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

Chapter Five: Supply & Demand: Markets at Work 124 CHAPTER FIVE ANSWERS 1. This is an interesting situation because it is not really a market; there are significant limitations on baseball players’ ability to turn to other teams as well as teams’ ability to hire other players. In this situation there is also a huge penalty for either party to appear “out for money.” Both Mr. Jeter and the Yankees find it in their interest NOT to have him go to another team, such that the competitive pressures are reduced. Yet at the end of the day, there is competition, as the Yankees found out when the Seattle Mariners signed All-Star Robinson Cano away from them. 2. No. As long as there are differing values of goods, there will be exchange. 3. A. The demand curve would shift right increasing prices and quantity as per Figure 5.9 . B. Consumers will respond by reducing consumption, and producers will respond by increasing corn acreage. C. Given the initial subsidies, the reaction in B) will be socially optimal to allow the highest valued ends to be satisfied (even if those highest valued ends are only highly valued because of the political process of a subsidy). 4. A. Supply will shift to the left as in Figure 4.5 or step 2 in Figure 5.8 . B. If price-gouging laws preclude the price rising to equilibrate, we will be left with a shortage, as in Figure 5.6 . C. The price will not encourage the reduction in consumption or the increase in production that would restore equilibrium. 5. Figure 5.6 illustrates a shortage, which is what will occur with the underpricing of the good; the arrows indicate how the shortage will be restored (read the text explaining 5.6). 6. Walmart workers’ leverage is in their ability to quit and work for another employer. By definition, the fact that the workers are at Walmart today suggests that the workers perceive Walmart’s total compensation better than they could achieve elsewhere. However, if Walmart does not continue to do this, workers will leave. 7. An economist would have encouraged no restrictions on prices to incentivize reduced consumption and increased production. As prices rose, entrepreneurs would find it in their interest to provide additional gas while consumers would find it in their interest to reduce consumption. 8. Keeping the anti-gouging laws in place would have the effect of increasing the time necessary to recover from the disaster, but would have the advantage of social cohesion, in that “we’re all in this together.” 9. False. The market is always a dynamic coordination process; there will be no long- lasting equilibrium as the market constantly changes.