Exploring Newsworthy Economic Issues
ECO 1001
Fall 2021 Dr. Reed
Introduction:
One goal of this class is for students to become more economically literate, meaning you should be able to read, understand, analyze, and relate current events to the topics covered in this microeconomics class. As stated on the syllabus, “Importantly, the topics covered in this course will provide a foundation for economic analysis of relevant issues observed in the economy.” To that end, you are required to read current news articles, analyze them in context of the concepts/models learned in this course, and answer questions about these articles.
Directions:
The following questions refer to news articles from The Wall Street Journal. The articles are available to you on Blackboard. You are to answer these questions using concepts covered in ECO 1001. Answers to these questions using concepts not covered in ECO 1001 will not be given credit.
Discussion among your peers regarding these questions is permitted, but all work that is submitted must be your own work. Any submissions that are similar beyond coincidence will not receive credit.
(20 points) In chapter 3, we discussed how demand and supply together determine prices for goods/services and how different factors would affect supply/demand. Read The Wall Street Journal article “Levi’s Won’t Be Unraveled by Cotton Price Surge”, and discuss each of the following points in a minimum of 2 complete sentences each:
The article states, “last year’s stimulus has left many shoppers’ wallets fatter.” If consumers purchase more goods from Levi Strauss when their incomes increase, what type of goods are these? What conclusions can you draw about the income elasticity for goods produced by Levi Strauss?
Using the supply and demand model, how can an increase in income be modeled in the market for Levi’s jeans? In the model, what is the resulting change to price? Is this consistent with the data cited in the article? (Note: You do not necessarily need to draw a supply and demand model. Instead, you can just explain how the model would show the change to income. However, you can draw the model if you would like.)
Using the supply and demand model, how can an increase in cotton prices be modeled in the market for Levi’s jeans? In the model, what is the resulting change to price? (Same note as part b.)
The article states, “Today, many apparel brands-including Levi’s-have regained pricing power” (referring to passing on higher costs to consumers in the form of higher prices). What does this imply about the price elasticity of demand for Levi’s products?
(30 points) Chapter 6 highlights one way in which governments can play a role in markets through price controls. Read The Wall Street Journal article “In Food Delivery, Iron Fist Could Trump the Invisible Hand”, and then answer the following questions:
One approach to thinking about the market for food delivery services is such that the supply of the food delivery services is provided by firms such as DoorDash, Grubhub, and Uber Eats and the demand comes from restaurants. Draw a graphical representation of this model (be sure to label your axes). (Note: You can choose to make this graph electronically or you can simply hand draw it. Either option is completely acceptable.)
NYC legislature wants to cap the price that delivery firms can charge restaurants. What type of price control does this exemplify? Explain your answer in 1-2 sentences.
For this price control to be binding, where should it be set relative to the equilibrium price in the market? Add a binding price control in your model above.
Assuming the price control you have shown in your model is enacted, identify the area in your model that represents the deadweight loss to society as a result of the price control, and then explain in 1-2 sentences what DWL means.
Assuming the price control you have shown in your model is enacted, identify the area in your model that represents the area of producer surplus that is transferred to consumers (i.e. the restaurants) as a result of the price control.
Even though some surplus is reallocated to restaurants as a result of this price control, explain in 2-3 sentences why not all restaurants will benefit from this price control.
Refer back to the title of the article. What does “iron fist” and “invisible hand” mean in reference to possible market outcomes? Explain in 2-3 sentences.
(25 points) Many firms are experiencing unusual production right now as the COVID-19 pandemic has reached every part of our economy. Read The Wall Street Journal article “Chipotle’s Profit More Than Doubles as Chain’s Burritos Get Pricier”, and discuss each of the following points in a minimum of 2 complete sentences each:
According to the law of demand, if Chipotle increases prices of burritos, what will happen to the quantity demanded of burritos?
According to the article, what type of costs, fixed or variable, have been responsible for driving up total costs of production for Chipotle?
Given that profit and costs have both increased for Chipotle, what does that imply about revenue earned by Chipotle?
Given your answer to part c (and the fact that Chipotle’s prices have increased), what can be said about the price elasticity of demand for Chipotle’s products? Furthermore, what can be said about the relative sizes of the change in quantity (discussed in part a.) versus the change in price?
Assume Chipotle is operating in a monopolistically competitive market. Even though Chipotle is earning positive profits in the short run, explain why the firm would (theoretically) earn zero economic profit in the long run.
(25 points) The last few chapters in the semester focus on different market structures and the different outcomes observed in each market structure. This last article focuses on two firms operating in the book publishing market, which is arguably an Oligopoly. Read The Wall Street Journal article “Justice Department Sues to Block Penguin Random House’s Acquisition of Simon & Schuster”, and answer the following questions in a minimum of 2 complete sentences each:
Generally speaking, what is the main goal of antitrust laws, and what entity in the US is tasked with enforcing antitrust laws?
How would this merger affect authors of books?
How would this merger affect consumers of books? Be sure to mention the effects on quantity of output, quality/variety of output, and prices to consumers.
Why do the two publishers argue this move is not anticompetitive?
Imagine you are an economic consultant to the Department of Justice for this case. Would you recommend the DOJ allow the merger, or would you recommend the DOJ stop this merger? Note: This is an opinion-based question, so there is no right or wrong answer, but you must justify your answer.
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