Department of Agricultural and Resource Economics

This paper uses a computable general equilibrium model of Turkey to explore the empirical effect on adjustment to various macroeconomic shocks of a variety of "structuralist" rigidities. Four types of rigidities are considered: exchange rate rigidity leading to premium rationing and rent seeking, wage rigidities leading to unemployment or labor scarcity, investment-savings imbalance leading to rationing of private consumption--forced saving--or to overall Keynesian unemployment, and sectorial price rigidity leading to consumption or supply rationing. In a series of comparative statics experiments, we explore the impact of, and interactions among, these different types of rigidities. In general, the results indicate that interaction effects are very important, especially between the macro closure rule, which specifies how investment-savings balance is achieved, and the other rigidities. Price rigidities are most damaging when a shock necessitates large relative price changes in a Walrasian world. Also, price rigidities are much more harmful when they lead to situations of excess supply rather than excess demand.

In this paper different models of vertical relationships between manufacturers and retailers in the supermarket industry are compared. Demand estimates are used to compute price-cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed. The purpose is to identify which set of margins iscompatible with the margins obtained from estimates of cost, and to select the model most consistent with the data among non-nested competing models. The models considered are: (1) a simple linear pricing model; (2) a vertically integrated model; and (3) a variety of alternative (strategic) supply scenarios that allow for collusion, non-linear pricing and strategic behavior with respect to private label products. Using data onyogurt sold in several stores in a large urban area of the United States the results imply that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain. This is consistent with non-linear pricing by the manufacturers, or high bargaining power of the retailers.

Diminishing marginal utility is neither necessary nor sufficient for downward sloping demand. Yet upper-division undergraduate and beginning graduate students often presume otherwise. This paper provides two simple counter examples that can be used to help students understand that the Law of Demand does not depend on diminishing marginal utility. The examples are accompanied with the geometry and basic mathematicsof the utility functions and the implied ordinary/Marshallian demands.