Ask an Economist

Welcome to Ask an Economist, a public service of the Department of Economics at Iowa State University, designed to answer your economic questions.

Our talented faculty and alumni can answer questions on a variety of economic topics to help you make more informed choices about your day-to-day decisions--or to just add a more reasoned voice when talk of the economy comes up around the dinner table.

If we answer your question, we'll post it along with the answer here. (Questions may be edited or adapted from their original form.)

Note: We do not do homework, give financial advice, or provide research support.

Ask a Question

E.g., Monday, December 11, 2017
E.g., Monday, December 11, 2017
Question:
Please advise my going to become an economist. I was an average mathematics major as an undergraduate with a G.P.A. of 3.19 overall with a bachelor's degree in applied mathematics. I have about the average IQ for economists, but I know nothing about economics. Now that I am 41 this year, I am thinking of starting anew in a brand new area of applied mathematics. Is this advisable this late in life to switch careers from mathematics to economics given that the two share a common bond in mathematical economics and are theoretical in microeconomics?

Would the transition be better if I pursued pure mathematics instead, because my experiences has been lately in proof making? What can I look forward to? How and what should I be looking into, to start off, if economics is a good choice? I am a highly curious person. Plus, I have worked hard, I have been doing pure mathematics on my own since 2004 until presently; but, it has been slow going; so, I thought that by going into something that has a better return in investments of my intellectual energy, I should try microeconomics?
Answer:

The prospect of a mid-life career change would be daunting for anyone.  In the end, you’ll have to make that difficult decision on your own.  But I can give you a few tips on how you might begin to explore whether a career in economics...

Question:
A commodity (let's say a vegetable like squash or tomato) that is grown in Mexico and transported to the US and is being sold at 1.29/lb.
After about a month when the commodity has less than 2 weeks of shelf life it may be sold at .69/lb and then discarded after another week.

1) Why would the store not further discount these items at let's say .30/lb to clear the complete stock? ( I understand it is so as not to let the global/US prices of the commodity go down.)
2) Is wasting better for the store than to sell it at a discount?
3) Even if customers stop buying fresh commodity and start to wait until the price goes down to .30/lb. Isn't it economically profitable to the store to actually sell it than waste it ?

Thanks
Answer:

Food waste arises from preferences, incentives, and constraints. Retailers have time and other resource constraints which implies that it simply will not be worth it to sell every last item of food in every instance. It can be said that there is...

Question:
Hi there,

Okay, so this is going to be a really stupid question but I need to know the answer to this. There is a message board about collecting video games and we got into a argument about the definition of the word "rarity." With these games, we all know the exact amount of copies printed for each title. Say Game A has 2000 copies printed and Game B has 5000 copies printed. Assuming that no copies are lost or destroyed, Game A will always be rarer, correct? Someone else is arguing that the availability of copies on the secondary market changes this.

If Game A has 20 copies available on the marketplace right now and Game B only has 2 copies, would Game B be considered to be rarer overall? At that moment in time, sure, but overall, I would say no. Are either of us correct? Would the monetary value of the game on the secondary market change the definition of rarity? Thanks for your time!
Answer:

In the strictest (or standard) sense of the word, you would be correct that game A is “rarer”, given that there are fewer of these in existence than game B. However, the other person is not totally wrong because, in the words of economists, the “...

Question:
When speaking about social welfare in economics, they are referring to the allocation of resources and imperfect markets, NOT the social welfare of Medicaid, food stamps etc. Is this assumption right?
Answer:

Social welfare maximization in Economics typically refers to the correct allocation of scare resources to agents (firms, individuals) so as to generate the maximum possible utility (or other criterion) for the agents. The term has no negative...

Question:
I have a vegan friend who believes that the meat and dairy industry and all its affiliates and infrastructure could be phased out of the United States economy without causing it to collapse. In one year. I vehemently disagree. I found a statistic from 2009 by the meat industry saying they essentially make up 5% of the economy. I understand that if we include the dairy industry and all industries that exploit animals, it would be much higher, but let's stick with 5%. Would a sudden loss of 5% of the total US economy, with all those people being left jobless, all those companies going under, and all the ripple effects (Who needs a grill anymore?) (Where did fast food go?) destroy the economy? This is also assuming the animals would be harvested one last time; so there wouldn't be any costs concerning the animals themselves.
Answer:

Agriculture and agriculture-related industries contributed $777.0 billion to the U.S. GDP in 2012, a 4.7% share. The value of U.S. livestock production output (dairy products, milk; meat animals; miscellaneous livestock; and poultry and eggs)...

Question:
My friend and I have been engaged in a heated debate over the astronomical purchasing prices of apartments in New York (and even Shanghai, as we live in China) and what causes them to be so high. He believes they are solely based on supply and demand, while I believe there are other factors independent of supply and demand that determine why the prices are so astronomically high. Could you please inform us as to which is the case?
Answer:

As for the high price of apartments in China's big cities, I believe the supply and demand play the main role.

1. The supply in big cities is depressed by the heavy land regulation. There are two types of regulation. First, according to...

Question:
What are the signs of a bubble about to burst, such as the housing market in San Francisco or tech bubble?
Answer:

It’s logically impossible to predict the bursting of a bubble. If it were possible, everyone would sell before the bubble burst. The selling would cause the bubble to burst earlier. But then people would anticipate the earlier bursting and sell...

Question:
If growth rate is measured as % of GDP, and inflation is also measured as % of GDP, wouldn't a growth rate of 2% be completely offset by a 2% inflation rate for the same period? That is, the GDP would experience 0% effective increase?
Answer:

Hello, and thank you for sending us a question! The GDP growth rate is measured relative to last year’s GDP. Usually the Growth numbers that make headlines on the news are of what economists usually call “Real GDP,” meaning that it is already...

Question:
I am part of a group of 5 students who wish to rent a house with 5 rooms of uneven size. We each have different budgets.

Initially, a suggestion was made that we just hunted for a house with a rental cost 5 times the person with the lowest budget and then allocate the rooms by lottery.

However, this seems a sub optimal approach, since some of us would happily pay extra if we could get a slightly larger house and then pay extra for the larger rooms.

Given some of us are prepared to pay more for a larger room in the house, how can we match the rooms with each person's budget and willingness to pay extra for a larger rooms?

Further it would be great if any solution was generic to a range of potential rental houses, each of which has rooms of varying size (as we are looking at a number of houses).

I originally thought that we could have an auction for the rooms, but noted that the aggregate bids must add up to the cost to rent the whole house. I then thought we could do relative bids (how much extra we would be willing to pay for the largest room compared with the second largest and so on), but this approach left the possibility that the solution would produce bids higher than someone's individual budget.

This seems to be an optimisation problem constrained by each individuals personal budget and the rental cost of the house as a whole.

Do you have any ideas how to solve this?

Regards

Justin
Answer:

Roughly speaking, you need to compute the aggregate valuation of the students for each house.  They should then rent the house for which the gap between their aggregate valuation and the house’s rent is the largest.  They can then...

Question:
If it could be shown that rising GDP is associated with rising levels of anxiety, would you favor deducting psychological costs to obtain the true value of GDP?
Answer:

Thanks for your very interesting question. GDP measures the market value of production. It is not intended to be a measure of aggregate well-being but it is often used as such. Economists generally recognize that GDP is an imperfect indicator of...

Question:
I work for the federal government as an auditor of costs proposed/incurred by government contractors, for goods and services for which there is no competitive market, and cannot be priced by the normal forces of supply and demand. We are supposed to help make sure the costs for the goods and services received are not unreasonable, or for purposes not allowed by the contract. My question is: What impact, if any, would it have on the economy if there weren't people in my position, and contractors could more easily charge the government unreasonable and unallowable costs for the goods and services provided?
Answer:

I am not sure I agree with the premise that the government buys a lot of goods and services which are otherwise not traded in a competitive market. (I suppose military expenses come under that description, to some extent.). If we assume that...

Question:
How does the government's disposal/burning of elephant ivory protect the market from illegal trading/poaching?
Answer:

If the government destroys ivory this year, then there is less of it this year which may cause price of ivory to rise. That may dissuade some current potential buyers. (I am assuming the government is destroying ivory that would otherwise be...

Question:
Are goods and services purchased to comply with regulations included in GDP? For example, is money spent on preparing tax returns considered "production" in GDP calculations? It kind of feels like it should *not* be, but I suspect that it is.
Answer:

GDP is the final $ value of all final goods and services produced in a year. Even if a service exists to help compliance with a regulation, it is included because the provision of that service, such as that performed by a tax attorney, is income...

Question:
This is a naive question from a fellow economist.

The model of perfect competition among firms is supposed to eliminate economic profits (a.k.a producers' surplus) in the long run. The idea is that such surplus will bring in new firms, pushing the economic surplus down to nothing, so that there are only normal market rates of return on all factor inputs, explicit and implicit.

Why then does this same model not apply to consumers? I have never seen it stated in any econ text that the entry of new consumers will push their surplus down to zero, including their search costs. Is this a serious inconsistency, or is unlimited entry of new consumers simply not a good way to model most markets? (I suspect the latter.) Even if this is so, should not this asymmetry in our most basic model be explicitly noted?
Answer:

Yes, economic theory traditionally has emphasized the role of the entry and exit of firms in dividing market surplus. In microeconomics, free entry and exit of firms is an important part of the assumption of free competition. For macroeconomists...

Question:
What percentage of Iowa's current row-crop farmer prosperity is the result of row-crop agriculture being completely unregulated in terms of water pollution, and therefore able to externalize water pollution costs? Installing new conventional pattern tiling, for example, raises crop yields but sends more polluted water into the drainage outlet (usually a river or lake). The farmer profits from the increased yield but pays nothing for the increased water pollution, which impacts society at large, since most rivers and lakes are public. Has any research been done on this question?
Answer:

The writer of this question understands economics and the market failure associated with externalities very well. Thank you for such an informed and interesting question! The writer is quite correct that the fact that agriculture generates an...

Question:
Should Internet companies like Uber and Airbnb be regulated?
Answer:

Should Uber and Airbnb be regulated? As a matter of fact, these companies, like any other in the United States, need to comply with a large number of regulations that cover for example workers compensation and health care. But should Uber and...

Question:
Generally speaking, an efficient allocation of ‘ownership’ or ‘control’ of a business is one that matches contribution to capital or input. For example, if I commit 60% of the resources a business requires (human or other capital), then I would expect approximately 60% control (ownership). It seems that both Partner 1 and Partner 2 contributed the same amount of cash equity (each secured “the same” loan to fund Business 2). Therefore, a starting point is that each Partner has equal ownership (on grounds of invested risk capital). One might also consider that Business 1 is a ‘partner’ because of the subsidization of land (rent) and Partner B’s salary. Business 1’s contribution is an amortized amount of rent and salary over the years in which Business 1 will subsidize Business 2. In this case, Business 1’s ownership is not trivial and should be recognized as risk capital to be repaid by Business 2 or purchased by either Partner A or Partner B at some point, giving the purchasing Partner a greater share of the remaining control.
Answer:

Partner A secures a loan for startup through a business (business 1) he owns 90% of. Partner A will have significant input in business decisions but little to do with day to day operations. The new business (business 2) is in a different industry...

Question:
My name is Bob Galask and I grew up in Iowa (Fort Dodge). I've been in the diamond business in Los Angeles for over 35 years. Much of that time has been spent in Asia, particularly Thailand where I still have a diamond cutting factory. I've developed extensive connections in Thailand, Burma, India, Taiwan and Indonesia as well as a strong familiarity with most Asian countries and customs.

My question is, are there opportunities to purchase, process and export Iowa agricultural products? Pigs ears, gluten, chicken feet, ginseng, farm equipment etc., I'd be amenable to any opportunities.. I'll be in Iowa next week visiting friends and family. I'd appreciate any feedback be it positive or negative from any members of your staff.
Answer:

Yes, there are definitely opportunities to export Iowa agricultural products.  The U.S. Census Bureau currently calculates that Iowa companies exported $13.2...

Question:
I'm just an average joe, but I thought I had a decent grasp on inflation and top down economics. I don't understand, however, why the cost of EVERYTHING continues to rise in leaps and bounds. Yesterday, I went to Sam's Club and passed on a can of cashews priced at $18. I'm certain last year I was debating whether or not they were worth $13. I'm almost certain that the cost of picking and packing nuts hasn't increased that dramatically; how can they justify an almost 50% increase in price? I've noticed that the cost of eggs has increased everywhere; a dozen eggs are almost $4, the expensive ones used to be $1 and some change. Am I to believe it costs 400% more now than it did five years ago for chickens to lay eggs? The cost of butter has increased at the same rate of eggs, so I can see whatever is affecting the chickens are affecting the cows as well... This question was prompted when I noticed that the $18 cashews were close to the same price as the honey which was comparable to the price of shrimp. No way you can tell me it costs the same to harvest honey, nuts and shrimp! For whatever reasons I know that the cost of gasoline has increased 400% since I first started driving less than twenty years ago; although it is declining significantly now, but why does a gallon of milk cost more than a gallon of gas? Who is controlling this stuff?
Answer:

Let me answer the last question first. The markets are controlling the prices, based on supply and demand. So, depending on how you want to look at it, either everyone or no one is controlling the prices. Let’s dive into the factors that have...

Question:
The Chinese government recently added a tax on imported luxury cars. My question is why "extravagant spending by the elite is politically dangerous at a time of slowing economic growth"?
Answer:

Although China has had a spectacular economic growth in the last three decades, income/wealth inequality has been rising over time. It would not be a big problem as long as the high growth of economy can be sustained. This is because most people...

Question:
What's the best place to put your money if your primary focus is preserving its value? During the recent financial crisis, stocks and bonds went down the tubes. Government debt is approaching unsustainable levels, the Fed is "printing money" (via quantitative easing) like it's going out of style, and it's all fiat money anyway, so keeping cash is looking riskier all the time. Real estate (housing) also lost value during the crisis, is highly illiquid, and has ongoing costs (property taxes). Is gold the answer? Is any place safe in a crisis? Help!
Answer:

First, a disclaimer. Whatever is written below is not actual investment advice; it is general economics discussion, a dinner table conversation, no more. When it comes to preserving value, it becomes important to figure out, over what length of...

Question:
Can you see the number GDP per capita increase in the next year and subsequently causing an increase in commercial boat ownership within the United States?
Answer:

Let me start by saying that I have expertise in the economics of commercial fishing. I cannot speak to whether GDP will increase next year. If GDP does rise, there may be channels by which commercial boat building and therefore boat ownership...

Question:
Why are economists and retailers surprised at the 11 percent lower Black Friday sales given the slight rise in the economy? Seems like just because gas is a bit less expensive and overall unemployment, people have still taken a financial hit that cannot be recovered in bank accounts simply by saving a few dollars at the gas pump. Is there an economic theory behind this surprise? I know I save more than most people but the outcome doesn't surprise me. Thanks for any thoughts and for this service!
Answer:

Black Friday is mostly a marketing gimmick to stimulate shopping during an extended weekend of wide-spread idleness, and the weekend’s performance is not a reliable predictor of total holiday spending or the health of the economy. To understand...

Question:
Some goods and services are provided by the government (e.g., mail delivery and schools) while others are provided by private business firms (e.g., grocery stores and dry cleaning). Economically, what goods and services would be best provided by the public sector and which are best provided by the private sector?
Answer:

Economists distinguish broadly among three types of goods along the private to public continuum. Purely private goods are purchased and used by individuals and families. Another way of explaining a private good is to say that my use (or...

Question:
I stumbled across a link regarding a Financial Settlement Tax (not FTT) from Scott Smith who is running a presidential campaign. The idea is to tax financial payments estimated to be $4515 trillion per annum in the US:

“The Bank for International Settlements in Basel, Switzerland, known as the BIS, publishes an annual report known as the Red Book, which reports on the volume of payments for most of the major nations in the world. The Federal Reserve keeps track of payments in the United States and provides the data to the BIS for publication in the Red Book. The Committee on Payments and Market Infrastructures at the BIS oversees the publication of the Red Book. International Financial Settlement payments are recorded and published and 1/10 of 1% could be deducted and transparently reported on the Internet.”

My questions are below:
1) Roughly what percentage of settlements would disappear with a 0.1% tax? My guess is there’s a significant percentage of very low margin trades that would end with such a tax.

2) Since you can’t take nearly 30% from the economy without someone noticing, what distortion(s) would be introduced in the market?
Answer:

1) There is no way to tell even approximately without a well calibrated model. As you suggested, very small profit margin trades will no longer be conducted. However, there are other, potentially much more important routes. First, many small...

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