Chapter 16
1. Is there a need for government to pick winners and losers?
a. A government picking winners and losers is essentially a central planning model. It does
not work. The government cannot know in advance which technologies will succeed and
which will not. The only way that can be determined is for the free market to judge. Let
the free market work without government intervention, and all of the distributed
knowledge that exists will be captured in price.
2. What objections to industrial policy suggested in the essay do you have? If no
objections, how do you support a government selecting losers and winners when the free
market does that type of thing so well?
a. When the government chooses there are seen and unseen effects. The unseen effects are
the technological innovations that would have occurred had the government not intervened
in the system. Some amazing breakthroughs, such as the microwave, HD television, or the
cell phone might not have existed because the government was directing resources in other
places.
Chapter 20
1. How can firms lose money due to foreign-exchange effects?
a. When firms speculate or bet on currency changes, they are susceptible to losing money
if the currency changes in the opposite direction from which they are betting. For that
reason most company’s hedge, not speculate. They offset their exposure to a currency
change with use of financial instruments such as options or forward contracts.
2. What causes a company to locate or not locate in a certain locale?
