LESSON 10
The Gift-Giving Mystery: Why Not Just
Send Money?
You don’t have to be Midas or Scrooge to enjoy hav-ing money.
Money is handy because people can ex-change it for other things
they want to have. Try get-ting a rental car or movie tickets on
the barter system.
Yet most gift-givers don't give money. Instead theyspend time
trying to find the right gift, and they oftenget it wrong.
Why do people struggle to find special gifts for im-portant days
like birthdays and holidays when it wouldbe easier and more
efficient just to give money?
Clues 3 and 7 are the most important for solving
thismystery.
SolutionThe incentive to the gift giver is the good feelingthat
comes with showing affection and making aloved one happy. To many
people, money by itselfseems to be a less satisfying gift precisely
becauseit is easier to give, requiring little thoughtfulness orcare
for the special interests of the loved one (Clue3). That is why
money is the preferred gift for strang-ers—the paper carrier, the
waiter or waitress whoprovides good service—rather than loved ones
(Clue7).
LESSON 11
The Mystery of the Crazy Quilt Air Fares
On a recent flight from Chicago to Tampa, Tim dis-covered that
he had paid twice as much for his ticketas the woman seated beside
him. Tim checked fur-ther, asking five other passengers about their
tick-ets, and he found that each of the five had paid adifferent
price. One person was flying “free” withfrequent flier miles.
What is going on here? Why do different passen-gers pay
different prices for exactly the same flight?
Clue 2 is the most important for solving this mystery.
SolutionAirlines do charge different prices to differentpeople
for the same product. Actually, many firmsdo. Some grocery stores
offer lower prices to cou-pon clippers, for example, and some fast
food res-taurants, hotels, and ski resorts offer discounts tosenior
citizens.
Why do airlines charge different prices for the same
flight? The different fares are largely a reflection
of the incentives facing the traveler and the airline.
Some customers book airfares well in advance.
They shop around. They travel at off-peak times.
They are willing to accept connections others might
reject. As a result, these travelers get lower fares,
and the airlines gain the security of knowing some
flights are at least partially sold out.
Other customers are more constrained. An unex-pected crisis, for
example, may cause a businessperson to book a last-minute flight.
The benefit ofgetting from Chicago to Tampa is so large to
ourbusiness traveler that he or she believes the highprice tag is
well worth it.
LESSON 12
Why the Kid Who Skipped College Earns
Big Bucks Playing Games
Many professional athletes never finish college.Some go directly
into professional sports from highschool. Yet professional athletes
are frequently paidmillions of dollars. Annual salaries for
professionalfootball players range from a few hundred thousandto
several million dollars. The story is much thesame among
professional athletes in basketball andbaseball.
Yet other people who perform worthy service—nurses, police
officers, firefighters, and teachers—receive incomes far short of
the amounts paid toprofessional athletes.
What is wrong with our values? Why are grown menand women paid
millions of dollars to play kidgames?
13
SMART Notebook
Elasticity True/False
1. If elasticity is greater than one, demand or supply is
inelastic. ______________________
2. If elasticity is greater than one, it means there is a large
response to a change in price. ____________________________
3. Demand for heart medication would be very inelastic.
____________________________
4. Supply of container ships would be very elastic.
_____________________________
5. If the price of an item goes down by 10% and I buy 20% more,
I have inelastic demand. ___________________________________
6. If elasticity is less than one, demand or supply is elastic.
_________________________
7. Elasticity of supply is affected by time and the complexity
of the product. __________________
8. If I am a producer, and demand for my product is inelastic, I
will likely make more money if I lower my price.
________________________________
9. If the price of an item goes down by 20%, and I supply 15%
less, my supply is inelastic. _________________________________
10. A small response to a price change means demand is likely
inelastic. ____________________
After you answer the questions, get with a partner (or two).
Discuss the statements and come to a CONSENSUS on whether they are
true or false. Then, as a group, select the 5 you are MOST CERTAIN
about and circle the number. Everyone in the group must circle the
same 5.
SMART Notebook
Elasticity Practice
Do the following characteristics apply to elastic, inelastic, or
unitary elastic demand?
1. Elasticity equals 1 _______________________________
2. Elasticity is greater than 1 ___________________________
3. Elasticity is less than 1 ______________________________
4. Jim buys sports drinks at a convenience store. The price
rises by 20%, but he only reduces his quantity demanded by 5%.
___________________________________
5. Tom buys candy bars at a convenience store. The price rises
by 20% and he reduces his quantity demanded by 50%.
___________________________________
6. Don buys bags of chips at a convenience store. The price
rises by 10%, and he reduces his quantity demanded by 10%.
______________________________________
Jim buys chewing gum. The price of his chewing gum goes up from
$1.00 to $1.50. Jim has inelastic demand for chewing gum. Which of
the following could represent the changes in his purchasing
pattern?
a. He bought 15 packs a month at $1.00. At $1.50 he buys 20.
b. He bought 10 packs a month at $1.00. At $1.50 he buys 9.
c. He bought 15 packs a month at $1.00. At $1.50 he buys 5.
d. He bought 10 packs a month at $1.00. At $1.50 he buys 5.
Explain your answer:
Katie buys chewing gum. The price of her chewing gum goes up
from $1.00 to $1.50. Katie has elastic demand for chewing gum.
Which of the following could represent the changes in her
purchasing pattern?
a. She bought 15 packs a month at $1.00. At $1.50 she buys
20.
b. She bought 10 packs a month at $1.00. At $1.50 she buys
9.
c. She bought 15 packs a month at $1.00. At $1.50 she buys
5.
d. She bought 10 packs a month at $1.00. At $1.50 she buys
5.
Explain your answer.
Each of the following stories contains an assumption about the
elasticity of demand for a good. For each one, complete the
following steps:
1. Is the person assuming demand is elastic or inelastic?
2. Is the assumption correct or incorrect?
3. Justify your answer.
A. I.M. Politico, a candidate for the state legislature, is
proposing a large increase in the taxes on cigarettes. He says,
“I’m not proposing these taxes to raise tax revenue, but to
discourage the filthy habit of smoking. If the price on cigarettes
goes up, most people will quit using them. After all, no one has to
smoke.”
B. Councilman Vic Aqua opposed a price increase for water during
a recent drought. He claimed that there is no substitute for water
and that therefore increasing the price of water charged by the
city-owned water company will not cause the amount of water people
use to decrease at all.
SMART Notebook
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