How should an individual structure his/her investment portfolio? A major field of study in financial economics which seeks the answer to this question is called portfolio theory. Can utility theory be used to show why all investors do not choose the same portfolio? Why is the optimal portfolio different for different investors? 

The Capital Asset Pricing Model (CAPM) taught in introductory finance courses leads to a security market line (SML) which shows the tradeoff available in the market between risk and return. Can economic theory use the SML to predict how individual investors will select a particular risk/return tradeoff? 

When you buy an Indiana lottery ticket you are in a sense buying the opposite of insurance. You purchase insurance to reduce your risk. You buy a lottery ticket to increase your risk. This brings us to a puzzle that has bothered economists for more than 200 years. Why do some people both buy insurance and purchase lottery tickets at the same time? Is this behavior consistent with rational behavior? 

In 1966 the American Catholic Church abolished the rule requiring Roman Catholics to abstain from eating meat on Fridays. What effect did this have on the price of fish? In order to determine the impact of the rule change alone it must be remembered that imports of fish were changing at the time, personal incomes were changing, and the prices of competing goods (such as poultry and meat) were also changing. Can you single out the effect of just the rule change? 

An average driver (e.g., adult male with no citations or at-fault accidents) pays different premiums depending upon where he lives. If he lives in Hollywood, Ca. the premium is $1,817; it is $697 in San Diego; it is only $581 in San Jose. Do auto insurance premiums really vary with costs?

The supply of petroleum to make gasoline, kerosene and heating oil is relatively constant over the course of a single year. Why then does the price of heating oil normally rise in the winter months and fall in the summer months? 

There is some potato production throughout the year in the United States but the major crop is harvested in the fall. Why is the price of potatoes lowest in the fall and highest in the summer? 

Do rats behave economically? Four economists have studied rat behavior as price ratios for water and rat chow are changed for the rats. Did the rats behave as humans might be expected to behave in a similar situation? 

As the incomes of individuals increases they will spend a smaller proportion of their total income on food. A nineteenth century statistician named Engel coined Engel's Law. Is this still true today? 

Some legislators support free public education (i.e., public schools) while other legislators feel we would be better off with vouchers (i.e., gifts of income spendable only on a specified commodity) for education. If the government winds up paying for the education anyway, aren't the two financing schemes essentially identical? 

Suppose that you were given the task of forecasting turkey consumption per capita for United States citizens for the next year on a month by month basis. Where would you look for past data? How would you model consumer behavior to obtain an accurate forecast? Once you had completed the forecast, how would you statistically describe the likely accuracy of your predictions?

The University of Wisconsin studied the effects of fertilizer use on corn yields. To nobody's surprise, as fertilizer use increased, so did corn yield. But the rate at which corn yield increased became smaller and smaller as more fertilizer was used. Economists call this diminishing marginal productivity of fertilizer. Does this concept of diminishing marginal productivity play a role in all production processes? 

Large banks will have a cost advantage over small banks if there are economies of scale in banking. Banks which offer more banking services (products) than their competitors will benefit from economies of scope. Is there empirical evidence that many industries have either economies of scale or scope? 

Electric power production seems to be an industry in which there are economies of scale over the entire production range (i.e., from the smallest to the largest generating plants). If this is true, why not have a single generating plant for the entire United States? Wouldn't this plant produce electricity at the cheapest cost per measured unit? 

In the early 1980's a large number of primary securities buyers were trading government securities and doing quite well in making profits. Throughout the eighties more firms entered the market. In 1989, however, the dealers as a group posted a loss for the first time. In response firms fled the market and profits increased. Could this behavior have been predicted? Is it a common occurrence in markets?

Who really pays taxes? When the government imposes a sales tax of $1 per gallon of gasoline for every gallon that is sold, the producer must pay the government $1. Does this money come out of the profits of those who produce the gasoline or do the producers "pass it along" to the consumers in the form of higher prices? 

As a result of the situation in Iraq, some government officials have suggested price controls on gasoline. The ostensible reason for this would be to lower the price of gasoline to consumers; it will not. Why? 

Why is popcorn sold at a higher price in movie theaters than elsewhere? If you believe it is because movie theaters have a captive audience, you are wrong! What then is the correct reason? Are there other examples of firms using similar pricing schemes and do these arrangements work? 

It is sometimes argued that if a company has monopoly selling rights for light bulbs and invents a new bulb that will last ten times as long as the old bulb, the company will be better off to suppress the invention. After all, it is said, if the new bulb is introduced, the company can sell only one tenth as many bulbs as before, so its revenue and profit will be one tenth as great. Is this correct? 

Students rent apartments from landlords. In addition to agreeing on the rent, the two parties agree on the other conditions of the rental, such as how much notice the landlord must give the tenant if he wishes to evict him, how much notice the tenant must give if he wishes to leave, etc. Cities often have laws restricting what lease agreements are legal. For example, the law may require the landlord to give the tenant three months' notice before evicting him. It seems obvious that the effect of such a law is to benefit the tenants and hurt the landlords. That may be true for tenants who have already signed leases when the law goes into effect. For most other tenants, it is false. Why?