Economics Puzzles

Note: all these are written by former students of mine, although I’m not listing their names. EJL

Why did the US postal service alter the borders on stamps and issue several more styles when they changed to the self-adhesive format?

As a monopoly, the US postal service knows that when marginal revenue is greater than marginal cost, they can increase profits by expanding output. In the past, collectors of mint stamps would buy a stamp and “hinge” it to the album with tiny piece of paper that was slightly sticky on both sides. Now, in order to maintain the integrity of the stamp’s border, the collector must by all four stamps that surround the stamp she wishes to collect, remove the additional stamps from the sticky paper, and trim the paper around the center stamp. The center stamp must have its original border and be attached to the original sticky paper. Whereas in the past the collector would purchase one stamp for her collection, now she must purchase five.

Collectors of mint stamps are an additional boon for the postal service, not only because they purchase so many stamps, but because the postal service doesn’t have to work to deliver any post associated with these stamps. The post office calls this process “revenue retention”: stamps that people buy and never use. The postal service also attempts to increase revenue retention by issuing cute stamps with Bugs Bunny and Snoopy. They want normal consumers to save the stamp because Snoopy is so cute.

Why do factory outlets have cheaper prices than standard retailers?

Most factory outlets are owned and operated by the manufacturer, and they generally carry merchandise that is over stocked, out of season, or discontinued. The reason why outlet stores can charge lower prices is very simple. The greatest demand in the retail market is for the most up-to-date styles; therefore the quantity demanded decreases for these out of date products when new fashions emerge, which leads to an increase in the price. The new price is grater than the equilibrium price, and the quantity supplies is greater than the quantity demanded, which results in an excess supply of last season’s clothes. In this situation the market faces a surplus and must find a way to get rid of all the leftover products without losing money. Given that there is an excess supply retailers will have an incentive to offer lower prices. As manufacturers bid the price down the quantity demanded would increase and the market will slowly return to equilibrium. In this position in order for firms to make a profit off of excess resources they must lower the price and sell them in outlet stores.

What costs more, baby sleepwear or adult sleepwear?

If this question were asked to an everyday Joe, he’d probably answer, “Duh…Adult sleepwear of course.” This would not be considered an unusual answer to a question like this. The average person would probably only take into account the amount of fabric involved in making these items. What he/she fails to notice is that producing small clothing is very labor intensive, therefore costs more. So then why do people by expensive sleepwear for babies; why don’t they just put them in a regular shirt? The answer is because parents don’t have many substitutes for baby sleepwear as they do for their own sleepwear. If adult sleepwear went up in price, most people would just sleep in their undergarments or nothing at all. Babies on the other hand, don’t have this luxury because they’re delicate. They need something to keep them warm. Baby sleepwear is less price elastic when compared to adult sleepwear.

How come in some states, it is illegal to have out-of-state wine shipped directly to you?

Having trade barriers between states is good news for wholesalers who provide wine within their state. The state law is helping to create a monopoly for these wholesalers within their state. If these trade barriers were dropped, the demand for out-of-state win would increase, and the demand for in-state wholesalers would drop. Basically, it is illegal to have out-of-state wine shipped directly to you because the state wholesalers would have to succumb to a competitive market.

For the first couple of years of Oprah’s talk show, it was just like Donahue and Geraldo. She had guests come on with controversial topics likes “Multiple Personalities Who Hate Each Other” and the like. Several years ago, though she changed her shows format to be more positive. Was this change due to her heavy conscience, as she claims?

Maybe, partly. When Oprah first started her talk show there were only a couple of shows like it, Donahue and Geraldo were her main competitors. Those who didn’t care for Donahue had only a few substitutes. As more people entered the talk show market, the industry became more competitive. In order to grow her profits, she needed to further differentiate the show from others. At this point, she had a choice to either get more ‘Sleazy’ in the topics covered by her show and attract more viewers with shock value (as Jerry Springer has done) or she could move away from this negativity and hopefully pull her viewers with her. She chose the latter. I remember when she announced the change in her shows format. She said that she didn’t feel right about being so negative and focusing on the bad side of life and that she wanted to help people and bring something into people’s homes that would uplift them. Of course she succeeded in increasing her profits with this method. I do not necessarily think that her intentions were only noble and that is the whole story. I think she wanted to increase the demand for her show by further differentiating it and that she chose the high road to do it.

Why did the institution of dowry arise in some societies? (or why women are economically worse off in a poor and monogamous society).

It has been observed by anthropologists that dowry is found almost exclusively in societies with socially-imposed monogamy, for almost no polygamous society requires a dowry from the bride upon marriage. This suggests that monogamous societies exhibit a disequilibrium in their marital market. The way this disequilibrium is caused (at least in a non-wealthy society, where resources are very limited and therefore mainly in the hands of men) is by not allowing men to acquire as many wives as their resources allow them to. Thus, in a poor and monogamous society, wealthy men became artificially precious commodities, and dowry is the price paid to them. More specifically, we can compare a polygamous society to a perfectly competitive market, whereas a monogamous one resembles a market in which wealthy men act as monopolies. As a consequence of their monopoly power, the richer men have the privilege of requiring their wives to pay them a dowry, just like a monopolistic firm can afford to pay its workers lower salaries than it would in amore competitive market. Therefore, we can say that women are economically worse off, for only the few ones with the ability to collect a dowry have access to wealthy husbands, whereas most have to settle to poorer ones.

Why are older model pickup trucks sold for higher prices at the U.S./Mexican border than any other place in the country (perhaps the world)?

This question is really not that difficult to explain. For starters, to make our question easier to study, let’s examine the Texas/Mexico border only. Texas sells more new pickup trucks than probably anywhere else in the world. This eventually increases a greater supply of used pickups as well. This is where some might get a little confused. After several years there would be a surplus of used trucks, which would drive their prices down. However, in reality, this never happens. While in Texas there is big demand for new pickups, in Mexico, the demand for used pickups is even greater. Most people cannot afford a new pickup in Mexico, and even those who can prefer the older body style. So, as long as Mexico’s demand is greater than the quantity supplied, there will continue to be a shortage (not a surplus) and the prices on used pickups will remain high.

Why do people buy very expensive designer’s clothes and try to find a cheap dry cleaner?

Expensive designer’s clothes are not necessities of life, but the dry cleaners are necessities of life because there are several clothes that needed to dry clean. The fact is that the market value of designer’s clothes is so high compared to cleaners. There are only a few famous designers in the market place, there are so few quantities of clothes produced. However, in the market place, there are so many cleaners. Also, they offered good quality, but most of time they offer good price. By the way the designer’s clothes usually offered good quality not the price. The reason is that people who want to buy the expensive designer’s clothes, they are very inelastic on the price, but the cleaners’ consumers are elastic on the price. The designer’s clothes are kind of monopolist because in the market there are only one designer, but may have several stores but it will be less than the cleaners. In consequence, people will buy designer’s clothes even they need to pay too much because there are only few amounts of outputs in the market place. However, people try to find cheaper dry cleaner because there are so many cleaners in the market place, so consumer has lots of choice.

Why do local family-owned pizza places offer cheaper prices compared to pizza place such as Pizza Hut, Papa Johns, Domino’s, etc., even though local pizza has better quality?

The answer is very simple. We assume large company and local pizza place’s fixed cost is it. The large company’s variable cost is much higher than local pizza place. The reason is large companies do TV advertisement and lots of other advertisements. It is very expensive. However, local pizza place they advertise but not the TV advertisement or expensive one. They make some flyers and deliver themselves to their neighborhood. Therefore, large company’s marginal cost is much higher than local pizza place. Nobody wants to have their price lower than marginal cost. Therefore, large companies have higher pizza prices than local family-owned pizza places even though the quality might be better.

Why are some drinks (alcohol) cheaper to buy at a dance club than at a restaurant?

Many consumers today drink socially. They may choose to drink at a bar, restaurant, or a dance club. Some have realized that it is cheaper to buy some drinks at a dance club than at a restaurant or bar. This example can be explained with the two-part tariff theory. With the two part tariff theory, a firm charges fee for the right to enter the market and then a unit price, (usually cheaper than normal), for a good. Consumers pay a fee to enter a dance club and then is “rewarded” with a cheaper price for the drinks. Since there is no fee to enter a restaurant or bar, drink prices may higher to cover other costs.

In northern Michigan there is a resort community which has recently been built. This community offers many clubs, yet it requires all property owners to join the yacht. My question is why do all property owners have to be members of the yacht club and not the other clubs?

This community is located on Lake Michigan and here they constructed a large harbor. In order to pay for this harbor the community planners have bundles property ownership and yacht club membership. The yacht membership received a reservation price which all potential property owners would be willing pay. Bundling the two together will allow the community to pay off the high costs of constructing the harbor. The other club could be open to a larger public market which could allow the community to set a higher reservation price due to the larger number of potential consumers.

Why do waiters and waitresses get tipped after services rendered?

If a couple were to go to dinner they would have expectations for what was preferred for the evening. After preferences are chosen the consumers most likely will place a dollar amount on the evening, in this dollar amount would be an allotment for a tip for expected service quality. If the tip were to be presented at the beginning of the meal the services could be purchased from wait staff or pre tipping. The wait staff would know the consumer’s expectations and the process of service could become more efficient. Efficient in the sense that the wait staff could allot time and service relative to the amount of service purchased. A drawback to this process would be a lack of service from the wait staff due to poor tipping. There could also be an advantage for the government for an accurate way to tax cash tips. I believe a more rational theory of tipping after the meal, is tips are a residual effect of a transfer of consumer surplus to the wait staff, in the form of a tip.

If prostitution is legal in the state of Nevada, then why have the cities of Las Vegas and Reno made it illegal within city limits?

In both Reno and Las Vegas, the major industry centers on gambling. This is a form of entertainment. Casinos control all of the gambling. If prostitution were introduced in these areas, another form of entertainment would be introduced. This would then be a substitute good for gambling. When a person hires a prostitute he will spend about a thousand dollars for an hour. A person spending a thousand dollars for an hour with a prostitute is not dropping ten thousand at a craps table. The business of the casinos is to keep the people at the tables. That’s why the other form of entertainment in Las Vegas is Neil Diamond. Here the patron spends $50 dollars for a ticket, then wishes he never left the craps table. Neil Diamond also keeps people close to the floor of the casino. Prostitution takes the gambler all the way upstairs to the room. The way the casinos have kept prostitution out of the cities is by colluding perfectly to form a monopoly. Using its monopoly status the casino business has set up barriers to entering the entertainment industry in Vegas and Reno. In this case they have set up political barriers by making the city limits of Vegas and Reno dry of prostitution. (Fall ’98)

Why do gas stations build close to other gas stations?

It can be explained by using the "beach location game." To explain, one gas station builds on a stretch of land right off the highway. If that gas station remains the only gas station on that stretch of land, it will receive 100% of the sales. When a second gas station builds within a couple of miles of the first on the same stretch of land, the sales will be split. If both gas stations locate in the center of this stretch of land, this would be an example of a Nash equilibrium. If the first gas station locates far to one end of the stretch of land, the second would build by the first but closer to the center. In that case, the second station would get more of the sales than the first, ceteris paribus.

Is gas a Giffen good in The Road Warrior?

An economic oddity, a Giffen good violates the law of demand in that it possesses a positively sloped demand curve. That is, the more expensive the good becomes, the more it is consumed. While largely a theoretical possibility, the concept of the Giffen good is premised on the understanding that it is strongly inferior and that it absorbs a substantial portion of the consumer’s income. For the purposes of this response, I will argue that the circumstances surrounding gasoline in The Road Warrior (1981) define it as a Giffen good in the context of the film. My argument rests on the understanding that in the weird moneyless economy of the film, income is represented through the expenditure of the characters’ time and effort. The more time and effort they spend in pursuit of a good, the greater are their expenditures on it. Correspondingly, the price of a good is the toll it exacts from the characters.

Set in a post-apocalyptic wasteland, the plot of The Road Warrior is structured by a bizarre economy in which gasoline is the good of primary interest to consumers. In the perverse universe of the film, the composite all other goods is composed of the trifles the characters loot or steal along with gas and the women and boys they argue over and bed. Gas is valued above these other goods because it fuels the souped-up vehicles of the scavengers, freaks, and thugs that people the desolate landscape. Despite the relative scarcity of gas, the characters make no effort toward its conservation, and they absorb their time and energy (income) in gas consuming activities – they speed down dusty highways, perform dangerous stunts, rev their engines, and set great oil burning fires. The film’s plot thickens when the characters discover a small community with an oil well, a pump and some barrels of fuel. The freakish tribe of Lord Humongous parks itself outside the community’s barricades and devotes increasing resources to stealing its gas. The protagonist Max stumbles onto the scene and enters into contracts with the community in which he devotes his energies to dangerous tasks in exchange for all the gas he can carry.

As the conflict builds, the price of gas grows unthinkably high – its purchase price becomes the characters’ lives and many die in dangerous high-speed stunts designed to penetrate the compound of the oil well community. As the price of gas rises (as more effort is spent and as more characters die), the amount the hot-rodding population consumes also rises as they use increasing amounts in their attempts to get at the fuel. This relationship between price and expenditure marks gas as an inferior good, but its status as a Giffen good arises from its overpowering income effect in the face of the price increase. In the context of the film, the substitute effect for the price increase is minimal. The few alternate goods the characters could have purchased with their energies have been diminished in battling for the gas. They’ve shot one of the few women they had and a boomerang to the forehead killed their coveted blonde loverboy. The loss of the sexual substitute goods leaves the thugs charged to devote even greater time and effort to their siege of the compound. In so doing, they consume even more gasoline, which marks the strength of the price increase’s income effect and confirms gasoline’s role as a Giffen good.

Although The Road Warrior’s appeal is rooted in its depiction of an absurd universe of tribal weirdoes battling over gas, it is conceivable that if gas were considerably less expensive – that is, if its purchase required substantially less time, effort and death – the characters might conceive of and address themselves to lifestyles that relied less on gasoline consumption. Perhaps they would turn to farming or build garages – though this would make for a much duller movie.

Poor people who have no property to put up as collateral are regarded as loan risks and have generally been shunned by banks from their lending activities. So why have micro-credit schemes devised to help such people – apparent credit risks – proved successful in the developing world?

Although poor people have no physical collateral to put up against loans, the concept of micro-credit revolves around “social collateral”. The loan – initially a small amount that increases incrementally with improving credit performance – is handed to not one person, but jointly to a group of persons (usually women). If one member falls behind on payments, the rest of the group must provide the overdue amount. If a member defaults entirely, the group becomes ineligible for future loans. This system of peer monitoring has proved to be a very effective tool, as members keep tabs on each other and ensure that the group’s credit status is not jeopardized by a single delinquent individual.

The wage difference between men and women has been steadily declining over the years although it still persists. Is the wage gap really attributable to gender discrimination?

Research suggests that the requirements of the labor market are more important determinants than discrimination. The specialized skills that bring higher wages come from i) work experience and ii) higher education. Today’s working women are much more likely to have similar levels of experience as their male colleagues, compared to earlier generations. And college enrollment and graduation among young women has greatly increased, as has enrollment in professional schools. Just as importantly, women today expect to work for a much longer time which influences their career and family planning accordingly. The priority that women place on family life over work life is a determinant of the gap. It has been shown that for men and women with similar experience and life situations, the wage gap all but disappears. According to a National Longitudinal Survey of Youth, among people aged between 27 and 33 who have never had a child, women’s income is about 98% of their male colleagues. These factors explain the gender differential more satisfactorily than does discrimination.

Why should I write only three puzzles instead of four?

Due to the “extra” homework assignment given near the end of the semester, I was able to recapture lost points from previous homework assignments. These were points that I had not planned on having, you might think of them as “sunk points.” So presently, I have a cushion of about twenty-five points, which was totally unexpected. Without this bonus twenty-five points, I had planned on an “A” in the class, this, of course, included the points from the fourth puzzle. Now, writing the fourth puzzle is economically inefficient. As it is worth only twenty-five points, which I have already earned, I would bye grossly misallocating my resources, time and brain power, into generating this extra puzzle, which in the long run, will have no impact on my grade in the course, as the highest grade possible is an “A.” And instead of toiling away at a task for which there is no net gain, I should go fishing or at least use my time preparing for another course in which my final grade is less than par.

Do governmental restrictions on driving reduce pollution in Mexico City?

In Mexico City there are limitations on the days that a person can drive. They differentiate the cars by assigning certain license plate numbers. A car can only be driven on certain days of the week, for example, Monday, Wednesday, and Friday. At first glance, you might be tempted to think that by restricting the days in which a car can be driven, pollution would decrease. But that is not necessarily the case. People that can afford to buy a car in Mexico City probably have enough money to buy a cheaper more pollutant second car. People then can drive every day of the week. In addition, the second car that is driven gives off much more pollution. So, by restricting the number of days the government actually encourages the citizens to drive more pollutant vehicles.

Why is an individual medium soft drink more expensive than a medium soft drink in a combo meal at McDonald’s?

McDonald’s knows that people will usually want to purchase combo meals at their establishments, but they also know that some people are just thirsty. So, they choose to use a mixed bundling pricing strategy to sell their food and drinks. Mixed bundling occurs when two or more goods are sold both as a package and individually. The reason McDonald’s does this is because they want to sell more of their goods, and if they bundle at seemingly lower prices, consumers will buy into their schemes; however, some consumers don’t want their purchasing choices dictated and will still just buy single food items. This is why mixed bundling works for them.

Alison Clemons, Spring 2001

What cause the collapse of the communist Caviar cartel?

First the Berlin wall came down and the Soviet Union disintegrated. The Caviar cartel has collapsed. The caviar cartel was located in former Soviet Union. On the Volga River Delta where Kazakhstan and Russia (both former members of Soviet Union) have a common border at northern end of Caspian Sea, the temperature and the salinity of the water in the Delta make it ideal spawning ground for sturgeon whose eggs have for centuries been view as the finest caviar in the world. Most fish produce eggs but there seems to be something special about sturgeon eggs that consumer find uniquely tasty and the Caspian Sea is the only place in the world where sturgeon have been able to survive in great number to make large scale harvesting of their eggs economical. So the Russian cartel took advantage of these factors and even if they have been considerate to produce an annual catch of 2000 tons of caviar, the communist cartel allowed only 150 tons out of the country. As a result a kilogram (2.2 pounds) of black caviar costing $5 on Moscow, commanded $2000 or more in New York. And because the consumers of top-quality caviar tend to concentrate in the highest of the high income brackets, where they are largely isolated from economical fluctuation, the communist cartel could charge these astronomical prices. The only other significant producer of Caspian Sea caviar was Iran, and the royal family of Iran, but they are quite happy to enjoy the profits that came from letting the soviets raise the market price of top quality caviar. These are the things that make the caviar cartel survive such a long time; until the soviet union dissolved and the two largest fishery fell under the jurisdictions of two different autonomous republics, each of which wants to own and operate its own lucrative caviar business. So the competition is present in the market and as a result the price of high-quality caviar fell.

Codruta Burzo, Spring 2001

Why are the services of scalpers (ticket scalpers) needed in the first place?

If you want to get a ticket to a popular rock concert or sport event you know that you have high chances not to get it because by the time you decide to purchase your ticket through the “normal” ticket channels (the local official agencies) the tickets are sold out. And here enter the services of ticket scalpers. When you purchase a ticket that is being resold you pay a higher price-you get “scalped.” This is happening because the quantity demanded is greater than quantity supplied. The ticket scalpers manage to take advantage of this disequilibrium to make a profit. The demand for scalper’s services is normally due to a mistake in pricing.

Certainly, not always it is set a “market clearing price” correctly for a Broadway musical or a rock concert for example. If the price for a Broadway is the same for a ticket on Saturday night as the price for a ticket on Tuesday night there is almost a guarantee that the quantity demand is greater than the quantity supply on Saturday night than on Tuesday night – in case that the musical is a hit. So it is almost certain that out there would be consumers willing to pay a higher price for a ticket.

Codruta Burzo, Spring 2001

Why does auto insurance cost more for male drivers under 25 years of age vs. female drivers under 25 years of age?

Insurance companies practice statistical discrimination. The Statistical Institute shows that females between the ages of 16 and 25 years of age are more likely to have a higher number of accidents than their male counterparts. However, while males have fewer accidents, they have more severe accidents involving more auto damage, injuries, and fatalities. Statistics further show that males are twice as likely as females to be intoxicated when involved in a fatal accident, has three times higher death rate, and only wear seat belts half as much. Statistics generate information showing male drivers under age 25 to be at higher risk for more severe and costlier accidents than females. Causing rates to me substantially higher for males than females under 25 years of age.

Why do people who live in all-bill paid apartments keep turning on air-conditioner or heater all the time?

One of my friends lives in an all-bill paid apartment. She never turns off air-conditioner or heater even when she goes out. She feels the more she use or waste the electricity, the more she earns something! She feels, the less she uses the electricity, the more she pays out the electricity bill of the other people in the apartment. The residents in all-bill paid apartment do not try to save the utilities and try to consume them as much as they can because they already paid a certain amount as a part of rent and are not billed for every additional amount consumed. Some lessee work hard to use every penny that they think they paid.

Some people think that the all-bill paid rent is cheaper because they can use utilities as much as they can. Really? The owner of the apartment is smart enough to figure out that the lessee would consume the utilities as much as they can. The owner sets the rent price enough high to cover the maximum utility bills. So, all-bill paid rent is not as cheap as the people expect.

Yura Yu

Why are people bothered to exchange gifts on holidays or birthdays?

I believe that most people voluntarily give presents to the people whom they love, from a detached and disinterested generosity that originates from affection, respect and friendship. However, in reality, when we prepare a present for someone, we expect some kinds of reward.

“I will receive a gift on my birthday from him/her.”

“He/she will be more kind to me.”

When we are selecting presents fro someone, we implicitly or explicitly calculate the expected benefit. We estimate the value of reward that we will receive later, such as gifts on our birthdays, favor, or love. According to the size of the benefit, we determine the price of our presents. For example, a husband chooses a diamond necklace for his wife because he considers the benefit, i.e., the love that she would provide, is big enough. Yet, he would choose a cheaper present for his friend, because he evaluates the benefit from the friend would be smaller than the benefit from his wife.

Further, an opportunity cost exists if you do not give presents to your friends, or family. You may lose a little bit of intimacy from them by not giving them presents. Or you may not receive a present on your birthday.

Yura Yu

Why do cheerleaders of NFL and NBA work for only about $10 per hour?

The cheerleaders (or dancers) are beautiful and tall. They could get a better paid job elsewhere. Especially, the cheerleaders for Portland Blazers are paid only the minimum wage per hour. One of the reasons they choose to stay at the cheerleader job is that they get paid sufficiently from extra jobs. They perform at many local events and get paid enough to compensate the lower wage. Besides, they are waiting for opportunities to be picked by entertainment business agents such as film directors, TV program producers, or model agencies. Or, the fact itself that they are the cheerleaders of Dallas Cowboys or any NFL or NBA team makes them be proud of themselves. For the cheerleaders, the benefit, high extra wages, potentials to be movie stars, and self-satisfaction, is greater than the cost, low wage. Those benefits are so great that a large number of beautiful women compete to be cheerleaders, i.e., the supply for the cheerleaders are larger than the demand. Consequently, the equilibrium occurs at lower price, i.e., the lower wage for cheerleaders.

Why do fishermen in the North Atlantic off the coast of Maine and Massachusetts choose to over-fish the waters rather than voluntarily cut back production?

The over-fishing in the waters off the coast of Maine and Massachusetts has resulted in a depletion of the area’s natural resource and a downturn in the area’s fishing industry. One cause of this problem is that the three basic principles of property rights are missing from allocating this resource: (1) exclusivity of rights to the choice of use of a resource; (2) exclusivity of rights to the services of a resource; and (3) rights to exchange the resource at mutually agreeable terms. The commercial fishermen are guided by self-interest and do not act to preserve the resource for others. This behavior was evident when the state government placed a ceiling on the total amount of a certain species of fish that could be caught. This encouraged fishermen to go out and catch as much fish as they could early in the season. Once the quota was reached no more of this fish could be harvested. This policy caused an over supply of this fish in the early part of the season, which lowered price and at the end of the season when this fish was in short supply, the price rose sharply.

A better policy would be to tax the amount of fish caught by each boat either commercial or recreational. This would provide and incentive for the individual to take only as much fish as he can sell for a profit, including the cost of the tax. The amount of the tax could vary depending on the supply of the fish, lower when plentiful and higher when relatively scarce. Taxes levied on a per unit basis decrease the quantity of a product purchased or in this case the amount of fish caught. Other policies that would be effective include reducing the number of total fisherman in the industry. The state and Federal government have been pursing this policy by buying out family fishermen and providing for the cost of their retraining in new occupations.

Why do people in low-income neighborhoods tolerate the “ghetto premium”?

People who live in low-income neighborhoods are often subject to an unofficial tax that is coined the term “ghetto premium”. This premium is like an unofficial tax that exists in Dallas’ poorer neighborhoods (as well as other urban cities). I compared the prices at convenience stores in my neighborhood and those in the south end of Dallas.

The widest range in prices was in cigarettes. The price for Marlboro’s in my neighborhood is $2.40; the price for Marlboro’s in the south end: $3.67. The price for Newport cigarettes is $2.67 in my neighborhood and $3.97 on the other side of town. The difference in price is more than one dollar and twenty-seven cents each time. This price difference is not unique to cigarettes, the difference in the price of bread was .39 on average; and the price difference in feminine products was over a dollar. Why would people tolerate this price? Why don’t they just drive four to six minutes north and get a lower price?

Well, most of the consumers I noticed walked to the convenience stores. Transportation seems to be the main reason that people tolerate this price difference. The cost to ride the bus combined with the time it takes to commute deters many people from going elsewhere. Weather is also a factor in this problem. A city like Dallas, usually has weather from one extreme to another, summer in particular is when business is at it’s highest (according to the owners). Most of the people in these neighborhoods use public transportation, and during the summer while people wait for the bus, they frequent these convenience stores for refreshments.

An antique dealer recently told me that if he is ever having trouble selling an antique, the first thing he does is raise the price. Why might this strategy work for antiques?

To answer the question I first asked what is the difference between antiques and other goods. Perhaps a cooler is a good example of an “other good.” A cooler is bought for very utilitarian reasons: an antique is bought more for aesthetic appeal, prestige, or more personal reasons such as collecting. Perhaps a higher price signals that an antique is more aesthetically pleasing to others than a lower priced good, thus signally both beauty and prestige. But why would a buyer of an antique depend so heavily on price as a signal?

The qualities of a cooler would seem much more easily judged than the qualities of an antique, which often requires an expert. Perhaps price is the easiest signal by which a buyer can compare antiques. The higher the price, the better the quality or more prestigious the antique. The uniqueness of antiques also makes judgment about them difficult. In essence, an asymmetry of information occurs between the dealer and the buyer, or at least, a lack of information with the dealer, the buyer, or both.