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Microeconomic Questions

1. In this election year, issues of campaign finance and political strategy are prominent. Suppose that you are in charge of a campaign to win a party's nomination. You can spend money on a variety of methods for trying to increase your candidates vote. These include (a) door to door visits, (b) direct mail, (c) network television advertising.

A. If the law of diminishing returns applies to campaign finance, what does it say about the marginal product on each of these campaign tactics? For our purposes one can view "output" as "votes".

B. Suppose you have a fixed budget to spend on attracting voters in a particular state. What condition would have to hold to indicate that you are allocating your budget across these three methods of attracting voters in such a way to maximize the expected votes for your candidate? Why does it hold? (ignore any "strategic" effects i.e. assume that your campaign budget choices do not affect the choices made by other candidates)

C. Use your answer to (a) to explain why you are likely to find a way to allocate your campaign budget in such a way so that the condition you describe in (b) applies.

D. Suppose an undergraduate intern comes in and says that he can reduce your television advertising costs by shooting an ad with his video camera and posting it on YouTube. If this reduces the cost of attracting voters with direct advertising, use your answer to (b) to explain how and why you would reallocate your budget among the different methods for attracting voters.

Solution Preview

1. In this election year, issues of campaign finance and political strategy are prominent. Suppose that you are in charge of a campaign to win a party's nomination. You can spend money on a variety of methods for trying to increase your candidates vote. These include (a) door to door visits, (b) direct mail, (c) network television advertising.

A. If the law of diminishing returns applies to campaign finance, what does it say about the marginal product on each of these campaign tactics? For our purposes one can view "output" as "votes".
If the law of diminishing returns applies to campaign finance, it means that for every dollar spent in campaign yields lower and lower additional votes. In other terms it means that with every additional dollar spent on door to door visits the number of additional votes comes down. Similarly with every additional dollar spent on direct mail the additional votes from the spending comes down and similarly with every additional dollar spent on network television broadcasting the additional output (votes) comes down.
From anther perspective the application of the law of diminishing returns in case of each method of campaigning means that there is an increasing opportunity cost.
If we consider the standpoint of costs, it implies that ...

Solution Summary

Microeconomic Questions are discussed in this solution.

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