All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Questions of the Day
Elasticity

1. A common belief is that the demand for gasoline is inelastic. Some even suggest this is one of the reasons why the expenditures on foreign oil continue to increase as the price of oil increases. To study the demand for gas, a group recently conducted a study in which they interviewed a number of Shell gasoline stations scattered around the country. The results showed a price elasticity of demand to be 1.43. Should this be taken as proof of an elastic demand for gas? Explain the basis for your decision in a brief memo. This is not a statistics question.

2. The effects of the internet are widespread. Some have suggested that the internet "is opening up a new era of pricing." [WSJ 6/8/1998] According to the authors of the article, the internet has decreased substantially the cost of comparison shopping.  Based on your knowledge of elasticity, what should happen to the price of goods sold on the internet?

3. Universities charge set one tuition rate for all student, two if you consider the in- and out-of-state rates, but in reality there are many different prices.   The difference between the actual price and the stated price is financial aid and universities have sought help in determining the allocation of the financial aid.   One proposal is to reduce aid to those who come for an on-campus interview and who ask for early acceptance.  How would you defend these proposals?

4. The university has a general education program that designates certain courses as satisfying the general education requirements and others that do not.  How would the elasticity of demand for the general education courses compare to that in the other courses?  Given that the price is the same, where do you think you would 'see' the differences in elasticity?

5. Assume that someone high up has found out that you have mastered many of the basic economic principles and you are asked to be a consultant to the Bay Area Transit Authority. Your job is to raise revenue. You need to decide on the appropriate price change - should you increase or decrease the tolls on the bridges coming into San Francisco?

6. By now you are familiar with the concept of government budget deficits - one of the hot issues in the 1996 presidential election. Legislators at both the federal and state level are under increasing pressure to reduce the deficit so they are always on the lookout for ways to close the deficit. Given that the budget deficit is defined as government spending - government revenues, the obvious choices to reduce the deficit would be a decrease in spending or an increase in taxes. [a less obvious choice would be a cut in taxes but that will be the subject matter of a later discussion]. At this time I would like you to consider the possibility of raising the sin taxes (booze and butts) to raise revenue. Do you think it will work? For example, would you propose a rise in the sin taxes as a way of raising additional revenue, some of which may be earmarked for higher education?

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