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Please send me a typed question, so I can answer your question as soon as possible.
 
 

Question:

我係個forum

http://www.economists.com.hk/

見到條咁ge question 'High land rent causes high land price'?Do you agree?Explain 我就咁reply:

 In my point of view capital is any asset which generates a stream of income over time land is a type of capital

 assume rent = annuity

 Wealth = income/interest rate

 Case 1
 if income = 1000 , interest rate = 10%
 PV = 1000/10% = 10000

 Case 2
 if income = 2000, interest rate = 10%
 PV = 2000/10%=20000

 As a conclusion, higher rent cause higher land price.

 rent increase result PV of an asset increase

 但係就有人講話我咁analysis 係錯, 本末倒置....... 但係佢地又講唔出我有咩錯, actually my analysis 有咩問題?
 

Martin's Answer:

I think the people in your forum are interesting.

 Your analysis is good enough because I teach you this one.

 However, high land price also causes high land rent.

 The logic is simple:

 Gov't changes its regulation that there will be no land supplied to the market in the future 10 years.

 What do you think happening on land price?

 Land price shall rise!!! and the corresponding land rent, property rent of the new contracts(i.e. in next round) shall rise, too.
 

 See, actually, there is no confusion here. If you see the situation in terms of two periods, then the analysis is then crystal clear.

 example 1:

 government allows the land owner to have more variety of use of their land ==> the expected annual income of land will
 increase ==> the PV of land increases ==> the bid price in the land market (in next land sales)will increase, too.
 

 example 2:

 government limits the land supply ==> the market price in land market increases ==> The corresponding monthly / annual rent of using an more expensive land shall (in next contract) increase, too.

 What do you think?
 

 p.s. I don't think the econ web you've mentioned is of high quality. Please limit your time spending on it. :-)
 

 Work hard,

 Martin
 2003/08/03

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Q.1:

 但Long run既時候, elasticity會不會改變而影響rent??
 

 Martin's Answer:

 I think we have an example in our text book, showing that in long run, the elasticity of supply is becoming more and more elastic.

 On the other hand, you should remember that the more elastic the supply is, the less the portion of economic rent in an
 individual's income.

 So, I think in the long run, elasticity 'of supply' should affect the amount of rent earned.
 

 Q.2:

 我就是不明白經濟解釋2第二章第二節其中有一段... 它似乎是說quasi-rent便是economic rent..

 「因為這種看法不限於土地,馬歇爾提出了那重要的準租值(quasi rent)理念。今天,一般而言,準租值是指土地之外的其他類似地租的收入:收入變而供應不變的。準租值後來又稱經濟租值(economic rent),或簡稱租值(rent)。」

 Thanks^^
 

 Martin's Answer:

 I think Marshall equated quasi rent and economic rent in the case of fixed supply of resource, e.g. Land. This is the same as what I have taught on class. Could you remember the topic of Ricardian rent? Because there is no cost of obtaining the
 resource, i.e. its supply curve is vertical, there is no varible cost nor total cost.

 Quasi rent = TR-TVC
 Economic rent=TR-TC

 Since TVC and TC equal to zero, so quasi rent = economic rent.

 However, the same thing does not happen in short run analysis!! That's why I teach you that quasi rent is NOT equal to
 economic rent in short run.

 Quasi rent is a concept invented by the economists to do short run analysis.

 In other words, there is no difference between quasi rent and economic rent in Long run, and we usually do analysis by means of econimic rent.

 What do you think?

 Work hard,

 Martin
2003/08/01
 

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Question:

Dear Martin,

 My friend told me that it is possible for high land rent causes high land price, because high land rent  (after derived demand) can in turn bids up the cost of land in alternative uses. So confusing...Then, is it meaningless to tell high land price causes high land rent??? And also, if there any constraint when we use this and the one in the textbook???

 Thanks
 

Martin's Answer:

 Let me answer you this question first, since i think this question is easier ans shorter.

 Your friend's view point is correct to certain extent only. It is true that when the land rent become higher, the land price shall increase. Land price is the present value of 'land',  so if the land rent i.e. the periodic income increases, its present value shall increase, too.

 However, your friend confused two concepts: 1) product demand and 2) dervied demand.

 In your example, there is no example of product demand. Land prices and land rent are all related to derived demand only. Their relationship should be periodic income and present value.

 See?

 Work hard,

 Martin
 2003/07/27

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Q1. (p.37)
 本書最尾果段話"competition among users absorbs the profit into higher and expected economic rent in the
 long run" . 但係demand同supply唔係指一個時間發生既事?  點解compete完仲有short run同long run之分??
 

Martin's Answer:

 Demand and Supply (in our elementary level) should happen at the same time.

 Competition happens in both short run and long run. Let me remind you our class materials:

 In short run (at least one factor of production is fixed), under perfect competition, an individual firm may be able to earn profits unexpectedly in the first time, and earn the expected 'economic rent' for the second time.

 In long run, (all factors are variable), even under perfect competition,  an individual firm can still earn the expected 'economic rent' for many times, if it has some comparative advantages in the industry (intra marginal firm).

 See?
 

 Q2. quasi-rent同monopoly rent係唔係economic rent呢??

 Martin's Answer:

 Quasi rent is not the same as economic rent, though their definition are similar
 to each other.

 Quasi rent is a concept invented by the economists to explain the behaviour of
 'short run' firm. The most important decision is to stay in the industry even
 in 'short run' loss (quasi rent is still positive). If we do not use the short
 run and long run concept, there is no need to use this concept.

 See professor Cheung "Economic Explanation" book 2.

 Monoploy rent is the same as economic rent since their definitions are the same!

 What do you think?

 Work hard,

 Martin
 2003/07/25

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 Q1) If firm exists, is there any market left? firm replaces market? or still have factor market and product market?

 Martin's Answer:

 In Coase's angle, firm replaces the functions of market in allocation of resources, coordination of working processes,
 ...etc. Coase calls this as "firm replaces market". Since there is a "firm", so there is no need for the consumer to deal with the  factor diectly. The product market shinks. The firm replaces the consumers to deal with the factor owners, and this is the "factor market". Coase calls this as "factor market replaces product market"

 See?
 

 Q2) What is the meaning of hirachy replaces private property right?

 Martin's Answer:

 In a firm, what is the method of allocation of resources? Via visible hands (i.e. instructions from the boss), the price
 mechanism is not functioning any more. Please notice that if there is a boss here, there is a ranking structure, meaning
 someone is in higher rank than another person. We call this ranking structure the "hirachy".

 Since private property rights supports market price mechanism, no price mechanism found in a firm implies no propoerty
 rights at all.

 Coase call this as "hirachy replaces private property right".
 

 Q3) Capital value = capital = wealth?
 

 Martin's Answer:

 Capital usually means capital asset. The value of capital asset is capital value, which has the same meaning as wealth.

 See?
 

I am glad that you are working hard in the summer vacation. However, please do not forget the importance of family, friends  (NOT girl friend) and resting. These elements also lead you to the final voctory in the AL exam.
 

Work hard,

Martin
2003/07/22

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Question:

Your question is a past papers' MC:

The consumption of a free good will stop when its

 1. marginal use value begins to fall.
 2. marginal use value is negative.
 3. marginal use value is zero.
 4. total use value falls.

 A. 1,2 and 3 only
 B. 2,3 and 4 only
 C. 1,3 and 4 only
 D. 3 and 4 only

 I found that answer 3 and 4 are correct,answer 2 is also correct.Since answer 2 is same as answer 4. It is because if the MUV is -ve, then this will lead the TUV falls.If the MUV =0 , then TUV is max. . If sum of MUV is +ve, then TUV will rise.Is it right?
 

 Martin's Answer:

 Well done! I think your idea is correct.

 Which is the correct answer? option B or option D? Since the model answer is option D, I agree that the it is not good enough indeed.

 Best Regards,

 Martin
 2003/07/21
 

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Q1: Is there any difference between wealth maximization and income maximization?
 W=I / R(R:interest rate)?

 Martin's Answer:

 They have no difference if the following assumptions are satisified.

 1. there is a well developed loan market, which enables market interest rate to emerge.

 2. periodic income (e.g. annual income) is a constant.

 3. the length of income stream is infinite.

 These 3 assumptions are necessary to establish the relationship between W and I, i.e. W = I / R. See? maximizing I is just the same as maximizing W.

 However, if one of the above 3 assumptions is not satisified, there will be no exact relationship between W and I. We then cannot say maximizing W is the same as maximizing I. Understand?
 

 Q2:  Percentage tax is included all products (lower and higher quality )? For example, the price of the wine is $100, all
 wine(lower and higher quality) are taxed 10%. Since under constant per-unit tax, there is the relative price between lower andhigher quality.It makes me feel confused.

 Martin's Answer:

 I am sorry that I don't understand your question. However, let me guess what you try to ask me. :-)

 There is a realtive price between the high quality and low quality wine: Ph /Pl

 Under per unit tax:

 the relative price between them is (Ph + T) / (Pl +T), and T is a constant for both high quality and low quality wine. The tax is counted by unit, e.g. litre, not counted on their price.

 Under percentage tax:

 The relative price between them is
 (Ph * (1+t%)) / (Pl * (1+t%))

 The tax is counted by their price.

 Now please compare the change in relative price under both tax systems.

 1. (Ph + T) / (Pl +T) < Ph / Pl

 2. (Ph * (1+t%)) / (Pl * (1+t%)) = Ph / Pl

 Under per unit tax system, the relative price reduces, and people shall consume more high quality wine (law of demand).
 However, percentage tax shall not affect people's consumption pattern.

 Understand?

 Work hard,

 Martin
 2003/07/19
 

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 Question:

 Martin Sir:

 I have another question......

 What is normal and abnormal profit? Normal profit is simply the opportunity cost of resources owners.
 Abnormal profit is any revenue in excess of opportunity cost.

 But, I dont understand what it is......

 thanks..
 

 Martin Answer:

 These two terms are old term in past syllabus. In our syllabus, we usually call 'normal profits' , the economic rent, that is the expected income. On the other hand, 'abnormal profits' refers to unexpected income, that is the usual meaning of 'profits' nowadays.

 See?

 Regards,

 Martin
 2003/07/17

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 Martin Sir:

 Q1) What is the difference between money income constant demand curve and real
 income constant demand curve?
 

 Martin's Answer:

 Money income constant demand curve only keeps "I" constant (I = PxQx + PyQy), there is a logic possibility of Giffen  good.

 Real income constant demand curve keeps the utility constant, and rule out the income effect. The corresponding demand  curve must be downward sloping, and no Giffen good is possible.
 

 Q2) In yr 83......section C.....What is induced investment ,accelerator theory,marginal propensity?
 

 Martin's Answer:

 No need to worry about "induced investment, accelerator theory, marginal propensity..." Let me explain them in next
 semester. Do revision on Micro first.

 Work hard,

 Martin
 2003/07/16



 Martin Sir:

 Induced investment, accelerator theory, marginal propensity..係我地micro
 past paper concept map功課裡面ge 題目黎gar wor 咁點做好?

 thanks ...

 Martin's Answer:

 Please note that in year 83, paper 1 contained both micro and macro questions. I think you should concentrate on micro.
 Understand? :-)

 work hard,

 Martin
 

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 Q1: Under what situation the demand curve should be added up horizontally
 instead of vertically?

 Martin's Answer:

 For private good (be careful!! private goods are those goods which are
 used exclusively, and exhaustible), the market demand curve are constructed
 by horizontal summation of individual demand curves.
 

 Q2: What is the difference between horizontal and vertical demand curve
 (both of them are market demand curve)?
 

 Martin's Answer:

 Actually, there are no pure horizontal(perfectly elastic) and
 vertical (perfectly inelastic) demand curve in reality. However, we
 can find examples close to these two cases.
 

 Q3: What are percentage tax and exchange cost?

 Martin's Answer:

 Percentage tax is a tax charged by the government on the price of product or factor.
 e.g. Sales tax: 3% sales tax means if the price of the product is $100, then the government
 will tax the producer or consumer $3. Another example is salary/income tax: 15% income tax
 means if your income is$10000 monthly, you have to pay $1500 as tax.

 Exchange cost is also known as transaction cost. See?
 

 Q4: producing illegal drugs is not included in property rights?why?

 Martin's Answer:

 Property rights system means legal market transactions. Since, drugs are not permitted
 in the society as a common practise, so we do not allow it to be transacted in the market.
 Any drug transaction is via illegal market, which has huge transaction costs invloved.

 What do you think?

 Work hard,

 Martin
 2003/07/11
 

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Question:

 我想問我要花多少時間係econ.(每日)?
 你係暑假通常邊日番黎?等我有問題可以問你.....
 

Martin's Answer:

Please feel free to do your homework in the summaer vacation.

 You have to enjoy in doing the concept mapping before you can get improvment. If you have too much pressure in doing my homework, you can never do it well.   :-)

 In my opinion, you can start with one hour per day. You can do anything you want. You can do correction or concept
 mapping, or reading the book or reading the concept maps I have taught on class. The first and the most important thing is your enjoyment in doing the revision.

 You can lengthen the time in revising Economics if you really want to expand the time. Please remember that it is you 'want' to lengthen the revision time, not you 'need' to lengthen it.

 If you want to see me, please send an email to me first, then we can find the most convenient time to have a meeting.

 Work hard,

 Martin
 2003/07/06
 

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 Martin Sir:

 Q1: 我做左條past paper 係問vmp,mrp 個d野ge....佢個model ans 用vmp 黎答,
 但我就話係price taker market vmp = mrp , 緊住個d 野就用左mrp 黎ans.....答d
 野係同個ans 想講ge 野係完全一樣, 咁我當佢中唔中ar?

 Martin's Answer:

 I suggest you to ask questions in English. This is to practise your presentation skills.

 I think your ans is O.K.
 

Q2 我係書讀ge necessary condition for performing price discrimination 有3 個
 monopolistic power, different elasticity and seperable market 有條past paper 係
 問有咩necessary condition.... 我照答個3 樣, 但個model  ans 係monopolistic
 power, seperable market, 同transaction cost of seperate the market are low, 我明
 第3 個ans 講緊mud, 但我想知我應該讀邊個好.......考試我應該寫哂出黎?

Martin's Answer:

There should be more than three necessary conditions for price discrimination. It is NOT a problem for you to remember
which 3 conditions.

 What do you think?

 Work hard!!!

 Martin
 2003/07/04
 

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Question:

 Martin sir:

When will an individual consider sunk cost when he is making decision? (as mentioned in the text book page 157)

 But in reality, because of the lack of information about the present and future conditions, we may often rely on past cost data to make our decisions.  How to answer this question?

 thanks!
 

Martin's Answer:

 Just imagine your girl friend has to go to study overseas for the next ten years.

 You 'love' her so much that you want to wait for her.

 Your economics teacher, Martin Sir, tells you that it is greatly uncertain to estimate her choices in next ten years,  since the information costs about the change of constraints to her decisions are just too high. Awaiting her for ten years  without considering another suitable girl as girl friend is paying too much opportunity cost.

 However, your very stupid friends tells you that you have spent a lot of time and money to chase your girl  friend, you must at least get some 'fruits' before leaving her.

 Now, what is your decision?

 The answer is both clever and stupid. If you choose the first option, you are not considering the SUNK cost. However, if you  choose the second one, it is because the future is too difficult to forecast (information cost about the future is too high), and  you are considering the past records (past cost data) to help you to mak decisions. These decisions are not consistent to the  principle of maximizing wealth, income, utility...etc, but using the sunk cost data is better than nothing.
 

 What do you think?

 Regards,

 Martin
2003/06/23
 

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Your questions are:

 Q1)what is the difference between wealth and income?
 wealth is the discounted income?

 Martin's answer:

 Wealth is a stock concept, while income is a flow concept.

 Wealth is the sum of the discounted income stream of capital.
 

 Q2) i don't understand interest is not part of income but the whole of income,
 would you mind to answer me once more? i don't understand the content in
 text book page 63. Very confusing...
 

 Martin's answer:

 Labour wage income can be interpreted to have the property of 'interest'. (See my
 example of Gavin and Martin on class)

 Renting income of a property can also be interpreted as 'interest'.

 This logic can be generalized to all other income, so all kinds of income can be
 interpreted as having the property of 'interest'.

 That's why interest is not part of income but the whole of income.
 
 

 Q3) pareto optimal is achieved when allocative consumption and production
 efficiency are achieved at the same time?

 Martin's answer:

 pareto optimal usually refers to allocative efficiency. However, while we are considering
 the equilibrium of allocative efficiency, the production efficieny must be achieved.

 In other words, we will not choose an option that is not production efficient, since the
 resources are scarce in the society. There is no reason for us to leave some resources
 alone why we are consuming them.

 The usual pattern of making choice is:

 resources ==> minimum cost method is used / all resources are used (i.e. production efficient)
 ==> on the PPC, all possible combinations are with production efficiency ==> highest utility /
 highest use value option is chosen (allocative efficiency).
 

 Q4) rent is part of the cost? i don't understand .....so confuse about rent
 wealth income ....
 

 Martin's Answer:

 Rent is the expected income exceed transfer earnings.

 When we make choice to leave the job, we have to sacrifice this
 rent + transfer earnings (opportunity cost).

 Rent is then part of our opportunity cost.

 What do you think?
 

 Regards,

 Martin
 2003/06/15
 

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Question:

Martin Sir:

 Sorry for bother you again...

 I forgot to ask how to present my ideas?especially for Section C. Can give me an example?  Besides i want to know Q2 in our test.  How to achieve a excellent presentation?

 Thanks...
 

Martin's Answer:

An excellent presentation, for Section C, is a well organized passage with simple sentences of present/past tense merely. A
 passage with 3 or 4 paragraphs, sometimes with graphs, will be very good. 'Well organized' here is defined as a passage
 which is supported by a concept map before you write anything.

 For Q2 in our test, as an example, let me show you what is a good organization of a passage:

 First paragraph:

 Explain the meaning of royalty, and the relevant three types of royalty mentioned in the question.

 Second paragraph:

 Explain the logic of choosing among these three types of royalty, e.g. both the author and the publisher are maximizing wealth  subject to what constraints? i.e. what are the relevant difficulties relating to a contract between them? These should be hinted  in the question! (e.g. The question mentioned uncertainty in different situations....See?)

 Third paragraph:

 In order to avoid those difficulties (e.g. uncertainty in price) mentioned in the question (i.e. to reduce the specific transaction
 cost), what is the choice in each of the situation? You have to explain according to your logic mentioned in paragraph 2.

 Your explanation can be:

 In the situation facing the uncertainty in price, there is a huge difficulty in writing clearly the definite amount of royalty in signing
 the constract. The publisher and the author may agree on % sharing of the gross sales to avoid this problem. If the publisher
 use fixed royalty contract in lack of price information, there is a risk of the publisher to give too much to the author.

 Fourth paragraph:

 Continue your explanation for another situation, e.g. uncertainty in quantity.

 Fifth paragraph:

 Continue your explanation, e.g. perfect certainty in income.

 Sixth paragraph:

 Conclusion. (It can be a short summary, or anything that is NOT rubbish)
 

 I hope I can help you clarify the examination technique a little more.
 

 Regards,

 Martin
2003/06/09

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Your problems on the chapter 4:

 Q1) I would like to ask about the nature of giffen good...It is a good with negative income effect (not sure about this one) and  negative substitution effect and finally it has postive price effect?

 I want to know why giffen good has negative income effect, any example for showing a giffen good is negative income effect?

 A giffen good should be necessarily an inferior good because the price effect are different from normal good? (I mean the giffen has positive price effect and the normal good has negative effect?)

 Martin's answer:

 Your understanding of the giffen good is correct. A giffen good is a good with -ve income effect, -ve subsitution effect, and finally has +ve price effect.

 Since i do not have an example of giffen good (it is only a logical possibility in IC analysis), I cannot show you how a giffen good demonstrate a negative income effect. Sorry.

 I think the last part of your question 1 is not good enough. A giffen good should be necessarily an inferior good because its price effect is negative(i.e different from normal good). Sure, it is.

 Honestly speaking, question 1 is not important.
 

 Q2) What is the difference between Hick's and Slutsky's analysis? Hick's decomposition suggest to keep utility constant but Slusky's not?

 Martin's answer:

 Yes. Hick's decomposition suggests to keep utility constant, and Slusky's method keeps an eye on apparent income constant.

 Again, this question is not important.
 

 Q3) Fallacy of denying Antecedent = Fallacy of affairmine the consquency?
 

 Martin's answer:

 No, they are not the same.

 let the empirical observed evidence be: If A then B.

 Example:
 If it is raining, there must be clouds in the sky.

 'Fallacy of denying Antecedent':

 If not A then not B.

 Example:
 If it is not raining, there must be no clouds in the sky.
 

 'Fallacy of affairmine the consquency':

 If B then A.

 Example:
 If there are clouds in the sky, it must be raining.

 You see, the nature of logical mistake of these two fallacies are different from each other.

 Let me teach you some more things:

 The correct dedection should be:

 If not B then not A.

 Example:
 If there are no clouds in the sky, it is not raining.
 

 Do you understand now?

 Regards,

 Martin

2003/06/06

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 I see a MC question in past papers...

 (Q1)The Diaoyu Islands issue shows that,

 A) there is a cost in defining and enforcing property rights.
 B) exchange is impossible without private property rights.
 C) demonstrators dissipate rents.
 D) All of the above.

 what is Diaoyu Islands?

 Martin's answer:

 Diaoyu Islands is 釣魚台島.
 
 
 

 (Q2) In chapter 14 the concept map which is titled transaction of products between consumer and produer:

 If pricing cost of the product > Categorizing cost of products into different quality imples ===> people will classify the
 products into different quality to fit in different price.

 I can't follow the logic again. would you mind to explain it to me once more?
 

 Martin's answer:

 Sellers have two options here tp trade the goods:

 1. No categorizing at first, and try to bargain a suitable price for each good with every potential consumer.

 2. Catergorize the product before trade, and no bargaining for the set price.

 If you are the seller, you will amke you choice by comparing the pricing cost via bargaining and the categorizing cost of
 products into different quality.

 So, when you choose option 2, pricing cost via bargaining must be larger than the categorizing cost of products into different  quality.
 
 
 

 (Q3)What is Cost Externality?
 

 Martin 's answer:

 It is the same as external cost, i.e. the bad effect on the third party to whom is not participating into the corresponding
 production or exchange.
 

 (Q4)In chapter 16,according to Coase's understanding of resources allocation, If the transaction cost in the market is too high,  the middlemen will merge  to release the market. They will allocate resources via visible hand/Central Planned Economy, At last hierarchy will occur in  the society.

 But i still dont understand why the transaction cost high will result hierarchy occur....

 Martin's answer:

 Again, there are two options for sellers of the factors (i.e. facotr owners):

 1. to sell their factors directly to the consumer in the market for an income, and work as what the consumer want.

 2. to sell their factors to the middlemen to earn income, and voluntarily work under instructions (i.e. to enter the hierarchy of a  firm).

 The crux of the problem is that which option shall involve less transaction cost.

 For simple product and service, like shoe shining service, the factor owners can find and sell their services to the consumers  very easily, and so they shall choose option 1.

 For very complicated products and services with high degree specialization, the problems of coordination among different  factor owners and estimation of consumers' requirements of the product bcome very important, and the transaction costs  involved are very high. Obviously, the factor owners shall choose option 2 to reduce the transaction cost and earn their living  (with the help of the middlemen).

 Do you understand now?
 
 

 Take care,

 Martin
 2003/06/05
 

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 Your first question:

 I have some problems in chapter 15

Q1) In the price control concept map, i understand the traditional viewpoint, but i don't understand part of the Cheung's
 viewpoint(Theory of price control):

 People shall choose the non price means/black market transaction arrangements to minimize the rent dissipation involve - We  can deduct the method of  allocation of resources ---> We can then deduce the final endowment of resources.

 actually i can't follow the logic of this concept map...
 

 Martin's answer:

 Let me give you an example:
 

 1. there is a price control in the renting market of house, and the government hope to benefit the tenant.

 2. the landlord cannot receive the rent as high as before.

 3. The landlord will be reluctant to rent his/her house.

 4. market supply of houses for renting shall reduce.

 5. there will be a keen competition among potential tenants to get the rent contract from the landlord.

 6. What shall the tenants do if the market rent is fixed by the government well below what they are willing to pay?

 7. some of the tanents may pay 'black' money, some may do something entertaining the landlord...etc. However, which
 method should the landlord welcome most?

 8. Surely, in money term, i.e. the method with the least rent dissipated. What will be the benefits to the landlord if the tenants sing a song for him/her?

 9. Now the 'black market' method is chosen. Can you deduce th final outcome between the landlord and the tenant getting the renting contract successful?

10. The final outcome may be the tanents will pay $1500 fot the offical rent and $500 'shoe money' to the landlord. We call this the final endowment.

 Understand now?
 

 For your second question:

 Q2) market supply=market demand ===> market is clear?
 

Martin's Answer:

 A market is 'clear' when Qd = Qs. This is the definition. Could you clarify your question before i can say more on this.
 
 

 Take care,

 Martin
 2003/06/01

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It seems that there are two girls asking me questions. Could anybody tell me if i guess it correctly?

 Your first question is:

 'since the price mechanism is banned by law, there is a shortage. In order to allocate the resources, we can use waiting, or
 first- come first -serve. For example, increasing in supply, more people will join the queue, but their waiting time will be
 less.However, i don't know when increasing in per-person allotment, what the result is.'
 

 Martin's answer:

We have to understand that there should be NO shortage. Waiting, first come first served, fighting...etc are non price methods  to allocate these limited resources, after the price mechanism is banned by government regulations. So, there problem of  'shortage' will still be solved. The market is still in equilibrium, i.e. Qd =Qs.

 The second part of your question is not logically consistent to the first part of it. If the price is forcibly reduced by government  regulations (i.e. price ceiling), the quantity supplied in the market shall be reduced, and that is why we have to allocate the  'limited' resources by non price methods. How can the market increase supply to fulfil the requirement of the consumers?

 Your second question is:

 'we can always observe people are queuing up for their lunch. although the sellers can raise the price to eliminate the queues,  they don't do this.why?'

 Martin's answer:

 The waiting behaviour observed here is not the same as that discussed in the first question. 'Waiting' in th efirst question is the result of price ceiling. However, 'Waiting' in your second question is the result of very high information cost about the fluctuation of market demand.

 Since the producers do not know exactly the fluctuation in market demand for lunch box, the change of preference and the distribution of consumers, It is too difficult for us to change the price of the lunch box in every minute, or every hour, or even everyday. The fact is, we seldom observe the price of lunch changing over time.

 How can the producer solve the problem of allocation of lunch box if the market demand is 'a little bit' larger than their
 quantity supplied? The answer is what we observe everyday: Waiting.

 Therefore the full price of the lunch box is:

 the money price of the lunch + time cost in waiting

 Do you understand?
 
 

 Take care,

 Martin
 2003/05/31
 

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Q:  I am not so understand when dissapation will occur??I mean is under what conditions??Thank you.
 

Martin's Answer:

 Dissipation of rental value of resources comes from competition which is not productive in the society. Finally, even if you can  win the resource, the effort you have spent is lost during the process of competition.

 In equilibrium, the effort you have spent = rental value of resources. Actually, your net gain will be zero!! The economist call  this a dissipation of rental value via non-productive competition.

 Do you understand now?

 Take care,

 Martin
2003/05/30

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Q: 有個frd問我  price taker 會唔會有transaction cost,information cost  because price taker 係perfect information.......i was wondering if there is  a perfect information  咁其實有無transaction cost in price taker market gar?

Martin's Answer:

 Perfect information means no cost to obtain information.

 Price taker and searcher model do not have any assumption on the existence of transaction cost. We can then say that the
 neo-classical models assume zero transaction costs.

 What do you think?

 Regards,

 Martin
 2003/05/24

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One of my students has asked the following question:
 

Q1) change of wage rate = movement along the MRP curve or shifting of the MRP curve?

Martin's Ans: Change of wage rate shall be observed as a movement along the MRP curve.
 

Q2) How to distinguish quasi rent and imputed rent?? when we are talking about the factor market we use imputed rent and quasi rent for the product market?

Martin's Ans: Yes, you are right. Quasi rent (in product market) is the same as imputed rent(in factor market) by definition. If you are patient enough, you should be able to find this relationship in your text book. (One of my student knows where the statement is. ^_^ )
 

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Test Correction:

MC Q.4:

An employer observes that when one employee is sick (and does not come to work), the value of output falls by $500 per day. If two workers are sick, the value of output falls by $1200 and when three workers are sick the value of output falls by $2100. Suppose the wage rate is $750 per man-day, the employer should

A. keep the same number of workers.
B. fire one worker.
C. fire two workers.
D. fire three workers.

The answer is option C.

MRP of the last labour is $500.
MRP of the second last labour is $1200.
MRP of the one before the seconf last labour is $2100.

We know the employer shall employ labour unless the labour's wage rate > MRP. The employer shall fire the last and the second last labour.

The employer will surely not fire the one before the second labour! Do you see why?
 

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MC Q.6:

The more human capital an individual worker brings to the labour market,

A. the higher will be his marginal product.
B. the easier it will be for him to find work.
C. the more difficult it will be for him to find work.
D. the more hours of labour he will be willing to supply.

The answer is option A.

One example of human capital is "skill". The more skilful the labour is, the higher his productivity. Get it?

However, a more skilful or less skilful labour does not necessarily imply the chance of finding a job.

For example, though you are a skilful labour in textile industry, you are still unemployed, because the textile industry is a declining industy. On the other hand, for a growing industry, even if you are not skilful enough, you can find a job, and learn the skill by on-the-job training.

For option D, there is no reason why you should work longer when you are more skilful than before.
 

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MC Q.9:

In a competitive labour market, two industries require the same type of labour. Suppose the marginal productivity of labour in Industry A is higher than in Industry B. In the absence of transaction costs, which of the following statements is correct?

A. If labours are switched from Industry B to Industry A, then the value of the total output of the two industries will increase.

B. Employers in Industry A will lay off some workers who will then be employed in Industry B.

C. The labour demand curve for Industry A will shift upward and that for Industry B will shift downward.

D. The labour demand curve for Industry A will shift downward and that for Industry B will shift upward.
 

The answer is option A.

Since
the marginal productivity of labour in Industry A >
the marginal productivity of labour in Industry B,

so if one labour is switched from Industry B to Industry A, there shall be net gain of productivity (i.e the total output of the two industries will increase).

The transfer of labours from Industry A to Industry B shall continue until

the marginal productivity of labour in Industry A =
the marginal productivity of labour in Industry B

and the transfer of labours only show itself by a movement along the same MP curve of the two industries.

What do you think?
 

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MC Q.10:

Assume only two inputs are used in agriculture: land and labour. If adding labour to work on a limited area of land were NOT subject to diminishing marginal productivity.

A. people would be infinitely healthy.
B. wage rates would be zero.
C. land rents would be zero.
D. scarcity would no longer exist.

The answer should be option D.

You can think of the answer like this:

we can use just a TINY piece of land to feed the whole world, since the diminishing marginal productivity does not exist. Then, the supply of land will far exceed the demand for it. In the land market, the land worth no price (no rent)at all, and the Qs >> Qd at P = 0. No scarcity problem of land exist.

However, there were students asking the following questions in past years:

1. How many labours are available to the land? If the amount of labour is limited, that tiny piece of land then could not feed the whole world. There should be a price for the land, at least the fertile land.

2. If the land is owned by a landlord, the labours could get the land unless they share their products to the landlord. So there should be a positive price for the land, and the land rent should be positive.

3. To the same token, if the landlord hire some labours to do the farm work, he has to pay wages to the labour the wage rate should be positive.

The final conclusion is that the price (the rent) of land is positive, at least to the fertile land. The wage rate of labours is also positive, if the landlords have to hire the labours to farm the land.
There is still a problem of scarcity to the fertile land, but not to the infertile one.

The options are all vague here, so I prefer to follow the answer provided in the past paper.
 

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MC Q14:

Suppose in a price taking industry, the market price of a product is $6. A firm is producing output at the point where the average total cost equals the marginal cost, both of which are $8. The average variable cost is $5. In order to maximize wealth, the firm will

A. keep on producing but reduce its output.
B. produce zero output.
C. leave its output unchanged.
D. increase its selling price.

The Answer is Option A.

From the graph, we can see that the firm now is NOT producing at MR = MC, but MC = AC.

The AC is $8 and is larger than the price of the product $6. The firm now is making loss. The firm can reduce its loss by stop producing the products, to which their MC>MR.

However the firm will not be closed immediately, because the price ($6) is still larger than the AVC ($5) at Qnow.

That is why the firm should keep on running, but have to reduce its amount of output.
 

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MC Q.17:

If the average variable costs are constant, the firm's short run supply curve is
 

 A. a horizontal line.

 B. the rising portion of the marginal cost curve.

 C. the rising portion of the average cost curve.

 D. the rising portion of the marginal cost curve above the minimum point of the average cost curve.
 

The answer is option A.

A firm's short run supply curve is its MC curve above min AVC.

MC = change of TC / change in Q  or
MC = change of TVC / change of Q (coz TC = TVC + TFC, and the change of TFC = 0)

Usually, that portion of MC curve is upward sloping, implying the law of diminishing marginal returns / productivity.

The AVC now is a constant and TVC = AVC * Q. So, the change in TVC for an extra unit of product produced= AVC .

For example:
 
Q 1 2 3 4 5 6 7
TVC=AVC*Q 5 10 15 20 25 30 35
AVC 
(a constant)
5 5 5 5 5 5 5
MC = 
change in TVC / change in Q
5 (10-5)/(2-1)
=5
(15-10)/(3-2)
=5
5 5 5 5

So, as a conclusion:

The change in TVC for an extra unit of product produced = AVC = MC = a constant.

That is why the MC curve is a horizontal line.
 

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MC Q.23:

A monopolist producing an output at which MR = MC is inefficient to society because
 

A. individuals capture more consumer's surplus in a competitive market than in a monopolistic market.

B. the maximium value of an additional unit of output to society is higher than the maximium sacrifice the society will have to make to produce that unit.

C. the monopolist tends to produce output of lower quality than a competitive producer.

D. in restraining competition, idle or unemployed resources will occur.
 

The answer is option B

Inefficiency in monopoly always means the existence of dead weight loss. Dead weight loss of a monopoly (i.e the production equilibrium is set at MR = MC ) exists when the MUV of a product is larger than its MC in production, BUT it is NOT produced.

This is exactly the same as option B.

Though option A, C, D are to some extent true, but they are not relevant to the concept of inefficiency.
 

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MC Q29:

Which one of the following statements about price discrimination is INCORRECT?
 

A. Price discrimination allows a producer to capture some or all of the consumer surplus.

B. A monopolist tends to produce a larger output when practising price discrimination than when he is using only one price.

C.When the market demand facing a monopolist lies entirely below the average cost curve, price discrimination may provide sufficient revenue to cover the cost of production.

D. Price discrimination can only occur if there is only one seller of the good.
 
 

The answer is option B.

One of the aims of the price discrimination is to extract the consumer surplus.

After extracting the consumer surplus, the monopoly is then able to produce a larger amount of outputs, just as the case of first degree price discrimination. However, increasing output is NOT a must in third degree price discrimination/ market segmentation.

The situation described in option C is as the following:

See? The market demand curve facing a monopolist now lies entirely below the average cost curve. In single pricing strategy, the monopoly should face a loss! However, under first degree price discrimination, the monopoly should be able to earn revenue   abQm0  to cover the cost of production, (i.e. abQm0  > AC*Qm )
 

If there are two or more firms selling the same product in the market, the seller with higher price will be competed away!!
So, there is only one firm in the market in order to have a successful price discrimination, especially, the third degree price discrimination.
 

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For the long question 2C:

Student's Question:

Exept p.d.,tie-in contract and lump-sum fee,have what other method to solve inefficiency?

You have talked about marginal cost pricing and average cost pricing,but i m not sure i understand them~is marginal cost pricing use MC to set the price?
 

Martin's answer:

Apart from price discrimination, tie-in contracts, lum sum fee, the monopoly can use all or nothing strategy, too.

Yes, you are right. The government help the monopoly set their price. Marginal cost pricing means that the price of the product equals to its marginal cost. To the same token, average cost pricing means that the price of the product equals to its average cost.
 

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