五常考室 1 - 4

1、What is normative economics? In what exact sense is it not a science?

Normative economics concerns what ought to be, involving value judgement. It is not a science because it contains no testable implications—therefore has no explanatory power.

On the other hand, positive economics studies what is. This implies the existence of some theories which contain propositions such as “if A then B”, with the logical consequence of “if not B then not A”. A positive science is regarded as empirical in nature if such propositions or implications are testable, which requires that both A and B are observable entities.

2、“The Giffen good may logically exist in a one-man world, but not in the market.” Defend this statement.

There is no logical flaw at all to say in a one-man world Giffen good exists, in the sense that an inferior good may exist to the point where the indifference curves of an individual bear the characteristics of a Giffen good. There is no market price in a one-man world, but relative opportunity costs or constraint changes may in logic lead to a Giffen good result. The same may be said of an individual in society who chooses not to participate in the market.

However, for a good that is actually transacted in the market, a Giffen good cannot logically exist because someone will bid the price so high that the good will not be traded in the market.

3、Is rent a cost? Is income a cost? Is interest a cost? What is not cost?

Rent is a cost in that it is an opportunity forgone if outright sale is considered, or if a change in use is considered. Income is a cost because the highest-valued option forgone is typically the same income. Interest is a cost because it is the whole of income. Profit is not cost because it is windfall, totally unanticipated and therefore cannot be counted as an option forgone.

4、A monopolist is not necessarily inefficient. Defend the monopolist on the grounds of efficiency in two ways.

Perfect price discrimination, all-or-nothing pricing arrangement, or the requirement of membership or entrance fees, may all lead to marginal-cost pricing. The presence of transaction costs may stand in the way of achieving fully this marginal-cost pricing result, but transaction costs may also exist in competitive markets. If these costs are taken as unavoidable constraints, efficiency may result even if marginal-cost pricing is not attained. (Monopolies protected by the government have the drawback of not allowing competition to reduce costs and improve qualities, a different and more serious issue.)