The effects of a price change are always understated by a ...

[ec501234]

The effects of a price change are always understated by a partial-equilibrium analysis when compared to a general-equilibrium analysis.
 
  Indicate whether the statement is true or false

Question 2

Your company makes copper pipes. Over the years, you have collected a large inventory of raw copper. The production process involves melting the copper and shaping it into pipes. You also have a large stockpile of pennies. Suppose the price of copper rises so much that the copper in the penny becomes worth more than one cent. Should you melt down your pennies?
 
  What will be an ideal response?

[Toya9913]

Answer to Question 1

False. If the price change affects other markets, the partial-equilibrium analysis will be different than the general-equilibrium. However, the results may be smaller or larger under either analysis.

Answer to Question 2

This problem appeared as a puzzle in the Journal of Economic Perspectives (Winter, 1988). It is true (in this problem) that the pennies when melted currently have a value greater than one cent. Yet, the price of copper can fluctuate. If the price of copper stays high, it does not matter if you melt pennies or not. However, if the price of copper falls so that the value of the copper in the penny falls below one cent, your unmelted pennies are still worth one cent. Your melted pennies would be worth less than one cent. Thus, as long as you have some other source of copper, you are better off melting that copper and not the pennies.

[ec501234]

Thank you

[Toya9913]

Happy to help you