Tuesday, July 19, 2005

Microeconomics Exam

Below is the final exam for my intermediate microeconomics course (by the way, just got the instructors evaluation result: I rank 6 out of 30 -- not too bad).

  1. Think about a monopoly market.
    1. A monopolist is a single player in its market. He/she can search for an optimal price. However, a rational monopolist can not set any arbitrary price. Why?
    2. Imagine an apple monopolist in Medan. He told you that today he gained maximum profit. You know from his neighbor that his marginal cost of production is Rp 4,000. But he sells his apples at Rp 7,500 each. There is another monopolist selling apple in Jakarta. She prices at Rp 5,000 and produces at the same marginal cost as the Medan monopolist’s. A friend of yours claims that the price difference is due to “Medan people are more responsive to apple price changes than Jakarta people”. Is he right or wrong? Give me a proof (assume away arbitrage between Jakarta and Medan).
  1. Following on # 2:
    1. The Jakarta monopolist – let’s call her Patrice – turns to you. She complains that there are now new competitors coming in to Jakarta. The first competitor uses advertisement that goes: “New Kind of Apples: Redder!”. The second competitor goes: “Super Apples: They Smell Better!”. So do other competitors; all try to appear differently. You, however; know that actually consumers don’t care that much with color or smell of the apples. What kind of market is this now in Jakarta?
    2. As it turns out, the new entrants put downward pressure to price. Now you can buy apple in Jakarta at Rp 4,500 each. Given the same marginal cost, is the market now efficient?
    3. Threatened by the increasing competition, Patrice changes her strategy. She buys a new technology from Singapore that allows her to be more efficient. Too bad, one competitor named Patrick follows suit. Other competitors can not compete anymore against Patrice and Patrick; they quit. What kind of market is this now?
    4. As they are the only players now, Patrice and Patrick become extra cautious. Meaning, one’s decision takes into account the other’s as given. What type of equilibrium do you expect?
    5. Explain the interaction process between Patrice and Patrick if: i) Each assumes other’s output as given then act accordingly; ii) Each assumes other’s price as given then act accordingly; iii) Patrick observes Patrice’s output, then decides his own.
  1. Exhausted from harsh competition, Patrice and Patrick agree to negotiate. They agree that profits will be joined, then shared proportional of outputs produced. Each may choose to produce 50, 75, or 100 apples. You are told that the total joint profits are Rp 3,200, Rp 3,500; Rp 3,000; Rp 2,100; and Rp 1,000 for total quantities of 100, 125, 150, 175, and 200 apples per day, respectively.
    1. Find the Nash equilibrium.
    2. Find the Stackelberg equilibrium, assuming Patrice as the first mover.

Friday, July 15, 2005

Save the energy and all the nonsense, 2

So, Bappenas chairperson denies that the Presidential Instruction for energy saving will not affect productivity, as earlier claimed by Bank Indonesia's governor. The vice president seems outraged. I think Ibu Ani is wrong this time, Pak Jusuf is misled, and Pak Burhanuddin is right. It's true that "stop/reduce using elevators, air conditioners, etc" can save energy. But it also can reduce productivity. So, it's a matter of calculating how much energy you want to save while willing to sacrifice some degree of productivity. If, by any chance, you can direct the save-energy campaign so as to make works more efficient, that's good. If you can produce the same output with less electricity, you save energy and increase productivity. The problem is, it is not simple to identify which one is which. You want to reduce the use of electricity. For that, you encourage efficiency in computer using. Some of your staff indeed needs the computers. But some use it to play solitaire. The problem becomes harder if some workers (can) do important jobs while busy chatting with friends, and some are used to multitask between office spreadsheet and solitaire. If you can find a way to discourage office abuses only, you already increase productivity and save the energy.

But if you want the shortcut by turning off the LAN at 4pm, I'm afraid that's not a good idea. I had a discussion with a consultant hired to help manage one of the state-owned enterprises. She complains that now she rarely can work as productive as before because "there is no internet to access important documents online". I believe this is not peculiar to her. In some busy offices, you need to stay until nine at night, because you have to exhange urgent emails or calls with somebody in New York who happens to be in his/her morning primetime. Some stockmarket analysts really work after midnight and they do make use of cables broadcasting real-time financial news. Now you want to stop all that?

Think about the president's instruction to stop wearing suit ("let's now wear our own traditional customs" -- my goodness; the government now wants to tell you what to or what not to wear??) , start using stairs rather than elevators, reduce the use of air-conditioners. It sounds good. But what is the reason for having ACs and elevators at work in the first place? Convenience, comfort. And why are convenience and comfort important? For better productivity. Imagine office workers with less elevators and ACs. Do you expect increase in productivity?

I'm all for rational energy saving. But not for all the nonsense as I have written below.

Addendum 1: A friend wrote me: "OK, you're saying that the Presidential instruction did not even touch the root of the problem. What is the root of the problem?". My response: "Comprehensive energy policy". He goes, "Well, that's cliche. Give me one reason why you think reducing the use of elevators, business suits, etc is not gonna work". I replied, "Illustration might work for you. Look at the chronic traffic problem in Jakarta. If you happened to be trapped in the traffic jam Friday last week, you should have come to realize that your car was simply, well, an umbrella. A very expensive umbrella, why? Because it protected you from the heavy rain; yet the fuel was burning all the time while the car stayed still in the jam for hours. How many litres of fuel do you think Jakarta people waste in their daily traffic problems? A lot. Indonesian people? Even more. Do I think it's higher than the energy we can save from reducing elevators, suits, etc? Yes I do. So I would like to see a comprehensive energy policy that also, among all, addresses the traffic problem". My friend was not satisfied, "But don't you think there are people wasting energy in the offices?". I responded, "Of course I do. Go to government offices at nine o'clock. How many officials are playing solitaire? How many are reading gossips in the internet? How many are chatting in friendsters? A lot. The problem is, can the government itself identify all this? And even if it can, can it tell the inefficient officials from the efficient ones? Probably not. Moral hazard is at play, and pooling equilibrium is sometimes an easy shortcut...". My friend: "Stop it, you're getting too academic. Give me a break: What is your 'comprehensive energy policy' in one word?". Me: "You're typical. You don't even want to listen. But I'm getting used of people like you. My answer is: PRICE". My friend left.

Addendum 2: A collegue called me. Him: "Why do you sound so harsh to Mbak Ani? Isn't she your tutor at LPEM?". Me: "Don't get me wrong. She's not only my tutor, she is my teacher. In fact, she is one of my favourite economists. And that's why I don't want her to go the wrong way. I still want to believe that it's the newspaper who misquoted her. I don't believe that she really meant that saving energy has really nothing to do with producticity. That's why I critiscized the statement in the newspaper. That's what friends are for, isn't it? After all, I praise what she does right. Knowing her, I think what she was really saying is actually: 'Saving energy is good. Productivity is good, as well. Now there are inefficiency here and there. Let's tackle them so as to save energy and to increase productivity' So the problem really is, how to exactly identify the sources of inefficiency and shoot your silver bullet. But as I say, this 'INPRES' is at best a pain reliever. It's not solving the problem. No, as long as you we live with distorted prices".

Addendum 3: A relative called up: "Why do you and your friends keep suggesting correcting the (BBM-) prices?". "Why don't you just recommend a total cleanup in the corrupt Pertamina?". My take: "We should do both: correct the market failure and ccombat corruption". The relative continued, "The price hike. Why now?". My answer, "So, when?".

Addendum 4: A fellow blogger commented (see "comments" below) that she agrees with "leave-your-suits-at-home" policy, because of a reasonable reason. However, my point was more on citizen's freedom of wearing what he or she likes. The Government really should stay away from this one (and many others, for that matter). (It occurs to me, by the way, my friend's example of "kemben" can not be generalized. My traditional clothes are far complicated than business suits. But, no I don't really love business suits either; stop by my office, if you don't buy this-- it's just that I hate government intervention in every private matters).

Monday, July 11, 2005

Save the energy and all the nonsense

The government seems to be incapable even to offer solutions that at least make sense. The oil and energy desperado has resulted in a series of childish and myopic "solutions". Among all, the "funniest" ones include 1) persuasion/request/invitation/directive (instruction?) to office workers not to use elevators, 2) p/r/q/d to reduce the use of air conditioners, 3) p/r/q/d not to wear suit in office -- so not to demand more fresh air from the air-con, 4) p/r/q/d (i was told, this is soon to be official instruction) to radio and tv broadcasts not to run from 1 am to 6 am, and 5) p/r/q/d to start switching off more house lightbulbs every night.

I say, oh my God. It's indeed hurting to see people are fighting for an access to fuel with "affordable" price. But the price has been manipulated. What stays in people's mind is wrong price. And it needs to be corrected so as to stop lying to people. But instead of trying to fix the price, everybody prefers to prolong the lie and to keep singing the fatal lullaby, that the price is alright. That this is temporary; tomorrow everything should be okay. Better to use some persuasion. Since when moral suasion works in this country? Unfortunately not only the government; some analysts, celebrities, and other public figures start echoing all the nonsense. Either they don't know what they're doing, or they deliberately do it to win the public's heart. Being politically popular is key to maintain political power. And it's not necessarily economically logical. Some "economists" even deny the very basic economics. That when you hold prices below what it is supposed to be, you would see either of two results: 1) the market cries out for subsidy, 2) a long line of queue. In worst situation, you will see both results. As in now. Even for these economists, being popular seems more important than to acknowledge the real examples of what they learned in schools.

What's so hard to understand that people do respond to incentives? If you really face a shortage problem, trust me, the only effective measure to fight it is ... well, price-- since shortage means the price is distorted (not necessarily means "scarcity"). Think again of your "heartful" solutions: stop using elevators, air-cons, suits, etc. Did you ever think why these pratices existed in the first place? Because people need a comforting environment to work more productively. Now go tell your staff to cease using elevators. Shut off all the air-con system. That's fine. You are saving the energy. But don't tell me you still expect a boost in production, or even to maintain the existing one. And what's with the midnight broadcasts? Some people have their peak productivity at night time. They work extremely well at night. With the accompany of ... well radios or tv programs (news wire, Bloomberg index, you name it). But sorry dudes, your government is imposing a new work habit for you!

The real sad thing is, this way of thinking is not peculiar to energy problem... It is pervasive.

Wednesday, July 06, 2005

Lines for BBM

It's truly saddening to see people queing up for hours trying to get gasoline. But isn't this exactly what happens if you keep holding prices down distortively? I have been telling this to my classes. Now they can see one perfect example. BBM prices have been false all these years. They're not the true signal of what is going on in the market. You face a lower price than. You would think you could easily buy the product with your money -- well, it's cheap. As it turns out, when you go to the marketplace, the good is rare. Why? What's going on? Because the prices are wrong. Now you have to compete with others to get the remaining litres. Hm, sounds like an opportuinity for rent-seeking by the suppliers. Hence the blackmarket.

Solution? None. Nothing, unless you are willing to listen -- even if it's not popular.