Question 1: Read what follows and answer the question(s) at the end

Scores of undergraduate and graduate students have been taught (and continue to be taught) that when resources (including time) are unlimited, there would be no scarcity and hence the subject matter of economics would be irrelevant. However, Scott Gordon (1980) thinks otherwise. His provocative argument in the February 1980 issue of the Journal of Political Economy implies that the subject matter of economics would still be relevant in a world of infinite resources (including time). He presents his argument with reference to Heaven but the reader should bear in mind that his argument goes beyond that. Indeed, in what follows, one can replace the word "Heaven" with the phrase "a world of infinite resources (including time)" without affecting the substance of the discussion. While one may be inclined to dismiss Scott Gordon's position as indefensible, it turns out that it is not easy or straight-forward to argue that he is wrong.

The fundamental question we need to answer is the following: "Is there scarcity in a world of infinite resources (including time)?" or "Would the subject matter of economics be relevant in a world of infinite resources (including time)?" To keep this in mind, we shall replace the word Heaven, unless otherwise stated, with the phrase "World of infinite resources" (hereafter WIR), because, as noted above, Scott Gordon's argument is not necessarily about Heaven; it is indeed about Economics 101.

Scott Gordon's Argument

Scott Gordon (1980) argues that everlasting life is not a sufficient condition for no scarcity in a WIR (i.e., world of infinite resources). He writes: "I take "everlasting life" to mean that every inhabitant of Heaven (WIR) is located on a time line which is, with certainty, expected to be infinite in duration. There is, then, an infinite amount of time available for each inhabitant. Does this mean that there is no scarcity of time? Not if Heaven time is like World time since, while it would be possible to do everything one wished to do sooner or later, one could not do everything at the same time; one could not, for example, play the harp and go swimming simultaneously. Choices would have to be made as to which to do first; that is, time would have to be allocated despite its certain infinite duration. So, everlasting life is not a sufficient condition for no scarcity." (p. 213, parentheses added).

Do you agree or disagree with Scott Gordon? Justify your position in no more than 3/4 of a page.

Reference

Gordon, Scott. (1980) "The Economics of the Afterlife." Journal of Political Economy 88 (February): 213-214.

Question 2: Suppose a firm faces two markets for the same product. In market A, the demand function is PA = 60 - QA, while in market B the demand function is PB = 36 - 0.5QB. The total cost function is C = 6(QA + QB).

(i) If the firm can sell at different prices in the two markets, find the profit- maximizing price and quantity in each market.

(ii) If the firm cannot price discriminate, what price will it charge.

(iii) Compare the profits in (i) and (ii).

Question 3: The demand function for a very famous introductory economics textbook is P = 100 - 0.005Q. The publisher must pay $20 per book in printing and distribution costs and, in addition, she must pay the author a $20 royalty for each book sold.

(a) Your job is to advise the publisher. What price will maximize the publisher's profit? How much profit will the publisher earn. How large will the author's royalty cheque be?

(b) A consultant says that the publisher and the author have the wrong agreement. He says the author and the publisher should tear up their original agreement, and instead enter a profit-sharing agreement. He recommends that the author gets 40% of the profit and the publisher gets 60%. (i) What price should the publisher set with this profit sharing agreement, (ii) will the author and publisher prefer the profit-sharing agreement to their original agreement? (iii) which agreement will the students who buy the textbook prefer?

(c) Explain why the original royalty agreement is not economically sound.