1. In the early 1970s, inflation was hitting the U.S. economy, and one of the results was that beef prices began to rise to record levels. Some of President Richard Nixon's advisers urged him to place price controls on the sale of beef cattle with the intended purpose being to hold down the price of cattle. If cattle prices were kept from rising, the advisers reasoned, then beef prices also would not rise. (The president did not follow their recommendations, but he did place overall wage and price controls on the economy for a while.)
Had the president implemented this recommendation of price controls on beef cattle, would that action have resulted in lower beef prices? Why or why not?
2. In the movie, "Castaway," Tom Hanks played a character stranded on a deserted island for four years before he created a makeshift raft and floated to the shipping lanes, where he was rescued. Assume, however, that unknown to the Hanks character, there was a seaworthy boat hidden in a cove on the other side of the island, and the boat enough fuel to take someone to the shipping lanes. According to Carl Menger's Theory of the Good, would the boat have qualified as a good as far as the Hanks character was concerned? Why or why not?
3. When he ran for President in 2000, Al Gore said that American farmland was disappearing at an "alarming" rate, and that soon it would be impossible to grow enough food on the remaining land to feed the entire country, which would mean the prospect of people not having enough to eat. His proposed solution was to have the government place restrictions on converting farmland to other uses, such as subdividing lots for building new homes.
Was Gore's assessment of the situation, along with his policy prescription, based upon accurate economic theory and analysis? Why or why not?
(Note: For this question, we will assume that all food consumed in the USA is grown or produced here. Yes, I know we import food, but this question can be answered even with the assumption that we don't import any food.)
4. The Federal Aviation Administration is a government agency that is in charge of air traffic control. All of the capital equipment (radar, etc.) used by air traffic controllers is purchased through appropriations from Congress. When Apple Corporation purchases new capital equipment, the decision is made by owners and managers that believe the firm can get a return on investment from the new capital because the new capital can be used to produce new and improved goods for Apple customers.
Which entity is likely to have more outdated and rundown capital? Why? Explain in detail.
5. In the 1970s, the Organization of Petroleum-Exporting Countries (OPEC) became a powerful economic force and whenever OPEC oil ministers met to decide to raise oil prices, the U.S. stock market tumbled and gas lines began to form at gas stations in the USA. Presidents Richard Nixon, Gerald Ford, and Jimmy Carter all declared that in order to counter OPEC, the USA needed to become "self-sufficient" in oil and other fuel products. Under Carter, the government began a synthetic fuels program (called SynFuels) that sought to derive crude oil from coal and tar sands as a replacement to importing oil from OPEC nations. The SynFuels program, however, was discontinued during the Ronald Reagan presidency, as world oil prices fell and the cost of creating crude oil from coal and tar sands would be substantially higher than what oil extraction cost in the USA and whatever it cost to purchase it from OPEC.
In 1990, Iraq, and OPEC nation, invaded neighboring Kuwait, also an OPEC member. Shortly thereafter, the USA led a military buildup that ultimately broke into the Gulf War of 1991. When the buildup began, a columnist for the Atlanta Constitution wrote that had Ronald Reagan not dismantled Carter's proposed "energy independence" programs, that the USA would be self-sufficient in fuels and would not have its economy threatened by OPEC or Middle East turmoil. Thus, he argued, there would have been "no need" for a military option to Iraq's invasion of Kuwait.
Economically speaking, was the columnist correct? Would a policy of "energy self-sufficiency" have saved the USA from oil price spikes and other oil-related dislocations? Why or why not?
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1. In order to keep the beef prices down, the suggestion was to keep the beef cattle prices to be kept down from rising as it would control the beef prices to be kept low. But the quantity demanded of a commodity affects its price and as a result of this keeping the price control on the beef cattle will bring the supply down and result in a shortage of supply of beef cattle and hence this will result in higher prices of beef and this is the opposite of what was intended by the price control on the cattle. IF the market prices have prevailed, then there would not have been a shortage as the demand and supply would have adjusted itself to the market price level....
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