Assignment:
Briefly point out the faulty reasoning in each of the following situations:
1. You win a free, nontransferable ticket to a Sheryl Crow concert. Since the ticket is free and it will therefore cost you nothing to go, you decide to go to the concert. What will be your response if only ticket is included? Please provide justification with correlation to economic concepts you have studied. How will your answer change if everything including gas, food and baby sitter charges are also paid?
2. You paid nonrefundable tuition of $3,000 to take a 15-week course. Therefore, the opportunity cost of attending class each week is $3,000 divided by 15, or $200.
3. You like to avoid costs; every decision involves opportunity cost. So you don't make decisions.
4. You have purchased 5 premium apples for $1.99 a pound, but when you get home, you discover they are mushy. Since you paid top dollar for these apples, you decide you have to eat them.
Some have claimed that due to the deep recession of 2008 - 2009, Keynesian economics is making a comeback. Do you think this true? Why do you think this is?
Please read the following passage and answer the questions:
• Peak-hour traffic jams have become so horrific, some governments are beginning to look at a market solution to the problem. This is what economists call a tragedy-of-the-commons problem.
• In Southern California, drivers are being charged premiums to travel in underused car pool lanes.
• Singapore, Norway, and France are managing traffic with various tolls.
• Peak surcharges are being studied for roads and bridges around New York, San Francisco, Los Angeles, and other cities.
Congestion pricing, as this traffic-control strategy is called, isn't that radical. Peak prices are used to ration such things as Super Bowl tickets, opening night at the opera or a rock concert, airline tickets at Thanksgiving, and hotel rooms in Cancun. Why not roads?
• Tollbooths would be required - millions of them. Besides their costs, they would slow up traffic even more.
• In every public poll taken, responders hate the idea. "Lexus lanes" would accommodate the well-heeled while Joe Sixpack couldn't afford it. The biggest fans of congestion pricing concede it could worsen inequality and "destroy what Joan Didion called America's only community - the free road may be the last thing that rich and poor share equally."
• Varying tolls may not reduce congestion. Maine Turnpike officials found that knocking off as much as $1.60 off the Saturday morning tolls didn't clear the Friday night backup.
But there is another side to the story.
• With new technology, road authorities can now hand out credit-card-size transponders that could be mounted on dashboards, and pay tolls to overhead computers as they whiz by. No delays for toll booths.
• A ten-mile stretch of privately-owned highway in Orange County, California, has been a great success. Studies have shown that by removing themselves from the freeway, the tollpayers are making the non-tollpayers' commutes faster too.
Who knows? This may be one of those invisible-hand deals that benefits all - faster commutes all round, cleaner air, financial reward for road investors, and savings for taxpayers.
Sources: Kim Clark, "How to Make Traffic Jams a Thing of the Past," Fortune, March 31, 1997, p. 34, and "The Road Less Traveled Is Private and Expensive," Los Angeles Times, August 16, 2002.
Questions:
1. Is the problem here one of supply, or demand, or both?
2. Is this a shift-factor problem or a quantity-supplied or quantity-demanded problem?
3. Do you agree that market-based pricing equilibrium would make everyone happy?
4. How would you graph this?
5. Does the article imply a consumer surplus or a producer surplus without tolls?