c. How does that compare to what you would consider socially desirable? 4. Many states have laws restricting price gouging, such as Texas, especially after natural disasters. Consider a hurricane in the gulf coast which disrupts oil production. a. Illustrate this effect on an S&D diagram. b. Show what the effect of Texas’ price gouging law might have on the market reaction. c. Discuss what price gouging laws do to the information content of higher prices. Will that information be transmitted? If so, how? If not, what is the likely result? 5. Imagine that the latest version of the iPhone was released at a suggested price of $19.99, when the “correct” market price is actually $299. Illustrate this with an S&D diagram, and show how the market process will correct Apple’s pricing error. 6. Walmart is by far the largest retailer in the United States. Does that mean Walmart employees have no leverage in determining wage rates? To answer, think through what workers’ options would be in light of a proposed sharp reduction of wages to Walmart employees. 7. After Hurricane Sandy hit the east coast in late 2012, Governor Chris Christie ordered rationing of gasoline to ensure enough supply. What might an economist suggest would be a better alternative to rationing by government edict? How would