Economics 301 Problem Set due October 7, 2016

pricetheory2016@gmail.com Email copy due 10:30am;

Hard copy due 12:30pm

1) The process of consumption often involves more than just purchasing a good. One
important ingredient in the consumption of many goods is time. It takes time to watch a
movie or play a round of golf. Consuming other goods requires some element of
expertise such knowing how to cook or knowing how to play golf.
A) How would the fact that goods take time to consume affect whether goods would be
complements or substitutes?
B) Would two goods that both require a substantial amount of time to consume tend to
be complements or substitutes, why?
C) How would you model the importance of expertise in consumption? How would the
importance of expertise affect the link between goods in terms of being complements
or substitutes?
D) How would the importance of expertise affect the dynamics (i.e. relationships over
time) of consumption?

2) After the breakup of the USSR many people were concerned about the materials needed
to make an atomic bomb falling into the wrong hands. One proposal, based on economic
principles, was for the United States to offer to purchase bomb-making materials (such as
plutonium) so that they would not fall into the wrong hands.
A) Articulate a theory based on supply, demand, and markets that would potentially
justify such a proposal.
B) Would such a policy be effective at reducing the availability of nuclear materials to
those wrong hands interested in building a nuclear weapon? Why or why not?
What would it depend on?
C) Could such a policy increase rather than reduce the nuclear threat? If so, why? If
not, why not?
D) How would such a policy affect the need to directly fight against trafficking in
nuclear materials (such as trying to catch and punish those involved in nuclear arms
trafficking and intercepting and confiscating black-market nuclear material)?
E) Can you articulate a more general theory (again based on supply, demand, and
markets) that integrates your answers to parts A-D?