Prof. Bryan Caplan

Econ 370


HW#3 (please type; diagrams may be drawn by hand)


I.         Contrast the private and social benefits of each of the following (2-3 sentences each).  If you think the private and social benefits are approximately equal, explain why.

A.     You go to a movie.

B.     You mow your lawn (think aesthetics).

C.    You take the Metro instead of driving during rush hour.

D.    You learn how to program computers.

E.     You invent a cure for AIDS.


II.       Contrast the private and social costs of each of the following (2-3 sentences each).  If you think the private and social costs are approximately equal, explain why.

A.     You start smoking marijuana.

B.     You mow your lawn (think noise).

C.    You drive late at night instead of taking the Metro.

D.    You put up a web page attacking organized religion.

E.     You rob a bank.


III.      Assume that national defense is a public good in the strong sense - an unsubsidized market produces NO defense even though the social benefits of it are high.  Carefully graph this market, showing the market quantity Qm and the efficient quantity Qe.  Shade the region of deadweight losses, and intuitively explain why these deadweight losses are so large. (1-2 sentences)


IV.   "Immigrants impose externalities on American workers by reducing wages."  Carefully explain why this claim mis-uses the notion of externalities.  (3-4 sentences)


V.                 [Use your calculator for this one!] In 1950, suppose that Britain has a per-capita GDP of $8000, and Hong Kong has a per-capita GDP of $400.  If Britain's per-capita GDP grows at 1% per year, and Hong Kong's grows at 8% per year, what will living standards look like in 1960?  1970?  2000?  Approximately when will Hong Kong's living standard exceed Britain's?  How does this illustrate the importance of dynamic efficiency?


VI.               Suppose there is a constant marginal cost of producing CDs of $2.

A.                 What will be the price of CDs if anyone can produce them?  What will the payoff to the artist be in this case?

B.                 If the artist's copyright is enforced, he will be able to earn $5 per CD.  How many copies must be demanded at this price if the artist is willing compose for a minimum fee of $30,000?

C.                Suppose you are a wealthy patron of the arts who wishes to make music available to all.  The artist holding the copyright can earn $30,000.  How large of a prize must you offer the artist to persuade him to put his music into the public domain (so it can be copied free of charge by anyone)?  What will happen to the price of the artist's CD?


VII.              What provides the most important incentive to innovate in each of the following cases?  If it isn't patent or copyright, what exactly is it?

A.                 Personal webpages

B.                 Yahoo!

C.                New drugs for fighting AIDS.

D.                John Grisham novels.

E.                 Today's Washington Post.


VIII.            Draw AC and demand curves for:

A.                 A zoo in Fairfax.

B.                 Groceries within walking distance of Fairfax.

C.                The Price Club by the Fair Oaks mall.