EXPERIMENTS. with ECONOMIC PRINCIPLES. Theodore C. Bergstrom. University of Michigan. John H. Miller. Carnegie Mellon University

Transcription

1 EXPERIMENTS with ECONOMIC PRINCIPLES Theodore C. Bergstrom University of Michigan John H. Miller Carnegie Mellon University C The McGraw-Hill Companies, Inc. New York St. Louis San Francisco Auckland Bogota Caracas Lisbon London Madrid Mexico City Milan Montreal New Delhi San Juan Singapore Sydney Tokyo Toronto

2 Contents About the Authors Preface Acknowledgements A Note to Users iii v vii ix I Competitive Markets 1 1 Supply and Demand 3 An Apple Market 3 Buying and Selling 3 Sessions, Rounds, and Transactions 5 Some Advice to Traders 5 Warm-up Exercise 7 Lab Report for Experiment 1 9 Records of Market Transactions 9 Graphing the Time Sequence of Prices. 15 Looking for Patterns in the Data 18 Food for Thought 19 Dl Supply and Demand 21 In Search of a Theory 21 Competitive Equilibrium 22 Supply and Demand Curves 24 Making a Supply Table 25 Making a Demand Table 25 Drawing Supply and Demand Curves 26

3 xviii CONTENTS Finding Equilibrium Price and Quantity 29 Practice Session-Reading Supply and Demand Curves Profits and Consumers' Surplus 33 Appendix 36 Mean, Variance, and Standard Deviation 36 Hints on Drawing the Demand Curve 37 Home Work for Experiment 1 39 Theory and Results of Session 1 39 Drawing Supply and Demand Curves 39 Competitive Equilibrium for Session 1 41 Theory and Results of Session 2 43 Drawing Supply and Demand Curves 43 Competitive Equilibrium for Session 2 45 More About Competitive Equilibrium 47 2 Shifting Supply 53 A Village Fish Market 53 Instructions 53 Warm-up Exercise 54 What Do You Expect to See? 55 Lab Report for Experiment 2 57 Records of Market Transactions 57 Competitive Supply and Demand 61 Analysis of the Results 65 Food for Thought 66 D2 Shifting Supply and Demand 69 Comparative- Statics of Market Changes 69 Seasonal Shifts in Demand 70 Smoothed Supply and Demand Curves 70 A Market for Motel Rooms 71 Two Riddles About Supply and Demand 73 Real-World Investigative Projects 75 Home Work for Experiment 2 79 Tracing the Effects of Market Changes 79 A Hypothetical Market Experiment 79 Effects of Events on Demand and Supply 81 How Do Supply Shifts Affect Prices? 82 Applications to Current Events 84 Algebra of Linear Supply and Demand Curves 87

4 CONTENTS xix II Market Intervention and Public Policy 89 3 A Sales Tax 91 Instructions 91 Warm-up Exercise 92 What Do You Expect to See? 93 Lab Report for Experiment 3 95 Records of Market Transactions 95 When Sellers Pay the Sales Tax 100 When Buyers Pay the Sales Tax 101 Comparing a Tax on Sellers to a Tax on Buyers 102 Food for Thought 102 D3 A Sales Tax 105 Equilibrium without Sales Taxes 105 Equilibrium When Sellers Pay a Sales Tax 108 Equilibrium When Buyers Pay the Sales Tax 109 The Effects of Sales Taxes Ill Equivalence of Taxes Collected from Sellers and Buyers... Ill Sharing the Burden of a Sales Tax 112 Tax Revenue, Profits, and Excess Burden 113 Home Work for Experiment Drawing Supply and Demand Curves 115 Competitive Predictions and Experimental Results 118 Total Profits and Tax Revenue 119 Subsidies and Taxes Prohibition 125 Illegal Markets. 125 Instructions 127 Suppliers' Instructions 127 Demanders' Instructions 127 Warm-up Exercise 128 What Do You Expect to See? 129 Lab Report for Experiment Record of Market Transactions 131 Session 1-No Prohibition 135 Session 2-Confiscation 136 Session 3-Confiscation and Resale 138 Food for Thought 141

5 xx CONTENTS 5 A Minimum Wage 145 Instructions 145 Laborers' Instructions 146 Employers' Instructions 146 A Tip for Employers 147 Warm-up Exercise 147 What Do You Expect to See? 148 Lab Report for Experiment Record of Market Transactions 151 Effect of a Minimum Wage on Profits and Labor Income Competitive Equilibrium Wages and Employment 158 Competitive Equilibrium and Experimental Results 163 D5 Price Floors and Ceilings 165 Price Floors in General 165 Involuntary and Voluntary Unemployment 166 Reservation Wages and Opportunity Cost 166 Calculating Unemployment and Income Statistics 167 On the Effect of a Minimum Wage 167 Losers and Gainers from the Minimum Wage 168 Rent Control and Price Ceilings 169 Home Work for Experiment Calculating Predicted Unemployment Rates 171 Minimum Wages-A Conservative's Eye View 173 III Imperfect Markets Externalities 179 A Polluting Economy 179 Instructions 179 Warm-up Exercise 181 Lab Report for Experiment Record of Market Transactions. 183 Profits and Pollution Costs with No Government Interference 187 Profits and Pollution Costs with a Pollution Tax 187 Profits and Pollution Costs with Pollution Permits 188

6 CONTENTS xxi D6 Externalities 189 Competitive Markets and Externalities 189 A Pollution Tax to Regulate Externalities 192 Marketable Pollution Permits 195 Supply and Demand for Pollution Permits (Optional) The Apple Market with Required Permits (Optional) 197 A Remark on Information 198 Positive Externalities 199 Home Work for Experiment Competitive Supply and Demand 201 Session 1-No Government Intervention 201 Session 2-A Pollution Tax 202 Session 3-Marketable Pollution Permits 204 Positive Externalities Monopolies and Cartels 209 I'll Scratch Your Back 209 Session 1-The Cartel Sets Output Quotas 209 Session 2-Can the Cartel Endure Secrecy? 211 Session 3-The Cartel Offers Student Rates 211 Session 4-Resale by Students 212 Warm-up Exercise 213 Profit Maximization for a Monopoly 213 Profit.Maximization for a Cartel 214 Student Discounts 215 What Do You Expect to See? 217 Lab Report for Experiment Session 1-The Cartel Sets Quotas 219 Session 2-Can the Cartel Endure Secrecy? 222 Session 3-The Cartel Introduces Student Prices 223 Session 4-The Resale Market 224 Food for Thought 224 D7 Monopolies and Cartels 227 Monopoly 227 Comparing Monopoly and Competition 231 Price Discrimination 234 Perfectly Discriminating Monopolist 234 Pricing in Separate Markets 236 Cartels 237

7 xxii CONTENTS Home Work for Experiment Price Discrimination 239 Monopoly with Linear Demand (Optional) 240 IV Firms and Technology Entry and Exit 245 The Ins and Outs of the Restaurant Business 245 Instructions 246 Stage 1-To Open or Not To Open a Restaurant? 246 Stage 2-Posting Prices and Selling Meals 247 Later Rounds of Trading in the First Session 247 Introducing a Sales Tax 247 Warm-up Exercise 248 What Do You Expect to See? 249 Lab Report for Experiment Record of Market Transactions 251 D8 Entry and Exit 257 Realism and the Restaurant Experiment 257 The Short Run and the Long Run 258 The Short Run 258 The Long Run 259 Short and Long-Run Equilibrium Example 259 Short-Run Equilibrium with Excess Capacity and Losses Short-Run Equilibrium with "Short Capacity" and Profits A Long-Run Equilibrium 263 Home Work for Experiment Short-Run Competitive Equilibrium-Session Short-Run Competitive Equilibrium-Session Measuring Productivity 271 Paper Airplane Factories 271 Instructions 271 Product Specifications 272 Production Rules 272 Warm-up Exercise / ^73 What Do You Expect to See? 273 Lab Report for Experiment 9 275

8 CONTENTS xxiii Production Records 275 D9 Measuring Productivity 277 Inputs and Output 277 Home Work for Experiment Average Product and Marginal Product 279 Specialization and Learning by Doing Comparative Advantage 283 Two Island Economies 283 Session 1-Economies without Trade 284 Session 2-Free Trade Between Countries 284 Warm-up Exercise 285 What Do You Expect to See? 286 Lab Report for Experiment An Economy without Trade 289 Economies with Free Trade 290 D10 Comparative Advantage 295 The Free-Trade Debate 295 Production Possibilities and Trade 297 Individual and Production Possibility Sets 297 Choice of Outputs with No International Trade 300 Absolute and Comparative Advantage 300 International Production Possibility Set 302 Equilibrium with Free International Trade 303 Home Work for Experiment Production Possibilities for Poorlanders Specialization, Production Possibility Set 308 Free International Trade Versus No Trade 309 V Information, Auctions, and Bargaining Adverse Selection 313 A "Lemons" Market 313 Instructions 313 Warm-up Exercise 316 Lab Report for Experiment Session 1-Monopolistic Used-Car Dealers 319

9 xxiv CONTENTS Session 2-Competing Used-Car Dealers 320 Session 3-Competing Used-Car Dealers with More Lemons. 321 Session 4-Good Car Cards Displayed 323 Dll Adverse Selection, Moral Hazard 325 Markets with Asymmetric Information 325 Adverse Selection 325 Moral Hazard 326 Demand and Supply in a Lemons Market 327 Example Example Optimistic, Self-Confirming Beliefs 331 Pessimistic, Self-Confirming Beliefs 332 A Remark on Multiple Equilibria 333 Home Work for Experiment Session 2-Competing Used-Car Dealers A 335 Session 3-Competing Used-Car Dealers B 338 Session 4-Certificatiori of Good Cars 341 Food for Thought " Auctions 345 An English Auction 345 A Dutch Auction 346 A Sealed-bid, First-price Auction 347 A Sealed-bid, Second-price Auction 347 Warm-up Exercise 348 Lab Report for Experiment An English Auction 353 A Dutch Auction 354 A Sealed-bid, First-price Auction 355 D12 Auctions 359 Auctions in the Real World 359 Real-world Background of Experimental Auctions 361 Private Value and Common Value Auctions 361 Private Values 362 Optimal Strategies (Optional) 364 Common Values and the "Winner's Curse" 366 Two Common Values Experiments 366 An Escalation Auction 367

10 CONTENTS xxv Home Work for Experiment Bargaining 373 Deals for Wheels 373 Instructions '. 373 A Single Ultimatum 373 A Two-Stage Bargaining Process 374 A Three-Stage Bargaining Process 375 Warm-up Exercise 376 Three-Stage Bargaining 379 Lab Report for Experiment A Single Ultimatum 381 Two-Stage Bargaining Process 384 Three-Stage Bargaining Process 387 D13 Bargaining 391 Session 1-The Ultimatum Game 391 Session 2-Two-Stage Bargaining 394 Session 3-Three-Stage Bargaining 395 Conclusion 396 Home Work for Experiment Sequential Bargaining Against a Robot 399 Food for Thought 400