On ½ sheets, Assume the price of Filters = $10

Filters /day

0123456789

10

FC

25

VC

010162022242732405475

TC MC

X

Revenue Profit

At which filter does diminishing returns begin?

How many filtersshould the firm produce?

Explain your answer to #3

0

20

-25-25

1.

2.

3.

4.

Practice one, Assume the price of Filters = $10

Filters /day

0123456789

10

FC

2525252525252525252525

VC

010162022242732405475

TC

25354145474952576579

100

MC

X106422358

1421

Revenue

0102030405060708090

100

Profit

How many filtersshould the firm produce?

-25-25-21-15-718

1315110

8, because the profit is 15, the highest. Profit Maximization point

Rational behavior experiment

Get into 4 groups

Using two slates, draw a large X and large O

X O

Let’s play a game for points If all X’s are played everyone loses 1 point 3 Xs and 1 O played each x gets 1 point, O loses 1 point 2 X and 2 O’s played each X gets 2 points, O loses 1 point 1 X and 3 Os played each x wins 3 points each O loses 1 point

All O’s played everyone wins 1 point

X O

Lack of Competition

• Oligopolies sometimes figure out competition hurts their profits, so……….

Dentists?

Pay?Why?Market Structure?Hours?

If firms discuss and agreed on new prices…

This is called collusion. And you formed a cartel.

Collusion = setting of prices by rival firmsCartel = groups of rival firms that try to fix prices

to increase profits

**Drug cartels – don’t compete on priceIn the United States, it is illegal

Meanwhile….• OPEC – Organization of Petroleum Exporting

Countries (1960-present)

How does OPEC indirectly set prices?

$/Barrel

Q/barrels

S

D

50

10 billion

Every 6 months, OPEC representativesand economists meet in Vienna to decideproduction.S after meeting

100

75

8 bi

Most Economists think cartels don’t work in the long term, why?

Problems with larger group assignments?

• Strategy?• Incentives?

On slates• 3 + goods that if you consume it, your friends

can’t consume it at the same time

• 1.5 + goods that if you consume it, your friends are unaffected by your consumption

Private Goods• Rivaled consumption• A person’s consumption affects

others’ consumption

• Excludable• Firms can exclude people who

don’t pay

Public Goods• Goods that are both non-excludable and

non-rivaled in consumption

Free Rider Problem• Free Rider – a person who does not pay for,

but benefits from a public good

• Incentives?

How does society pay for public goods?

TaxesUser fees

Private GoodsFor example: food

Common GoodsEX: Open ocean fishing

Club goodsEX: Golf Course, movie theatre

Public goodsEX: National DefenseStreet lights

Excludable? Rivaled Consp.?Market structure?

Excludable? Rivaled Consp.? Market structure?

Excludable? Rivaled Consp.? Market structure?

Excludable? Rivaled Consp.? Market structure?

Excludable? Rivaled Consp.? Market structure?

Excludable? Rivaled Consp.? Market structure?

On Slates1. Write a building in your neighborhood you

wish didn’t exist. 2. Why does that building bother you?

Externalities

• Economic question: would you want to live next to the airport? Why or Why not?

• Different question: Would you want to own a business next to the airport?

Externality: any external effect due to economic activity

Positive Externalities

Brings customers to other businesses in Anaheim

Positive Externalities

Prevents the spread of future diseases

Positive Externalities

Brings customers to Food City, Walgreens and El PotisinoAlso educates future workers

Also a negative?

Negative Externalities

Negative Externalities

Negative Externalities

Brings traffic to Anaheim

Negative Externalities

Remember Public Goods?• Any good which is non-rivaled consumption

AND non-excludable• EXAMPLES?

Rosemont Copper Mine

2-3 paragraph letter re: Rosemont Mine• Write a letter to the Star either in support or

opposition to the Rosemont Copper mine in the Santa Rita Mountains south of Tucson

• Use at least 2 economic externalities to support your letter

Dear editor, last Sunday’s Star discussed the Rosemont Copper

mine, I would like to express my support/opposition to the mine.

US government spending on mostly non-public goods

Show US debt clock

1. How much money you want to be

earning (per year) when you are 30.

2. What percentage do you think that

income has to pay to the government in

taxes (in the US)

Bellringer on your ½ sheet

Taxation“In this world nothing can be said to be certain,

except death and taxes.”Benjamin Franklin

In reality…• US Federal Tax Rates: (only 3 % of Americans make over $250,000)

• Add 3 -15 % more depending on which state you work in

3. On your ½ sheet how much in tax dollars would you would pay?

Net Income

• Gross income: How much you earn• Net income: how much you keep

• Net income = gross income - gross income*tax rate

• For example: Mr. Klein made $37,500 last year.

• Net income = $37,500 - $37,500(.25)• Net income = $37,500 - $9,375 = $28,125

4. How much is your “net income”?

World Tax Rates

    United Kingdom

21-28%0-40 %

17.5%

Ireland 12.5 %20-41%

21 %

Mexico 29%3-29 %

15 %

Sweden 28 %0-59 %

25 %

Slovakia 19 %19 % 19 %

Hong Kong 15 %0-15 %

0 %

United Arab Emirates

0 %0 % 0 %

Country CorporateTax rate

Income Tax

SalesTax

What are “Good Taxes”?• According to Adam Smith:• Simple to understand• Don’t mess up incentives• Avoid loopholes

• IRS manual – 70,000 pages – (4 X size of the Bible)

Loopholes• Reading, other problem in USA? Why difficult

to solve?

• Tax incentives• Really, ways to not pay tax• “write offs”

• Thousands of examples, hybrid cars, college loan debt, 2nd home mortgage

Income Tax in USA

• IRS – tax collection agency in USA• Taxes are deducted throughout year• Every citizen must file every year by:• If you paid more during the year then

you need to: you get a refund• If you paid less during the year then

you need to: pay the difference

Taxes: For Example• For example: Mr. Klein made

$37,500 last year.• Net income = $37,500 -

$37,500(.25)• Net income = $37,500 - $9,375 =

$28,125

5. If Mr. Klein paid $10,375 in 2010, what happens after he files?

6. Why is a BIG refund not such a great idea?

7. Does the US have a good tax system? Explain your answer & remember Adam Smith’s

definition

With your partner• Imagine the state of Arizona was

going to simplify its tax structure and adopt only 1 tax method. How it works, why it’s the best, why the other two are not as good

1. Sales tax2. airport tax3. Corporate tax4. Alcohol tax5. rental car tax

6. Income tax7. property tax8. Gasoline tax9. Hotel room tax

What would be good about each tax, one change in behavior tax payers/consumers/businesses would make.

Tax on a household income% increases b/c income

“tax the rich more!”The more you make, the

higher your tax %For example: Tax $12/hour

labor or accountant $55,000/year

Why common in USA & EUIncentive?

Progressive Income Tax

IncomeTax Rate

$0-$15,000 0%

$15,001-$20,000 10%

$20,000-$30,000 15%

$30,000-$50,000 25%

$50,000-$100,000 33%

$100,001 + 38%

Proportional Income Tax• Tax on a household

income• % of stays the same• “flat tax”• For example: 5% tax,

$25,000/year or $100,000/year

• Why rare in USA?• Incentive?

But wait, the government isn’t done yet!

• Other taxes

Property tax• Tax on something you own• Usually expensive like your

house or boat• For example: $100,000

home– 5% property tax rate

• 100,000 X .05 = $5,000 property tax

• Incentive?8.01 % ave Pima Co rate

Regressive Tax• Smaller % taken the higher your

income• Sales tax• Sin tax• For example: 5% tax, $25,000/year

w/$10,000 consumption pays: 10,000 X .05 = $500, or 2% of total income

• $50,000/year w/$15,000 consumption pays: 15,000 X .05 = $750, or 1.5% of total income

• Incentive?• Why don’t poor people get upset?

Regressive taxes

• Conclusion?

Regressive taxes

Regressive taxes

Capital Gains Tax• Tax on real estate, stock

sales or dividends, or collectables.

• Why not only for the rich?

Gift tax• Tax on gifts or rewards• Games shows, gambling,

lottery• Rate depends on gift• 35-60 %• Is this a bad incentive?

Tucson painter Ted DeGrazia

Estate tax• Tax on inheritance• Sometimes called

“death tax”• In US today,

$5,000,000 and up• 40% rate

• Is this a bad incentive?

If you are curious…• US estate taxes over the years• GW Bush worked to repeal in

2001• Came back in 2011 when law

expires• Barack Obama supports

estate tax• Next president?

Tax Game• Each of you has a job• Present a tax proposal before the end of

class• You can use: proportional, progressive or

regressive taxes, or a combination of both• You can cut $100,000 in services

The group with the most votes wins 5 points of extra credit.

In reality…• US Federal Tax Rates: (only 3 % of Americans make over $250,000)

Let’s do your taxes

• 1040 Form for IRS• 1040EZ• W2 from employer (s) – shows wages• 1099 (other forms for interest, stock income,

etc)

• Plus you must file in every state except: TX, NV, NH, FL, WA.

On Slates1. How old will you be in

2070?2. Do you think $13/hour

is a lot of money?

10 richest people in the WorldForbes (2014)

1. Bill Gates $79 B2. Carlos Slim Helú $69 B 3. Warren Buffett4. Amancio Ortega5. Larry Ellison 6. Charles Koch7. David Koch8. Christy Walton9. Jim Walton10. Liliane Bettencourt

1, 3, 5, 6, 7, 8, 9

2 10

4

10 richest people in the USAForbes (2014)

1. Bill Gates $79 B Operating Systems2. Warren Buffett $68 B Investments3. Larry Ellison $54 B Cisco systems4. Charles Koch $41 B oil production5. David Koch $41 B oil production6. Jeff Bezos $ 39 B Amazon.com7. Michael Bloomberg $37 B computerized

investments

8. Christy Walton $36 B Walmart family9. Mark Zuckerberg $35 B Facebook10. Jim Walton $35 B Walmart family

BusinessName

Credit Cards• Loan from the

bank• High interest

rates• Keep control

• Bankruptcy• Video clip

• http://www.nbc.com/saturday-night-live/video/dont-buy-stuff/n12020 https://vimeo.com/50044167

Chances are….Only 3% of the US earns

over $250,000/year You will workYou will have a limited

supply of wealthYou will need to think

about your income and make good choices

You need a budgetYou need to think about

investing

Do you want to be?• Rich & Retired

Social Security

Specifics about investing• Opportunity cost of

investing?

• Things to consider:– Liquidity– Risk– Diversify

Liquidity• “How easy is it to turn this investment into

cash”?

Cash under mattress

• Bad idea, why?• No return, risky• 100% liquid• Inflation, you will lose

the inflation rate

Savings Account• Low interest rate• No risk in USA• Today: 1%, yuck! Money Market Acct 3-3.5 %

Pension Plan

• Employee plan• Usually union or large firm• For example: 10% from

State employees, 80% of salary when you retire, after 30+ years

• Not liquid at all• Low risk, long term

Bonds• Issued by

government or large corporation

• Low risk, low return• Must wait for

maturity• Can be traded

(liquidity!!)• WW1 & WW2 War

Bonds

Mutual Funds• Managed stocks• Lower risk, lower

control• Some sort of

theme• Saves you time

Traditional IRA• Individual Retirement

Account• You have to set it up• You can deposit up to

$5000 per year• (into mutual funds,

stocks or bonds)• Tax loopholes (breaks) • Can’t touch until 60• Not liquid

At 10% interest, a $5000 IRA becomes $226,000 over 40 years! $10,000 is over $400,000!

Roth IRA• Individual Retirement

Account• You have to set it up• You can deposit up to

$5000 per year• (into mutual funds,

stocks or bonds)• No tax break, but tax

free when you retire• Can’t touch until 60• Not liquid

At 10% interest, a $5000 IRA becomes $226,000 over 40 years! $10,000 is over $400,000!

401 K Plan• Set up by employer• Payroll deduction• Invested into stock

market• Lowers tax incidence• Tax break for

employee• Employee match• Not liquid

Investment calculator

• http://www.moneychimp.com/calculator/compound_interest_calculator.htm

• .

Real Estate• Risky, high capital• Relatively liquid• Speculation • Average real estate in

Tucson in 1970 $23,000• Average real estate in

Tucson in 2013 $164,900!!!

Rank in order by liquidity• Traditional IRA• Roth IRA• 401 K• Real Estate• Stocks• Mutual Funds• Pension plan• bonds

Rank in order by liquidity

• Traditional IRA• Roth IRA• 401 K• Real Estate• Stocks• Mutual Funds• Pension plan• bonds

Cable company article for portfolio