Prof. Bryan Caplan

Econ 370


HW#1 (please type; diagrams may be drawn by hand)


I.                     Use supply and demand diagrams to analyze the effects of the UPS strike on:

A.                 The market for package shipping

B.                 The market for college textbooks (which have to be shipped)

C.                The market for truck drivers

D.                Analysis: Do all three of your answers make sense to you?  Are any of your predictions wrong or over-simplified?  Explain.


II.                   In his Philosophical Considerations, the anarcho-communist Bakunin writes that:


What the economists call equalized supply and demand does not constitute real equality between those who offer their sale and those who purchase it...What happens in the market is a meeting between a drive for lucre and starvation, between master and slave.  Juridically they are both equal; but economically the worker is the serf of the capitalist, even before the market transaction has been concluded whereby the worker sells his person and his liberty for a given time.  The worker is in the position of a serf because this terrible threat of starvation which daily hangs over his head and over his family, will force him to accept any conditions imposed by the gainful calculations of the capitalist, the industrialist, the employer.


The result of the interaction of supply and demand in the labor market,

then, is that:


Since the worker finds himself in a state of poverty, the worker is compelled to sell his labor for almost nothing, and because he sells that product for almost nothing, he sinks into ever greater poverty.


A.                 Try to graphically represent the conditions that Bakunin describes in the first paragraph using supply and demand diagrams.  Pay particular attention to the shape of the labor supply curve -- what would it look like if workers are "forced to accept any conditions"?

B.                 Accepting the assumptions in the first paragraph as correct, does the conclusion about the wage rate (the price of labor) given in the second paragraph follow?  What happens if the demand for labor increases?

C.                Real wages have risen tremendously since the 19th century during which Bakunin wrote.  Comment on the relevance of your answer to (2) for this long-run historical trend.


III.                  GM, Ford, and Chrystler compete in the car market.  GM’s marginal cost of producing a car is $8000; Ford’s is $10,000; Chrystler’s is $11,000.  The market works like we discussed in class: the low-bidder gets the whole market, and a tie splits the market evenly.

A.                 What price will result from competition between these firms? 

B.                 What are the profits per car sold for each firm?  Does any firm earn positive profits?

C.                How many firms actually produce cars?

D.                The government argues that GM is a “monopoly” and puts a $2000/car tax on GM cars as punishment.  What happens to the car market now?  Who benefits from this?


IV.               Draw your personal cost curves for the following tasks.  Describe what the fixed cost is and what the marginal cost is, and how these affect your decisions.

A.                 Taking out the trash.

B.                 Commuting to campus.

C.                Deciding how many classes to take.


V.                 Provide one example (historical or contemporary) of each of the following.  Briefly (2-3 sentences) explain who exercised the monopoly privilege and who (on net) profited from it.  Your example can come from class, the readings, or your own knowledge.

A.                 A monopoly exercised by the government itself.

B.        A monopoly auctioned off by the government to private suppliers.

C.        A monopoly given by the government to private suppliers.


VI.               The Queen holds on auction on the monopoly right to produce and sell tea.  There are two available producers of tea.  The demand curve for tea, and the costs of the two producers (Lancaster and York), are given in this table:

Price per ton

Quantity (tons)

Total Revenue

Total Cost of Lancaster

Total Cost of York















































A.        If Lancaster received the monopoly privilege, what price and output level would he set?  What would his (gross) monopoly profits be?

B.                 If York received the monopoly privilege, what would his price, output, and (gross) monopoly profits be?

C.                If the Queen auctioned off the monopoly privilege to Lancaster and York, who would win the auction?  How much would the winner pay?

D.                Are there any losses to productive efficiency from this grant of privilege?  To allocative efficiency?  Why?

E.                 Suppose the Queen, sensitive to the charge that she is enriching herself with these auctions, randomly selects the recipient of the grant (by making Lancaster and York publicly play Rock, Paper, Scissors, for example).  How are the deadweight losses of monopoly likely to be affected?

F.                 Parliament strips the Queen of the right to give monopolies, and declares that henceforth monopolies will be awarded to whichever firm gets the most votes from the members of Parliament.  Lancaster and York compete for votes by paying for political advertising for their supporters, hiring lawyers, and so on.  Who, if anyone, now benefits - on net - from the distribution of monopoly grants?


VII.              In each of the following cases: (a) Describe the resources Transferred; (b) describe the Deadweight Costs; (c) suggest how the deadweight costs might be avoided.  Try to be as comprehensive as possible - and make sure you remember opportunity costs!

A.                 The car theft "industry."

B.                 Prohibiting the copying of an article without the express written permission of (and payment to) the publisher.

C.                Putting out free tables and chairs in the Johnson Center cafeteria.

D.                The Civil War (including the abolition of slavery).


Was there any feasible way to avoid the deadweight costs in any of these cases?  Explain.


VIII.            Wholesale clubs typically charge a membership fee to shop with them, but have much lower prices.  Suppose your local grocery store prices 10% above marginal cost.  Explain why it would be more efficient for them to charge you a membership fee, and reduce their prices.  What is the biggest annual membership fee you would pay to your grocery store if they reduced prices by 5%?  By 10%?  Explain why you should be willing to pay more than (your current grocery bill*% discount).


IX.               Try to provide examples of each of the following.  If you can't produce an example, explain why.

A.                 A grant of monopoly privilege with losses to allocative efficiency, but no loss in productive efficiency.

B.                 A grant of monopoly privilege with losses to productive efficiency, but no losses in allocative efficiency.

C.                A grant of monopoly privilege with losses to neither productive nor allocative efficiency.

D.                A grant of monopoly privilege worth more than the total consumer surplus under free competition.

E.                 A worthless grant of monopoly privilege (i.e., one where an auction for the privilege would raise no revenue).


X.                 Suppose that Congress plans to award a monopoly privilege worth $10,000,000 to whichever firm gets it.  Every firm that retains a lobbying team has an equal chance of winning the privilege.  It costs $100,000 to retain a lobbying team.

A.                 How many firms have to lobby in order to make hiring a lobbying team an even bet (expected profit=0)?

B.                 What does this lobbying activity do to the net monopoly profit earned by the winner?  To the net profits given to the entire industry?

C.                What if firms pay a bribe (or buy a lottery ticket) instead?  Who, if anyone, now on net gets a monopoly profit?


XI.               Analyze ONE of the following grants of monopoly privilege discussed in the readings.  In 1 page or less, explain: (a) What kind of competition the privilege kept out, and how; (b) The gross monopoly profits, and who got them; (c)  The deadweight losses of monopoly (allocative, productive, and "lobbying").

A.                 The NRA

B.                 Medical licensing

C.                The CAB

D.                Immigration restrictions

E.        The Post Office