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.
