Principles of Economics: Problems: Foundations of Supply: Six Characters Plus Mao Zedong
Consider a toy economy with six producing workers—Arya, Bran, Tegan, Taylor, Sarah, and Zedd--that produces two commodities: lattes (large, vanilla-caramel, half-caf, sweetened, made half with skim milk and half with half-and-half), and yoga lessons.
In an hour the six workers could each teach at most the following number of yoga students: Arya 10; Bran 6; Tegan 4; Taylor 4; Sarah 2; and Zedd 0. In an hour the six workers could prepare at most the following number of lattes: Arya 60; Bran 10; Tegan 20; Taylor 30; Sarah 30; and Zedd 60.
Suppose that some central planner—Mao Zedong, say—grabs three people at random and says “you are making lattes” and tells the other three “you are teaching yoga students”. How many lattes do you expect Mao’s allocation to make in an hour? How many yoga students do you expect Mao’s allocation to teach an an hour?
If you allow the market system to work, what price of yoga lessons £Y would have the economy teaching as many students as you expect to get in Mao’s economy? How many lattes would that market economy produce? How much better off would consumers be as a result?
If you allow the market system to work, at what price of yoga lessons £Y would the economy make as many lattes as you expect to get in Mao’s economy? How many yoga lessons would that market economy teach? How much better off would consumers be as a result?
Write a paragraph, 400 words at most, in which you make your argument to Mao Zedong that he should decontrol the Chinese economy and let it revert back to a market economy. For extra credit, in an appropriate and sensible place, quote Deng Xiaoping: “It is not important whether a cat is red or white; it is important whether a cat catches mice!”
What do you think Mao would say and do in answer to your attempt to convince him to reverse his economic policy course?
