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Econ MidTerm

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a) If there is more than one opportunity to be forsaken, which forsaken opportunity is the cost?

a) The forsaken opportunity that is most valuable (to you)

b) Are costs the same thing as the undesirable consequences of some action?

b) No. Costs are not the undesirable consequences of an act: they are the highest- valued forsaken opportunity.

c) Social welfare is maximized by producing roughly an equal amount of guns and butter.

c) Social welfare is maximized somewhere along the production possibility boundary. But, beyond that, economics cannot predict where on the boundary social welfare is maximized.

d) How does the government pay for goods and services given to the public for “free”?

d) The government can finance expenditures in one of three ways: (1) it can raise taxes on individuals; (2) it can raise taxes on corporations; or (3) it can print more money”

e) Explain why the “substitution” postulate implies there is no such thing as a need.

e) REMs are always willing to give up a sufficiently small amount of any good they desire for a sufficiently$50 large amount of other good (or bundle of goods) they desire.

f) Explain the difference between a “want” and a “need” and give me an example of each.

f) There is no such thing as a “need,” only “wants.”

a) What does Adam Smith mean by the term “invisible hand?”

a) Adam Smith coined the term “invisible hand” as a metaphor for the competitive market mechanism that leads self-interested buyers and sellers into purchasing and supplying the quantity of goods that society demands, and that allocates those goods among individuals according to their personal valuations, all without the help (or hindrance) of a central planner.

b) What is Consumer Surplus?

help (or hindrance) of a central planner.
b) Consumer Surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price they are willing to pay.

c) What is Producer Surplus?

c) Producer Surplus is the monetary gain obtained by producers because they are able to sell a product for a price that is higher than the lowest price they are willing to accept.

d) What is the First Law of Demand?

d) The lower the price at which one can buy a good, the more one will purchase, have, use, or consume. Alternatively, demand curves slope down.

e) What is the Second Law of Demand?

e) The longer the time allowed to adjust the amount demanded in response to a price change, the greater is the change in the amount demanded. Alternatively, demand is more elastic in the long run than in the short run.

3) True, False,
a) A 3% fall in price that induces a 1% increase in the amount purchased indicates an elasticity (in absolute value) greater than 1.

a) False. The elasticity is h = 1%/-3% = -.333 so |h| < 1.

T/F:
b) A 3% rise in price that induces a 1% decrease in the amount purchased indicates an elasticity (in absolute value) greater than 1.

b) False. The elasticity is h = -1%/3% = -.333 so |h| < 1.

T/F
c) A 3% fall in price that has no effect on the quantity demanded indicates an elasticity equal to zero.

c) True. The elasticity is h = 0%/-1% = 0 so |h| = 0.

T/F
d) A .001% increase in price that drives the quantity demanded to zero indicates an elasticity (in absolute value) equal to infinity.

d) True.

T/F

e) When a couple goes out, the probability that they will attend an expensive theatre is greater if they have infants for whom a babysitter is necessary than if they are childless.

e) True. Since the couple has to pay the same amount for a babysitter, the relative price of an expensive theater falls.

T/F
f) A good is free in the economic sense if it is provided by the government at zero cost.

f) False. A good is free in the economic sense if there is no opportunity cost (such as “air” unless you live in Bejing, Los Angeles, or Mars).

T/F
g) An individual will tend to drink better quality wine when she is dieting than when she is not dieting.

g) True. Since the calorie cost is the same for low and high quality wine, the relative price of high quality wine falls and more will be demanded.

T/F
h) Rent controls likely increase discriminatory behavior in New York City.

h) True. Landlords will face a surplus of rental applicants, and can be expected to use non-price factors in choosing applicants (since they are prohibited from using market-clearing prices).

T/F
i) The average quality of California wines will tend to be higher in New York wine stores than in San Francisco wine stores.

i) True. Since the shipping cost is the same per bottle for both low and high quality wines, the relative price of high quality California wines will be lower in New York.

T/F
j) If a consumer can purchase as large a quantity as he wants at a given price, he will continue to buy additional units up to the point where the marginal personal use value is zero.

j) False. Consumers will purchase up to the point where MV = P, not MV = 0.

4) During Prohibition in the United States, much to the dismay of Eliot Ness and the Women's Christian Temperance Union, alcoholic beverages continued to be produced and sold, despite the threat of confiscation, fine, or jail. Assume that there were two types of alcohol, “good stuff” (e.g. Napoleon Brandy) and “bad stuff” (e.g. bathtub gin) and that the probability of apprehension was the same for each type. Assuming that liquor is sold at “cost” (including expected penalties), what would happen to the average quality of alcoholic beverages during Prohibition under the following penalty schemes?
a) The only penalty was a fixed fine per bottle.
b) The only penalty was confiscation.

4) Prohibition
a) Since the fixed penalty will raise the price of both types of alcohol by the same amount (i.e., the penalty multiplied by the apprehension probability), the relative price of Good Stuff falls and average quality will increase.
b) The confiscation penalty raises the price of each type in proportion to its value. Therefore, the relative price of Good Stuff to Bad Stuff is unchanged, and the average quality will not change.

Short Answer
a) The Marshall School has recently announced cutting the price of graduation ceremony tickets sold to parents by $5.00, reflecting the fact that the Galen Center
is never filled for these ceremonies. The Dean stated he believed this increase would generate about $10,000 per year in additional revenue. What is he assuming about the elasticity of demand for graduation tickets?

a) Cutting the price will increase total revenues only if demand is elastic (that is, |h| > 1).

b) L.A. Metro is considering a $1.00 increase in the price of light-rail tickets between USC and downtown Los Angeles. As an expert economic consultant, you are asked to determine whether this change will increase or decrease RTS profits. What conclusions do you reach if the demand for light-rail rides is unitary inelastic?

b) If demand is unitary elastic, total revenue is unchanged as price increases (because the percentage decrease in the quantity demanded exactly offsets the percentage increase in the price, leaving total revenue unchanged). Since the quantity decreases (and since marginal are never negative), total costs will decline. Therefore profit will increase.

c) Suppose that the Los Angeles County currently realizes $15 billion annually on its 9% sales tax, and is contemplating doubling the sales tax to 18% to generate an additional $15 billion in tax revenues. Assuming no other prices change in response to the increased tax rate, what is the Los Angeles County government implicitly assuming about the elasticity of demand for goods bought in Los Angeles County?

c) The country government must be assuming that the demand for goods is perfectly inelastic. Increasing the tax increases the full price of the goods being purchased. If tax revenues double when the tax rate doubles, and no other prices change, the quantity demanded must not change when the full price increases, which suggests that demand is perfectly inelastic. Demand is not, of course, so the County will likely be disappointed that they raise less revenue than they anticipated.

6) Suppose the Demand Curve is given by Q = 100 - 2 P
a) Derive the Inverse Demand Curve
b) Derive the Marginal Revenue Curve
c) Derive the Price that Maximizes Total Revenue
d) Derive the Price that Maximizes Total Profit if the company produced at a constant marginal cost of $20/unit.

6) DemandCurveisgivenbyQ=100-2P
a) P=50–.5Q
b) MR = 50 – Q
c) Total revenue is maximized when MR = 0, or when Q = 50, which implies Price = 50 – .5 x 50 = 25.
d) TotalprofitismaximizedwhenMR=MC,orwhen50– Q=20,orQ=30, which implies Price = 50 – .5 x 30 = $35.

7) A price searcher faces an elasticity of demand of -1.5. The marginal cost of production is $2. What price is charged?

7) P=6. Recall that MR = P(1 + 1/n) and MR=MC to maximize profit. Plug in n=-1.5 and MC=2, and solve for P.

8) Suppose that a price searcher faces a linear demand curve and can sell 120 units at a zero price. Assuming that his marginal costs are positive, will his equilibrium quantity be less than, equal to, or greater than 60? Or, is there not enough information to tell? Justify your answer.

8) Less than 60. (More than 60 would be in the inelastic region of the linear demand, where MR < 0. Since MC > 0 and MR = MC to maximize profit, any quantity where MR < 0 cannot be optimal.

9) Suppose that a price-searching firm maximized revenues and not profits. What will be the revenue-maximizing elasticity of demand?

9) Total revenues maximized by producing until MR = 0, which implies |n| = 1.

True, False, and Uncertain.
a) Suppose a monopolist owns the entire existing quantity of a particular good, and no more can ever be produced. Then, she’ll always sell the entire quantity.

a) Uncertain. Sell the entire quantity if MR > 0 at that quantity. Otherwise, the monopolist is better off only selling that portion where MR > 0.

10) True, False, and Uncertain.
b) A price searcher who sets a single price and faces a demand elasticity of -4.0 will mark up his goods 33%. (That is, price will be 33% higher than costs.)

b) True. MR = MC implies that P(1+1/n) = MC, so P/MC = n/(1+n) (a little algebra). If the elasticity is -4, then P/MC = 4/3 = 1.3333%

10) True, False, and Uncertain.
c) Price-taking firms produce where marginal costs equal price, not where marginal
costs equal marginal revenue.

c) False. The MR for a price taking firm IS the price, so the firm does indeed produce where MR = MC.

10) True, False, and Uncertain.
d) A price searcher maximizes his revenue (from a given output) by selling identical units of output at the same price to all customers, for if she sold identical units at different prices to different customers, it would be possible to increase the revenue derived from a given output by shifting sales from low paying customers to high paying customers.

d) False. Revenue is maximized by equating Marginal Revenues across customers, not prices.

a) Will a profit-maximizing price searcher offering a single price ever choose a price-quantity combination where demand is inelastic?

a) No. When demand is inelastic, MR < 0. Since profit is maximized when MR = MC and since MC > 0, MR = MC must always occur in the elastic region of the demand curve.

12) A firm faces two customers with demands given by: Q1 =8-P1
Q2 =16–2P2
The firm is assumed to have zero marginal and fixed costs of production.

12) Inter-Customer Price Discrimination

14) True, False, and Uncertain.
a) A price searcher who charges different (discriminatory) prices to two groups of consumers will produce more total output than if he was constrained to offer the same price to both groups.

False. There is no reason why quantity will necessarily increase under discrimination (though it could)

14) True, False, and Uncertain.
b) Some physicians charge more for services delivered to wealthy patients than they do for services delivered to low income individuals. This fact underscores the basic humanitarian ethic that drives individuals in the medical profession since if doctors wished only to increase their own wealth they would not treat low income individuals and would treat only those willing to pay a higher price.

b) False. Wealth-maximizing doctors will treat individuals offering the highest marginal revenues. Since wealthy patients tend to be less price elastic, they will be charged the higher price, but this doesn’t imply the doctor could make more money by selling only to wealthier people.

14) True, False, and Uncertain.
c) Service stations (especially in lower-income areas) have started giving discounts to customers paying with cash instead of credit cards. This is probably an example of price discrimination.

c) Uncertain. It certainly could be, if cash customers have more elastic demands then credit card companies. But, of course, credit card companies charge the service stations for credit-card transactions, so the price difference might be explained by cost. I also find it intriguing that this practice is much more prevalent in lower- income areas, perhaps where credit-card fraud is a bigger problem?

True, False, and Uncertain.
d) Multipart pricing schemes are typically less efficient than the usual single-price monopoly pricing because the monopolist is able to exploit a larger share of the consumer surplus.

d) False. “Efficiency” is about the deadweight cost, not about who captures the surplus. Multi-part schemes typically reduce deadweight cost by increasing quantity.

14) True, False, and Uncertain.
e) A perfectly price-discriminating monopolist will produce at MC = MR.

e) True. As examples of “perfect price discrimination” is monopolists who charge different prices for each unit sold, all the way to P = MC for the last unit; in this case the marginal revenue of each unit sold is the price for that unit (because the firm does not have to accept a lower price for all units when increasing quantity). Similarly, multi-part schemes where the price is set at P=MC and the entire consumer surplus is charged as an entry fee are also consistent with MR = MC, when MR is calculated to include the change in the entry fee that occurs when ever quantity increases.

14) True, False, and Uncertain.
f) A price searcher maximizes his revenue (from a given output) by selling identical units of output at the same price to all customers, for if she sold identical units at different prices to different customers, it would be possible to increase the revenue derived from a given output by shifting sales from low paying customers to high paying customers.

f) FALSE. Revenue is maximized by equating Marginal Revenues across customers, not prices.

16) Disneyland has recently announced “surge pricing” on its busiest days, raising the one-day ticket price from $99 per day to $119 per day. Average attendance on busy days is about 70,000 visitors, and Disney expects the surge pricing will lower attendance to approximately 60,000 visitors.
What is Disney (implicitly) assuming about the elasticity of demand for tickets?

16) h = -14.2%/20.2% = -0.70.

a) What is the difference between accounting profit and economic profit?

Short answers
a) Accounting Profit uses realized or actual gains and losses and is calculated according to generally accepted accounting principles (GAAP). It is a company's total revenue reduced by the explicit costs of producing goods or services. These explicit costs involve direct monetary movement and include expenses such as the cost of raw materials, employee wages, transportation, rent and interest on capital.

Economic Profit is also calculated as revenues minus costs, but the relevant costs include not only the “explicit” cost but also the “implicit” or opportunity cost of the resources used (such as the opportunity cost of the land, company-owned buildings, and non-compensated time of the owner/manager.
In addition, Accounting Profit is typically limited to a specific time frame (e.g., month, quarter, fiscal year), while Economic Profit is typically used to measure the capitalized value of revenues and costs.

b) Suppose that the total revenue of a firm from the sale of goods is $90,000, and its cost in raw materials and payment of wages is $35,000. Suppose that the owner of the firm contributed his own resources, land, capital, and time in the production of goods, and that the value of the owner’s forgone salary is $40,000, the forgone interest on this capital is $1000, and the forgone rent he could have earned on the property is $2,000. Compute the firm’s accounting and economic profit.

b) Accounting profit is $55,000. The Economic Profit, which includes the owner’s opportunity costs, is $12,000.

c) What is the difference between fixed cost, avoidable cost, and sunk cost?

c) Fixed cost = Costs of production that do not vary with output
Avoidable cost = The portion of fixed cost that be avoided by not producing Sunk cost = The portion of fixed cost that cannot be avoided by not producing

d) Fill in the blank: Sunk costs are _________

Sunk

e) True or False (and explain!).
Price-taking firms should shut down when the market price is below average total cost.

e) False. Price-taking firms should shut down when the market price is below average avoidable cost.

22) True, False, and Uncertain.
a) A decrease in the price of iPhones will shift the demand curve for iPhones to the right.

a) False. The demand curve “defines” the relation between the price of a good and the quantity demanded for that good, so any change in the price is reflected by a movement “along” the demand curve, and not a shift in the demand curve.

22) True, False, and Uncertain.
b) Assuming that McDonalds hamburgers are an inferior good, an increase in income levels (holding everything else constant) will increase the equilibrium price of McDonalds hamburgers.

b) False. An increase in the price of an inferior good will shift the demand curve to the left, which (holding supply constant) will decrease the equilibrium price.

(As an important technical note: a good cannot be “inferior” over the entire range of income. For example, even if McDonald’s hamburgers are inferior at sufficiently high levels of income (since wealthier people will better and more expensive food choices), McDonald’s hamburgers must be normal at sufficiently low levels of income.)

22) True, False, and Uncertain.
c) Perfect weather conditions (for growing trees) in the Pacific Northwest will decrease the price of artificial Christmas trees.

c) True. An increase in the supply of “real” Christmas trees will decrease the price of such trees, which in turn will decrease the demand for substitutes (i.e., artificial Christmas trees), which in turn (holding the supply of artificial trees constant) will decrease the price.

22) True, False, and Uncertain.
d) The price of a gallon of gas has recently decreased by 25 cents. This likely implies an increase in the supply of gasoline.

d) Price decreases can reflect either an decrease in demand (i.e., a shift to the left in the demand curve) or an increase in supply (i.e., a shift to the right in the supply curve).

22) True, False, and Uncertain.
e) Increasing the Los Angeles minimum wage from $9.00 to $15.00 will increase employment because more individuals will want to work (and existing workers will want to supply more hours) when the wage is $15.00.

e) FALSE. Raising the minimum wage will increase the supply of labor, but will simultaneously reduce the demand for labor.

23) Petroleum economists have concluded that development of the North Dakota oil fields is only profitable when the price of oil exceeds $60/barrel. Assuming this is true, why are so many North Dakota producers still producing now that the price has fallen below $30/barrel?

23) Enter when Price > Min[Average Total Cost] = $60? Exist when Price < Min[Average Avoidable Cost] < $30?

24) President Obama has recently proposed a $10/barrel tax on oil produced in the United States, asserting that consumers will not pay more at the pump for gasoline since the tax will be imposed on oil producers and not consumers. What is the President assuming about the relative supply and demand elasticities for gasoline?

24) President Obama must be assuming that the supply of petroleum is perfectly inelastic: if it’s not then consumers will end up bearing some or all of the burden of the increased tax

33) Suppose that all new cars are either Good, with probability 50%, or Lemons (i.e., bad cars), with probability 50%. The only way to detect that a car is a Lemon is by owning and driving it extensively (that is, even the new-car dealer or salesperson will not be able to distinguish Good cars from Lemons, nor can any new-car buyer until they have owned the car for a while). Suppose further that Good cars are worth $20,000 while Lemons are worth $10,000).
a) What is the market price of new cars in this market, given that there are an equal number of Good cars and Lemons produced?
b) What is the price of USED cars in this market? Go ahead and ignore depreciation but consider the fact that the owner of the used car knows whether it is a Good car or a Lemon.

33) Lemons
a) New cars will sell for their expected value of $15,000.
b) Used cars will sell for $10,000 and will all be lemons. Since the buyer cannot distinguish between good cars and lemons, her best guess is that the car is of average quality, and she’s willing to pay at most $15,000 for a car of average quality. At $15,000, owners of lemons are happy to sell but owners of good cars are not. And, of course, buyers understand this as well, and will correctly assume that the only cars sold in the used-car market are lemons, driving the price down to $10,000 for used cars. Ultimately, the fact that the seller knows more about the quality than the buyer, and that the buyer knows that the seller knows more about the quality than the buyer, implies that no market for good used cars will exist.

34) Consider a case where a doctor and a baker are sharing an office building. The problem is that the baker’s loud machinery disturbs the doctor’s medical practice, and the doctor cannot treat patients while the baker’s machinery is running.
Assume also that the doctor can soundproof his walls for $50, and that the baker can buy quieter machinery for $100. Suppose that the town council is deciding whether to give the right to the baker to make as much noise as needed to do his work, or to give the right to the doctor to control the noise level in the building.
To which party should the town council assign the rights?

34) Assuming that it is efficient for both to remain in business in the building, the efficient outcome is for the doctor’s walls to be sound-proofed. In the absence of transaction costs, the Coase Theorem states that it doesn’t matter whether the doctor has the right to a quiet office or the baker has the right to make as much noise as necessarily, the outcome will be the same. If the baker has the right to make noise, the doctor will pay $50 to sound-proof his walls. Alternatively, if the doctor has the right to a quiet office, the baker would rather pay the doctor anywhere between $50 and $99 to soundproof his walls than to pay $100 for quieter machinery.
In the presence of transaction costs, the assignment of legal rights matters. Suppose that, for whatever reason, the doctor and the baker are precluded from bargaining. Then, it is economically more efficient to allow the baker to make as much noise as possible, forcing the doctor to spend $50 to sound-proof, than to allow the doctor the right to a quiet office, forcing the baker to spend $100 for quieter machinery.

35) Shortsville is currently involved in heated debate over the imposition of two alternative legal systems. Under the first system, if I threw a rock through your window I would be assessed a restitutional fine. Under the second system, I could throw a rock through your window at any time without legal recourse from you. Which system would be most economically efficient? Be explicit about the assumptions you make in your analysis.

35) In the absence of transaction costs, the Coase Theorem states that it doesn’t matter whether the I have a right to throw a window through your window or if you have the right to restitution, the outcome will be the same. If I have the right but its worth more to you to not have a broken window than it is worth to me to throw the rock, you will bribe me to not throw the rock.
In the presence of transaction costs, the assignment of legal rights matters.

35) Shortsville is currently involved in heated debate over the imposition of two alternative legal systems. Under the first system, if I threw a rock through your window I would be assessed a restitutional fine. Under the second system, I could throw a rock through your window at any time without legal recourse from you. Which system would be most economically efficient? Be explicit about the assumptions you make in your analysis.

35) In the absence of transaction costs, the Coase Theorem states that it doesn’t matter whether the I have a right to throw a window through your window or if you have the right to restitution, the outcome will be the same. If I have the right but its worth more to you to not have a broken window than it is worth to me to throw the rock, you will bribe me to not throw the rock.
In the presence of transaction costs, the assignment of legal rights matters.

36) Suppose that Cuba and the United States both produce two (and only two) products: tobacco and televisions. Suppose that one “man-year” of U.S. labor can produce 200 tons of tobacco or 100 televisions (or any linear combination thereof), while one man- year of less-productive Cuban labor can produce 50 tons of tobacco or 50 televisions (or any linear combination). Finally, suppose that, in the absence of free trade between the two countries, each country spent half of its man-years on each good (i.e., the “average” U.S. worker was producing 100 tons of tobacco and 50 televisions, and the “average” Cuban worker was producing 25 tons of tobacco and 25 televisions).
Now, suppose (realistically) that Cuba and the U.S. begin exchanging goods in a free market. Which goods will Cuba and the U.S. export, and which will they import? Can you prove that both countries can be made better off with free trade?

36) Clearly the US has an ”absolute advantage” in both tobacco and televisions.
But, in terms of opportunity cost, the US must give up 2 tons of tobacco to produce one television, while Cuba must give up only 1 ton of tobacco to produce one television. Hence, Cuba can produce televisions “cheaper” (in terms of tobacco) that can the U.S. It follows that Cuba has a “comparative advantage” in televisions, and should specialize in producing televisions, while the US specializes in tobacco.
Many ways to prove that both countries can be made better off. Here’s one. Start with the current consumption (100, 50) in the US, and (25, 25) in Cuba. If the countries still want 75 TVs between them and are willing to trade, the Cuba should produce only TVs (max 50), while the US should produce 25 TVs and the rest in tobacco (150 tons). Note that this increases the total tonnage of tobacco to 150 tons (from 125 before) while producing the same number of TVs

Who's Big Idea?
“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”

D Adam Smith

Who's big idea?

Considered situations where the seller knows more about the quality of a product than the buyer, concluding that such information asymmetry can cause the market to fail, with no transactions occurring at any price.

George Akerlof

Who's big idea?

Defined “economic rent” as any payment to a factor of production in excess of the cost needed to bring that factor of production into production.

H. David Ricardo

Who's big idea?
Described supply and demand as the blades of a pair of scissors, arguing that asking whether supply or demand alone determined price was like asking whether the top blade or bottom blade of the scissors did all the cutting.

Alfred Marshall

Who's big idea?
Even if firms do not purposely equate marginal costs and marginal revenues, firms in aggregate will act “as if” they maximize profits since profitable firms will survive, while unprofitable firms will disappear.

Armen Alchian

Who's big idea?
Generally credited with developing the graphical representation of supply and demand (with the dependent variable Quantity on the horizontal axis and independent variable Price on the vertical axis).

Alfred Marshall

Who's big idea?
His dissertation was titled “The Economics of Racial Discrimination.”

Gary Becker

Who's big idea?
In a world without transaction costs, it doesn’t matter which party is held liable for the damages caused by an externality: any assignment will get to the (same) socially efficient outcome.

Ronald Coase

Who's big idea?
Introduced “the invisible hand” as a metaphor for the competitive market mechanism that leads self-interested buyers and sellers into purchasing and supplying the quantity of goods that society demands, and that allocates those goods among individuals according to their personal valuations, all without the help or hindrance of a central planner.

Adam Smith

Who's big idea?
It is comparative advantage, and not absolute advantage, that facilitates mutually beneficial exchange across nations.

David Ricardo

Who's big idea?
Loved to quote Frederic Bastiat: “Government is that fiction whereby everybody believes he can live at the expense of everybody else.”

A. Milton Friedman

Who's big idea?
Perennial gales of creative destruction create continuous profit opportunities and improve standards of living.

Joseph Schumpeter

Who's big idea?
Predicted that capitalism will ultimately collapse because of a constant struggle between labor, the creators of value, and capitalists, the exploiters of labor.

G. Karl Marx

Who's big idea?
Proposed “satisficing” (a combination of the words satisfy and suffice) as a alternative to maximizing.

B. Herbert Simon

Who's big idea?
Since owners of will seek to employ those assets where they will yield the highest return, competition will drive prices so that the return on any asset will be the same across all uses.

Adam Smith

Who's big idea?
Suggested that negative externalities could be mitigated by charging a tax equal to the difference between the private marginal costs and the social marginal cost of activity.

Arthur Pigou

Who's big idea?
There’s no such thing as a free lunch.

Milton Friedman

Who's big idea?
Viewed criminal behavior as a result of rational comparisons of costs and benefits.

Gary Becker

Who's big idea?
In the absence of transaction cost, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

Ronald Coase

Who's big idea?
Predicted that capitalism will ultimately be a victim of its own success, since capitalism inherently raises the economic and political positions of groups that are hostile to it.

Joseph Schumpeter

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