Category: Economics: Ch 04

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More expensive cigarettes = happier smokers

In the article below Tim Harford (the Undercover Economist) looks at rationality in the purchase of cigarettes. He consider whether healthy and happy smokers are the same thing and the extent to which smokers would be happier if cigarettes were more expensive.

Why smokers are happier when cigarettes cost more MSN Slate (17/5/08)

Questions

1. Identify the principal factors that determine the level of demand for cigarettes.
2. Given the factors identified in part (a), discuss the likely value of the price elasticity of demand for cigarettes.
3. Discuss the extent to which higher cigarette prices would make smokers happier.
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Wine – is the value in the nose or in the price?

Researchers at the California Institute of Technology have shown that a person’s enjoyment of wine is heightened if they are told that the wine is an expensive one. So what are the main factors determining the demand for wine? Is it really the taste or is it simply the expectation resulting from the price?

Raising a glass to pricey wine BBC News Online (14/1/08)
High price makes wine taste better Times Online (13/2/08)
Why expensive wine tastes the best Metro (13/2/08)

Questions

1. What are the main factors determining the demand for wine? Assess the relative importance of each of these factors in the overall level of demand.
2. Analyse how utility theory can help to explain the level of demand for more expensive wine.
3. How would marginal utility and market demand be affected by the knowledge that bottle of wine is a relatively expensive one?
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Can economics make you a better person?

The start of a new year is a time that many of us make New Year Resolutions. Generally we have broken these before then end of January, but a new web site called Stickk.com aims to helps us keep the resolutions. Can economics help us rationalise the process of making resolutions? In the article below Tim Harford (the Undercover Economist) looks at incentives and what economics can tell us about New Year Resolutions.

Rationalising resolutions MSN Slate (22/12/07)

Questions

1. Assess the importance of incentives in determining people’s economic behaviour.
2. How does the analysis of ‘rational behaviour’ help us understand the economic choices people make?
3. Discuss the likely success of the business model developed by Stickk.com.
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What Al Gore doesn’t understand about climate change

Al Gore’s contribution to the global climate change debate is not in question and he has, along with the IPCC, been awarded the 2007 Nobel Peace Prize for his work in raising awareness. If you haven’t seen his film “An inconvenient truth” then do get hold of the DVD – it may just be the most interesting PowerPoint presentation you will ever see! However, does he really understand the nature of the debate? The article below suggests that he has not yet taken account of the most fundamental trade-off in dealing with climate change – the trade-off between our own quality of life and that of our descendants in the future.

Save the earth in six hard questions MSN Slate (22/10/07)

Questions

1. Explain what is mean by a trade-off “between the quality of our own lives and the quality of our descendants’ [lives]”.
2. What is meant by the term ‘risk-averse’ and how is this relevant in the climate change debate?
3. Consider the questions raised by the article. Discuss how relevant the conclusion reached is in the light of these questions.
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Parents priced out of independent schools?

Independent school fees have generally risen faster than inflation and a relatively inelastic value of the price elasticity of demand seems to have led to their revenues increasing. Demand has stayed high despite the above-inflation fee increases. However, a recent report suggests that fees have risen relative to average earnings and that independent schools have become less affordable. This may, the report argues, make some schools relatively more vulnerable to a fall in the number of places demanded.

Public school fees ‘risk pricing parents out’ Guardian (18/9/2007)

Questions

1. Identify the main factors affecting the value of the price elasticity of demand for places at independent schools.
2. Discuss the extent to which the value of the price elasticity of demand for places at independent schools is likely to change as fees increase relative to average earnings.
3. Assess the extent to which competition in the market for independent schools affects the level of fees (the market price) and the value of the price elasticity of demand for places.