Discussion Questions
1. The problem below refers to the 1994 health care debate. Provide a response to this question using your knowledge of the current health care debate. Is it true that in the long run insurance companies can “make profits at the expense of their customers?” Discuss.
Problem:In 1994 during the debate over national health insurance, First Lady Hillary Clinton accused insurance companies of “making profits at the expense of their customers.” Do you agree? Can you provide some examples of medical insurance companies being unresponsive to the needs of their customers?

2. The problem below asks you to consider two definitions of opportunity cost. Explain the meaning of both of them. Discuss.

Problem: Explain the meaning of the following two statements in terms of opportunity cost: (a) “Either you spend it or someone else will.” (b) “If you spend it now, you can’t spend it later.”

3. The problem below is an application of price ceilings on consumer goods. What would be the effect of such a policy? Discuss.

Problem: How would you respond to the following: “When producers reduce process for goods and services, it increases consumers’ surplus and everyone’s standard of living. Therefore, it behooves government to impose below-market price ceilings on consumer goods, thereby increasing consumer’ surplus and making everyone better off.” What would be the effect of this policy?

4. The problem below asks about how the market provides water for all in the population. Is water different than other goods since it can be best delivered by a natural monopoly? Discuss your response to the questions in this problem.

Problem: “People cannot live without water. No one will reduce his use of water just because the price goes up. Therefore, it will do no good for the utility company to raise the price of water during a water shortage. Water must be rationed.” List ways that consumers would use less if the price of water were raised. Demonstrate that water has a downward demand curve like all other commodities. What is the elasticity of water demand?

5. The problem below asks about the oil price increase from 1973-1980. We have also seen this in 2005 and 2010, although not as dramatic a price increase. Please answer the questions in this problem. Discuss.

Problem: When oil prices increased 10 fold during the 1973-80 energy crisis, many oil companies made huge profits. During this energy crisis, Congress considered imposing an “excess profits” tax on oil companies. If you were in Congress would you vote for such a tax? Do unexpected monopolistic profits serve any useful function in a market economy? (Hint: Could additional oil revenue be used to explore and develop new oil fields?)

6. The problem below is an issue today. Discuss this proposition and what can be done to solve California’s financial crisis. What role to business firms have to help solve this issue?

Problem: California’s Proposition 13, enacted in 1978, limits the property tax on real estate to one percent of the market value when purchased, and a maximum annual increase in the tax amount of two percent. Followers of Henry George contend that Prop 13 deprived local government of its most suitable tax base, real estate taxed, and forced the state to increase other taxed that hurt business activity, and shifted power from local government to the state. According to the Georgists, Prop 13 did not constrain state spending and caused the budget deficit to grow so that California was hit with a fiscal crisis in 2008-09. What could be done to solve California’s financial crisis?

7. The problem below is about risk taking. Based on your experience, respond to this problem. Discuss.

Problem: One of the reasons Joseph Schumpeter argued that capital was doomed was because he predicted that big corporations would naturally shift away from risk-taking entrepreneurship in favor of low-risk managerial strategies. Has this happened? Have major corporations been unwilling to adapt to the times and meet competition head on? Are corporate executives better described at risk-averse managers than entrepreneurs willing to take a chance?

8. The problem below is about product improvement or the increase in technology, broadly defined, over time. Provide a short list and discuss the specific items in the problem.

Problem: Make a list of products and services which are least satisfactory and have shown the least improvement over time. How many of these are produced by government? Do you agree or disagree with this statement by Milton Friedman: “Postal service, elementary and secondary schooling, railroad passenger transport would surely be high on the list. Ask yourself which products are most satisfactory and have improved the most. Household appliances, television and radio sets, hi-fi equipment, computers and, we would add, supermarkets and shopping centers would surely come high on that list.” (Free to Choose. P. 192)

9. The U. S. and the World economy is still in a period of slow growth and high unemployment. Since we in the U. S. are already in an election year, does the Political Business Cycle still exist? Do incumbent politicians use their power and influence to get reelected? Is this a “valid” use of political power? How does this impact business firms? Discuss.

10. Explain how the following two market-based incentives: Pollution fees and Marketable Permits provide a market based solution to Pollution in the U. S.

11. The problem below asks about import protection. Please respond to the question and provide some examples of the costs and benefits of each form of protection. Discuss.

Problem: Which protectionist measure causes the least damage economically, import quotas or tariffs?

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