# Some Corrections

Here are a few modifications for some of the chapters. None of these are vital, but they may prevent students from making some common mistakes when answering some of the questions.

## General Notes

• Sometimes competitive equilibrium theory will predict a range of prices (or output) in a particular market. When asked for the theoretical prediction of these values, students should, unless otherwise asked, write the range and the average. However, in subsequent calculations (for example, buyer or seller profit), students should, unless otherwise asked, just do the calculation once using the average value of the range. Thus, if theory predicts the price will fall between \$5 and \$10, students should assume that the predicted price is \$7.50 for their profit calculations, etc.

## Part I: Competitive Markets

• Experiment 1: Supply and Demand

• The x-axis scale on Figure H1.1 and H1.2 (p 40, p 44) may be too small depending on the number of students in the class. Either have them rescale the axis or go into the right margin.

• Question 1, p 48: Answer this question using the demanders and suppliers used in Session 1 of the experiment.

• Experiment 2: Shifting Supply and Demand

• Question 2, p 81: Assume that "mad cow disease" does not affect seller costs.

• Question 2, p 82, line 2: Removing the word "former" may relive a potential ambiguity.

• Questions 1 and 2, p 88: The first equation in each question gives the supply curve (not the demand curve as stated), and the second equation gives the demand curve (not the supply curve).

## Part II: Market Intervention and Public Policy

• Experiment 3: Sales Taxes

• Question 3, p 116 (and Table H3.2, p 117): If there is a range of equilibrium prices, use the middle value when calculating profits of the buyers and sellers. Also, these profits should be the after-tax profits.

• Question 1 and Table H3.3, p 118: Total profits are again after-tax profits.

• Question 3, p 120: You can have your students indicate the area of excess burden by lightly shading it with a pencil.

• Figure H3.4, p 123: The x-axis may be too small depending on the number of students in the class. Either have them rescale the axis or go into the right margin.

• Experiment 4: Prohibition

• Table L4.2, L4.3, and L4.4 (pp 132, 133, 134): When calculating the total profit of addicts use only their buyer value of \$30, and ignore the potential withdrawal cost of \$20.

• Experiment 5: Minimum Wages

• Tables L5.1, L5.2, L5.3, L5.4, and L5.5 and the associated questions (pp 151-154): All references to "Type A" and "Type B" workers on these pages should be changed to "\$12 Reservation Wage" and "\$5 Reservation Wage." This will avoid any confusion by the students, since the reservation wages of the two types switch between sessions (to give students different experiences).

• Question 3 and Table L5.9 (p 159): The distribution of reservation wages will be the same for all sessions. The labor supply asked for in this question and table is for a single session.

• Question 3 and Table L5.10 (p 160): The value of workers to firms is identical in Sessions 1 and 2. The labor demand asked for in this question and table should be for each individual session, and not the total demand for both sessions combined.

• Figure L5.1, p 161: The x-axis may be too small depending on the number of students in the class. Either have them rescale the axis or go into the right margin.

• Question 2 (p 163): The question should read: "Complete Table L5.12 to compare the competitive equilibrium predictions about wage rates and number of laborers employed in each session with the observed values." Also, in this question, in Session 2, you should use the "theoretical prediction," not the "Competitive Equilibrium" prediction to calculate the number that will be employed.

• Question 1 and Table H5.1 (p 171): The references to "Competitive Equilibrium" in this question and table are confusing. Remove the words "competitive equilibrium" from the second line of the question, and alter the title of Table H5.1 to "Employment and Labor Income--Theoretical Predictions." Make sure it is clear to the students that "theoretical prediction" may differ from "competitive equilibrium" when the minimum wage is binding.

• Question 3, p. 171: Change the word "involuntary" to "voluntary" on the last line of the question.

## Part III: Imperfect Markets

• Experiment 6: Externalities

• To make the home work on positive externalities more interesting, alter Table D6.1 (p 190), Figure D6.1 (p 191), and Figure D6.2 (p 194). In the table, instead of having 5 buyers with Buyer Value \$10, have 5 buyers with Buyer Value \$20 (that is, alter the "10" in the 4th row, 3rd column to a "20"). When you make this change, the demand curves in the two figures need to be modified by eliminating the line segments from (10,20) to (10,10) and (10,10) to (15,10), and replacing them with line segments from ((10,20) to (15,20) and (15,20) to (15,10)---this will correct the last segment of the demand curve. These changes have no effect on the discussion that follows in the text.

• Questions on pp 205-207: All of these questions refer to the demand curve used for Figure D6.1 (p 191).

• The last line on the first question asks for the student to draw a dotted red line to show the supply curve with the subsidy. This question is then repeated as the first question on the next page in a more elaborate form. Obviously, once will suffice.

• Last question on page 207: To avoid confusion, a better wording is: "Explain why it is that the subisdy on apple production increases total profits (including externalities and less the cost of the subsidy) compared to the market without any subsidy."

• Experiment 7: Monopolies and Cartels

• In the "Firm Record Sheets" for all sessions, you should have the buyer both record his/her ID and Buyer Value on the sheet if you then want to easily calculate individual profits. (Currently, only the ID is requested, but there should be enough room for both on the sheet.)

• The titles for Figure L7.2 (p 221), L7.3 (p 222), L7.4 (p 223) should all be changed to read "Table" not "Figure."

## Part IV: Firms and Technology

• Experiment 8: Entry and Exit

• Experiment 9: Measuring Productivity

• In this experiment, make sure that there are exactly two Poorlanders for every Richlander in the experiment (if your class size is not divisible by three, either have the remaining students assist, have some students pair up, or give some students multiple Personal Information Sheets).

Although the experiment will still work without the exact ratio, the competitive equilibrium is much less robust and the discussion of the theory is more complicated. With extra Poorlanders, the competitive equilibrium requires that the price ratio between bread and fish exactly equal 2/3---given this ratio, Richlanders still make all fish and Poorlanders are indifferent between producing either of the two goods. Intuitively, this allows the demand for bread from the Richlanders to be matched by Poorlanders who specialize in bread, while simultaneously allowing the remaining Poorlanders to produce so as to match their own needs.

• On the Session 1 Personal Information Sheets, the payoff is the minimum of the two quantities times ten. (Typically students have no problem with calculating their payoff, but often they get sloppy about writing down either the minimum or the minimum times ten. This is something you should be aware of when grading this (personally, I'm willing to accept either method as long as they are consistent).

## Part IV: Information, Auctions, and Bargaining

• If you let students use their own ID numbers on the "Record of Cars Purchased," it may be time consuming during the lab to figure out how many of the sales involved good cars and how many involved lemons at the end of a round. You can solve this problem in at least two ways. One way, is to have each seller of a car report to the Market Manager after they make a deal, and have them place a mark by their ID number on the "Quality Registration Sheet" (inform the students ahead of time that they will be doing this, so that they can pay attention to the rough location of their ID on the sheet). Alternatively, you can assign a new ID number to each student, and code these in such a way that it is easy to figure out the quality of the car by inspecting the ID number (for example, even numbers are good cars, odd ones are lemons, etc.---make sure the buyers don't know the coding ahead of time!). (An easy way to assign new numbers is to write the new numbers down ahead of time on the "Quality Registration Sheet", and when the student signs up they get the new ID number.)

• Lab Report, p 319: The students should record the number of good car owners, lemon owners, and dealers for Sessions 2, 3 and 4. You may just want to include a new table at the bottom of this page along the following lines:
```Table L11.0: Distribution of Car Type and Dealers by Session:
Session 1     Session 2     Session 3
Number Good Car Owners:
Number Lemon Owners:
Number of Dealers:
```

• Use the data from the last round of each session for the Lab Report.

• Experiment 12: Auctions

• In the instructor's manual for experiment 12.S (Accounts Estimates: Common Value Auction), there are only 20 (not 22) slips of paper, and the average is 145 (not 120).

• Experiment 13: Bargaining

• In Tables L13.2 (p 382), L13.4 (p383), L13.6 (p 386), L13.7 (p 387), and L13.9 (p 389), the average profit asked for in the last column is the profit at the end of the bargaining.

• The very last word on p 384 should be "buyers" not "sellers."

• On the top of p 387 (and in table L13.7) record the average profit (not price)of the sellers.