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| Ann McCutcheon is hired as a consultant to a firm producing ball bearings. This firm sells in two distinct markets, each of which is completely sealed off from the other. The demand curve for the firm’s output in the first market is P1 = 160 – 8Q1, where P1 is the price of the product and Q1 is the amount sold in the first market. The demand curve for the firm’s output in the second market is P2 = 80 – 2Q2, where P is the price of the product and Q2 is the amount sold in the second market. The firm’s marginal cost curve is 5 + Q, where Q is the firm’s entire output (destined for either market). Managers ask Ann McCutcheon to suggest a pricing policy. a. How many units of output should she tell managers to sell in the second market? b. How many units of output should she tell managers to sell in the first market? c. What price should managers charge in each market? |
Ann McCutcheon is hired as a consultant to a firm
The Oahu Trading Company is considering the purchase of a
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| The Oahu Trading Company is considering the purchase of a small firm that produces clocks. Oahu’s management feels there is a 50-50 chance, if Oahu buys the firm, that it can mold the firm into an effective producer of washing machine parts. If the firm can be transformed in this way, Oahu believes that it will make $500,000 if it buys the firm; if it cannot be transformed in this way, Oahu believes that it will lose $400,000. a. Construct a decision tree to represent Oahu’s problem. b. What are the decision forks? (Are there more than one?) c. What are the chance forks? (Are there more than one?) d. Use the decision tree to solve Oahu’s problem. In other words, assuming that the firm wants to maximize the expected profit, should Oahu buy the firm? e. Before Oahu makes a decision concerning the purchase of the firm, Oahu’s president learns that if the clock producer cannot be made into an effective producer of washing machine parts, there is a 0.2 probability that it can be resold to a Saudi Arabian syndicate at a profit of $100,000. (If the firm cannot be resold, Oahu will lose $400,000.) (1) Does this information alter the decision tree? (2) Can you think of three mutually exclusive outcomes if Oahu buys the firm? (3) What is the probability of each of these outcomes? (4) What is the monetary value to Oahu of each of these outcomes? f. Use your results in part (e) to solve Oahu’s problem under this new set of conditions. In other words, on the basis of this new information, should Oahu buy the firm? g. Oahu’s executive vice president discovers an error in the estimate of how much Oahu will gain if it buys the clock manufacturer and turns it into an effective producer of washing machine parts. (1) Under the circumstances in part (d), how big would this error have to be to reverse the indicated decision? (2) Under the circumstances in part (e), ho |
In recent years, the government of Pakistan has established a
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| In recent years, the government of Pakistan has established a support price for wheat of about $0.20 per kilogram of wheat. At this price, consumers are willing to purchase 10 billion kilograms of wheat per year, while Pakistani farmers are willing to grow and harvest 18 billion kilograms of wheat per year. The government purchases and stores all surplus wheat. a. What are annual consumer expenditures on the Pakistani wheat crop? b. What are annual government expenditures on the Pakistani wheat crop? c. How much, in total, do Pakistani wheat farmers receive for the wheat they produce? |
A chemical factory has leaked a toxic substance into the
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| A chemical factory has leaked a toxic substance into the ground because fixing the leak was more expensive than the small amount of toxic substance was worth to them. Once it was discovered that the substance was contaminating local water supplies, though, the factory agreed to fix the leak. (a) Draw supply and demand curves for the chemicals produced by the factory before the contamination was discovered. (b) Which, if either, of these curves will be affected by the decision to fix the leak? Adjust your diagram to reflect this change. What, if anything, has happened to the equilibrium price and quantity? (c) How have the buyers of chemicals from the factory (who live far away from the contamination) been affected by the decision to fix the leak? Why do they feel that effect? Do you think that this effect is appropriate? Why or why not? |
A competitive refining industry produces one unit of waste for
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| A competitive refining industry produces one unit of waste for each unit of refined product. The industry disposes of the waste by releasing it into the atmosphere. The inverse demand curve for the refined product (which is also the marginal benefit curve) is Pd = 24 – Q, where Q is the quantity consumed when the price consumers pay is Pd. The inverse supply curve (also the marginal private cost curve) for refining is MPC = 2 + Q, where MPC is the marginal private cost when the industry produces Q units. The marginal external cost curve is MEC = 0.5Q, where MEC is the marginal external cost when the industry releases Q units of waste. a) What are the equilibrium price and quantity for the refined product when there is no correction for the externality? b) How much of the chemical should the market supply at the social optimum? c) How large is the deadweight loss from the externality? d) Suppose the government imposes an emissions fee of $T per unit of emissions. How large should the emissions fee be if the market is to produce the economically efficient amount of the refined product? |
Jane likes hamburgers (H) and milkshakes (M). Her indifference curves
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| Jane likes hamburgers (H) and milkshakes (M). Her indifference curves are bowed in toward the origin and do not intersect the axes. The price of a milkshake is $1 and the price of a hamburger is $3. She is spending all her income at the basket she is currently consuming, and her marginal rate of substitution of hamburgers for milkshakes is 2. Is she at an optimum? If so, show why. If not, should she buy fewer hamburgers and more milkshakes, or the reverse? |
Explain the type(s) of risk Lafayette Bank takes in the
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| Explain the type(s) of risk Lafayette Bank takes in the following examples. a. Lafayette Bank extends a one-year loan to Joe Johnson to purchase a new washer and dryer for his home. b. Lafayette Bank extends a 30-year, fixed-interest-rate loan to Joe Johnson for the purchase of a new home. c. Lafayette Bank extends a 30-year, floating-interest-rate loan to Joe Johnson for the purchase of a new home. d. Lafayette Bank purchases $100,000 in 10-year government bonds. e. Lafayette Bank purchases $200,000 in 10-year municipal bonds. |
Which of the following are examples of first-degree, second-degree, or
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| Which of the following are examples of first-degree, second-degree, or third-degree price discrimination? a) The publishers of the Journal of Price Discrimination charge a subscription price of $75 per year to individuals and $300 per year to libraries. b) The U.S. government auctions off leases on tracts of land in the Gulf of Mexico. Oil companies bid for the right to explore each tract of land and to extract oil. c) Ye Olde Country Club charges golfers $12 to play the first 9 holes of golf on a given day, $9 to play an additional 9 holes, and $6 to play 9 more holes. d) The telephone company charges you $0.10 per minute to make a long-distance call from Monday through Saturday and $0.05 per minute on Sunday. e) You can buy one computer disk for $10, a pack of 3 for $27, or a pack of 10 for $75. f) When you fly from New York to Chicago, the airline charges you $250 if you buy your ticket 14 days in advance, but $350 if you buy the ticket on the day of travel. |
Sarah’s preferences can be described by the utility function U(X,
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| Sarah’s preferences can be described by the utility function U(X, Y) = X2 + Y2. For this utility function, MUX = 2X and MUY = 2Y. What is her MRSXY? Do her preferences have the declining MRS property? Draw the indifference curve corresponding to a utility level of 1 (that is, combinations of X and Y such that U(X, Y) = 1). If PX = 1, PY= 2, and M = 100, at what consumption bundle is her budget line tangent to an indifference curve? What is her best choice? Is there a difference and, if so, why? |
Consider the market for used cars shown in the figure
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| a. Suppose that buyers recognize that the chance of getting a lemon is 50%, but are unable to tell whether a car is a lemon or a plum. What is the expected value of a used car to a buyer? b. If the market works to the extent that prices reflect the expected value of a used car, how many high-quality automobiles will be offered for sale at the price determined in (a)? How many low-quality automobiles will be offered for sale? Of the automobiles offered for sale, what is the proportion of low-quality automobiles? c. Compared to a market with perfect information, what kind of deadweight loss does the information loss generate in the market for high-quality used cars? Is there a deadweight loss in the market for lemons, too? |
