Exploring Adjustment

9. In competitive markets higher-than-normal profits cause more people to enter the industry and lower-than-normal profits cause people to leave the industry. Let's test your web-searching ability. Search for the pair of words "grapefruit" and "Lipitor." Based on what you find, should people be leaving or entering the grapefruit industry? Then do a search on "grapefruit production statistics" to see what is happening. When will the industry stabilize?

10. Many years ago when Hong Kong was a very poor city, people used rickshaws instead of taxis. The rickshaw was a human-powered vehicle and labor was at this time very cheap in Hong Kong. Many people from Europe, unaccustomed to the very low wage level of Hong Kong, paid much more than the going rate for rickshaw rides. You may be tempted to say that this was good for the rickshaw drivers, and in the short-run it might have been. But once you allow for entry and exit, what adjustment should these very generous payments cause? Explain why in the long run these generous payments had no effect on the income of the average rickshaw driver. (Adapted from David Friedman, Hidden Order: The Economics of Everyday Life 1996)

11. The same analysis can be applied to crop subsidies. If the government guarantees the price of corn, who will benefit in the long run, the farmer or the owner of the land? (Comment: Farmers often cultivate land that they do not own.)


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