The Mensa Exam for Economists

(Assume you know the answers.)

1. Why is scalping frequently illegal? (That is, ticket scalping--I’m not puzzled by the illegality of scalping literally understood.)

Scalping does nobody harm that I can identify and makes three people better off. It makes the scalper better off because typically he buys low and sells high. It makes the buyer of the ticket better off (even at premium prices) because the buyer wouldn’t buy if it didn’t. It makes the seller better off because the seller wouldn’t sell if it didn’t.

So why is it illegal? I’m guessing here that there is some economic advantage for the original issuers of the tickets to sell below market prices and that this advantage is negated through the re-sell market. Thus, original issuers lobby government for laws to abet them in business. (It’s a commie thing: making peaceful behavior illegal.)

2. (Even more puzzling) Why do theatre owners, concert promoters, and college football ticket offices (well, Penn State’s and Notre Dame’s anyway) underprice their tickets?

I mean if scalpers can get a premium for the tickets, why don’t the original issuers just price the tickets higher rather than lose all that revenue to scalpers? I don’t know.

3. Why do people tip anonymously? Better, why do people tip waiters and waitresses at all?

They want the food to taste good. The owner of the restaurant can only be in one place at a time—back in the kitchen, supervising food, or out with the customers supervising service. Tips are a way to motivate waiters and waitresses to deliver good service when the owner isn’t around. And it's easier for the owner to oversee a few chefs than many waiters and waitresses.

4. Why do people buy each other gifts instead of just giving cash? (Cash is always the right size!)

I’m not sure on this one (or most of the others, to tell the truth). Some people say that it shows you’ve made an effort to get know what’s important to the recipient. I think the opposite. It takes very little effort for me to find something for the people I love. In any case, you can’t go wrong giving me cash!

5. Why do people vote?

I have no idea on this one. Voting intelligently requires a lot of effort, yet the chance that one person’s vote is going to affect the outcome of an election is minuscule. And if it did, would we really want all that power in one person’s hand? (By the way, I can come up with a half-dozen or more reasons you should not vote, including one that makes you a better citizen and patriot.)

6. Why do youngsters speed and old people go so slow when driving?

Here’s an easy answer. Time is very valuable to the young as they have many things they could be doing with their time and their actions will impact their futures which are very long. So they need to get where they’re going in a hurry. Old people have a shorter future and fewer things to do with their time, so they’re in no hurry. (Although I have to say I think Seinfeld is right when he suggests the speed limit should be your age—if you’re 75 you should drive 75 mph and if you’re 25 you should drive 25 mph. I would add, however, if you’re over 80 you ought not be driving period.)

7. (An easy one) Why do women spend more than men on healthcare?

Women live longer and so the payoff for investing in themselves will be larger.

8. (A little more difficult) Why might selfish women prefer that healthcare funds be spent on men rather than women?

Because women live longer than men, many will be spending the end periods of their lives in loneliness. If we can get men to live as long, then the amount of loneliness shrinks. Of course, we can reduce that loneliness by reducing how long women live, but not many are going to find that a suitable option. Even for economists, death is an extreme and inelegant solution.

9. Why so much uneven pricing? For example, $2.99, $19.99, $169.99, etc.

I don’t know. A long time ago when every sale was rung up at a cash register it made sense as a way to prevent stealing by the clerk. For example, if the sale was an even dollar transaction, there would be no need to give change and the clerk could just pocket the dollars. But if change is required, as it most likely would be with uneven pricing, then the clerk has to ring up the sale to get change out of the register. But there are problems with that theory and it certainly doesn’t hold much weight today. And gasoline, for some reason, is priced at 9/10 of a cent per gallon—why?

10. Why should non-smokers oppose efforts to ban cigarettes and prevent smoking? Well, if you know this, then you know why those who willingly wear helmets when motorcycling ought to oppose mandatory helmet laws.

As long as there are smokers in the world, non-smokers can use their non-smoking behavior to signal insurance companies that they are better risks and consequently deserving of better rates. The same is true for wearing motorcycle helmets. Of course, you might claim that in a free society we ought to run our lives as we see fit, but that would make you a crazy libertarian and there’s no fun in holding those views in a society dominated by socialists.

11. Besides the obvious tax reason, why do employers frequently provide healthcare for their workers?

Employers that provide benefits that have long-term consequences for employees, tend to attract employees that stick around. So if you’re running a business where less turnover is a significant advantage, then healthcare and other sorts of programs with long-term benefits can help attract and keep a stable workforce.

12. Are American CEOs overpaid, underpaid, or fairly paid?

If they’re overpaid, the cost is borne by the shareholders who hire them. If they’re underpaid, it’s their own fault. If they’re fairly paid, then everybody’s happy. In all of these situations it's nobody’s business except the stockholders and the CEO. So butt out all you politicians, pundits, and other jerks who try to make a connection between CEO pay and the nation’s and world’s economy.

13. Why are farmers subsidized for not growing crops, but motel owners are never subsidized for having vacancies?

Government subsidies are the result of effective lobbying. Why is it easier for farmers to lobby than motel owners? It might have something to do with the size of farms and the ease with which fellow farmers can come to agreement, while motel owners have to compete with others on a local basis.

14. Which is more expensive: a volunteer army or a draft? A related question: if Congressional salaries were higher so that brighter and more able people would be drawn to Congress (and how hard would that be?), would society benefit?

A draft is many times more expensive than a volunteer army. The opportunity cost of taking years of productivity from a Steve Jobs or Bill Gates would run into the tens of billions of dollars. On part two of the question, the issue is where are people more productive—in the public sector or in the private sector? In a free society the private sector will always be the more productive and so we don’t want our best people in government. (We seemed to have been immensely successful in this effort.) In a less free society, it might help to have better people in government, but only if they agreed to shrink the government.

15. If a person burns money, is the world poorer?

No. Money is a claim to goods and services produced by others and the assets that produce those goods or services. So burning money does not affect the assets, nor the goods and services they produce. Burning money will, however, reduce the price of things since there are now fewer claims on those things. A money-burner in effect is giving unconditionally to the rest of society by renouncing his claims to assets, goods, and services in the world.

16. If a tree falls in a forest, does recycling affect the size of the forest? (Yes, I know that’s a non-sequitur, but I couldn’t resist the appearance of being philosophical.)

The more trees used the more trees we will have—recycling is a crock. Quick digression—how do we know recycling is a crock? Because it has to be forced on us (though I’m still resisting). You don’t believe that cutting down trees increases the size of the forest? Well, look at ground beef. We don’t recycle it and there doesn’t seem to be any shortage of cows. Same for pigs and chickens.

17. Why is popcorn so expensive at the movies? A related question: Why can you get parking and 18 hotdogs at a Reading Phillies game for the same price as parking, two soft pretzels and two cokes at the Vet?

This is an old question as the Vet has been torn down. Somehow they managed to keep the price level the same at the new Phillies ballpark. Major league baseball has a more loyal following than minor league baseball and as a consequence it can profit off of that loyalty. The prices at the Curve games is not cheap, but if they were at major league levels, I don’t think anyone would be showing up for the game. Factor in the population densities that surround major league parks compared to minor league parks and we’ve sort of got an answer here, but I’m sure it’s incomplete.

18. Do new, safer, and more easily accessible birth control techniques reduce unwanted pregnancies? (Obviously not, why not?)

This is akin to car safety. In the 1960s, many new and major safety improvements were made on cars yet accident rates increased on a per mile traveled basis? Why? People drive less safely when they’re in a car with more safety features. This is what’s called moral hazard in economics and insurance. Similarly with birth control: without it, people would be a whole lot more careful in choosing when and with-whom they’re copulating with, but the increase in “safety” with birth control leads to an increase of behavior from which pregnancy may result.

19. Do energy efficient cars reduce consumption of gasoline?

Probably not. Most people will just expand the miles they drive when they have more efficient cars, thus using up the savings of gasoline produced by efficiency. And if more people are driving more miles, there will be more congestion and less efficient fuel consumption. We better start drilling some more oil wells.

20. Does the death penalty deter would-be murderers?

Well, it certainly doesn’t encourage them. Or does it? If you commit one capital crime, then you have a free ticket to as many as you want.

21. (A history question with an economic explanation) What were the effects of the mandated safety measures for automobiles enacted in the 1960s?

See the answer to question #18.

22. What effects might there be from having a “Baby on Board” sign hanging in a car window?

The point of the sign is to tell other drivers to be more careful. As a driver, I think that’s insulting and I just might change my level of care in driving, but not the way the sign intends.

23. Why has the architecture of bank buildings changed? They used to be built with marble floors and ornate and imposing columns. (A guess: it’s probably related to the same reason that Nike pays Michael Jordan guzzillions of dollars.)

Most companies pay endorsements to demonstrate that they are a solid company and will be around for years. For example, Pennzoil pays Arnold Palmer to endorse their product though it has nothing to do with playing golf, which is his claim to fame. But by paying him a huge fee, they are sending a credible signal to the public that they will be around long enough to earn that fee, plus a profit. Banks of a century ago were built with marble to convey the same assurance. Apparently, things have changed.

24. Is a country better off making potato chips or computer chips? (Ask Ross Perot, he thinks he knows.)

A country with a lot of computer chips (or a few very good ones) is going to be better off making potato chips. The nicest thing about computer chips is that they help build an economy full of potato chips.

25. Are low interest rates a good thing?

Not if you’re saving, which is why the national government is always trying to keep rates down—it’s the largest borrower on the planet and higher rates (net of inflation) make life more difficult for prodigals and better for savers. But here's a real puzzler: The U.S. government has absolute powers of confiscating money from the richest economy in the history of the world and has absolute power to print money at its will--and yet its debt is 8 trillion dollars and growing. What's going on here?

26. Why did the Red Coats wear red coats?

To make it less costly to detect deserters. The battlefield tactic in the 18^th century was to have soldiers with muskets (not an accurate weapon) to stand side-by-side to fire at the same time. Red coats made it easier for the soldiers to stand together and easier for the generals to spot the cowards.

27. Why does Coca-Cola cost 5 times as much as gasoline? Well, that’s easy, Coke’s worth whatever they price it at, but why are all soft drinks priced at about 5 times the price of gasoline?

I’m not sure if this ratio from a few years ago is correct. Gasoline today is about $2 a gallon. Coke is about $6 a gallon so the ratio is 3 to 1 not 5 to 1. Still, soda pop is not hard to produce—carbonated water sweetened with sugar or a sugar substitute. Gasoline on the other hand has to be refined through a very expensive process from oil that is either shipped half way across the world or gotten from some nether region of difficulty. And the demand for gasoline is certainly less elastic than that for soda pop. If production costs were all that mattered, then surely gasoline would cost more than soda pop, but there are other significant costs (advertising, distribution, shelf allocation rights, etc.) that likely are quite large for soda pop relative to gasoline. At least, however, we should be appreciative of just how efficient the gasoline providers are—adjusted for inflation, the price today is less than it was in 1960.

28. Why do ATMs charge fees? Relatedly, why is it more expensive to get cigarettes out of a machine rather than at the counter?

I don’t have answers for these questions, although it is the case that one can find ATMs that don’t charge fees. You might think the answer is obvious, that the ATM machine costs have to be covered, but on net such machines save banks money, by allowing it to reduce personnel costs. Why doesn’t the competitive market make them pass these savings on to their customers?

29. If professional athletes were paid less would ticket prices be cheaper? (Hint: college athletes are paid next to nothing--how do college tickets compare with pro events?)

Sports franchises charge the maximum regardless of costs. You will notice that no matter how much tax payer money goes into the operation budgets of these franchises that tax payers are never offered a discount and only in very rare cases (Blair County Ball Park being the only case I’m aware of) do they even get a thank-you.

30. Why is the option play frequently used in collegiate football, but almost never in professional football?

Option plays make the quarterback vulnerable. In pro football, the career of the quarterback is going to be a lot longer than for a college quarterback so there is a much greater potential loss by putting the quarterback at risk.

31. Why are human sexes roughly proportional?

One male could fertilize many females so it’s plausible that a ratio other than 50-50 would advance the human race. But suppose it were the case that one sex greatly outnumbered the other. Let’s say, for instance, 1/3 of the population are men and 2/3 are women. That would require that on average men would have twice as many children as women. And every son that is born to a couple will produce twice as many grandkids for that couple as will a daughter. So there will be in future generations a disproportionate increase in the male gene and therefore larger numbers of men, bringing the ratio back to 50-50. You might think this is biology and it is, but it’s also what’s known in economics as marginal analysis.

32. Why do homosexuals care that government sanctions their marriages? Probably for the same reason that heterosexuals care. Besides pecuniary reasons, why is that?

Economically, marriage is a mutual non-compete agreement. Each spouse promises not to allow any other human being to compete for his or her interest. Marriage takes people, voluntarily, out of the relationship market. But such agreements need to be enforced and government has been the traditional agency of enforcing these and other non-compete agreements.

33. Why are older people more likely to play bingo and lottery games, as well as visit casinos?

They have fewer options and opportunities than younger peoples. Older people are much more likely to clip coupons, shop for discounts, vote, and a host of other time-consuming activities whose payoffs are quite small. Time is simply more valuable the younger you are. (See question #6)

34. Assume you buy a house on Wednesday. Housing prices change 20% overnight. Are you better off or worse off on Thursday?

You might think this depends on which way the housing prices changed. It does not. Whether housing prices goes up or down, you will be better off. I probably don’t need to convince you that you would be better off if housing prices have gone up, but how can it be that you are better off if it went down? Before you bought the house, you had an idea of what would be the best way to allocate your money—how much for your house and how much for other things. Once you’ve bought the house, so long as it maintains its physical value, you cannot be worse off since you have the house you wanted and the other things too. But with housing prices lower, the other goods will look a bit better and their value is higher than it was relative to the house. In fact, with housing prices down, you might decide to trade some of the other goods for a little more housing.

35. From the perspective of economics, why is baseball the best game to watch and play? (Finally, a question I can answer, but be careful asking me what the answer is because I’m long-winded on this one.)

Economics is all about trade-offs and real baseball (as opposed to the kind that allows designated hitters) is replete with trade-offs. Each game is a drama that unfolds in a beautiful environment with beautiful actions. Each game is unpredictable. No other sport so reflects the fundamental aspects of human life.

36. Some have described poker as chess with luck. If you're the most brilliant poker player on the planet, you will lose more often because of the luck factor than in a game without luck. Why play then in the game of chance?

Well, the obvious answer is that you may win less often, but you get more when you do win. In other words, luck attracts more money to the game. To put this less delicately, a person who has no business trying to compete with Johnny Chan would learn that very quickly in a game without chance. The longer fools remain foolish, the richer the smart people will get. If you've got a son or daughter wanting to make a career out of chess, get them immediately hooked on gambling. But look at the next question first.

37. Why has gambling been taboo in the past and why is it thriving today?

Gambling involves effort of significant value, but does not increase society's wealth. It is, strictly defined, a zero-sum game. Most non-gambling employment is involved in positive-sum games: exchanges between parties of mutual benefit. So gambling has a rather large opportunity cost and, consequently has historically been taboo.

But no longer. Governments promote gambling, casinos promote gambling, TV and the Web promote gambling. Not to mention the local church-run bingo games and raffles. Why the change? I don't know.

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Identify the U.S. Presidents with their quotations below.

“We must put public interest ahead of private interest.”

“The interest of the private individual will be a sentinel on the public rights.”

“It is the eternal struggle between two principles--right and wrong. It is the same spirit that says you toil and work and earn bread and I’ll eat it. No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor; or from one race of man as an apology for enslaving another race, it is the same tyrannical principle.”

“The free market is not only a more efficient decision maker than even the wisest central planning body, but even more important, the free market keeps economic power widely dispersed.”

“It is not for the President, Congress, nor the Judiciary to interfere with any American’s desire to voluntarily trade, whether the American trades with another American or with a foreigner. It is, rather, the government’s job to protect every American’s right to trade.”

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Identify the great economists with their quotations below.

“Capitals are increased by parsimony, and diminished by prodigality and misconduct.”

“Life is a series of trade-offs.”

“You can usually see a lot, just by looking.”

“The bottom line is that ... we can and must make decisions and take actions ...”

“We are what we do.”

“Judgments are absolutely necessary. Without them, the issue of choice has no meaning because everything is equal.”

“All options are not equal in their potential outcomes.”

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

"Politics should be limited in its scope to war, protection of property, and the occasional precautionary beheading of a member of the ruling class."

"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."

“.. most of us are committed to the Biblical injunction, "Thou shalt not steal." This is based on the moral principle that each person has the right to the fruits of his own labor. The point I wish to make - my major point - is that this as a principle defies compromise. You either take someone else's property without his consent, or you do not. If you steal just a bit - a penny - you do not compromise the principle; you abandon it. You surrender your principle."

“There are people who think that plunder loses all its immorality as soon as it becomes legal. Personally, I cannot imagine a more alarming situation."