Assignment:
Write down the equation you're using, not just the numerical answer.
Problem 1. Competitive Coffee Bean Market.
The market demand for a standard size package of coffee beans is Q? = 30 - 2P where Q? is the quantity demanded and P is the price of the beans ($ per standard size package). The market supply is Q? = P where Q? is the quantity supplied (measured in millions of 12 packs) and P is price. Assume that conditions in the coffee bean market are such that perfect competition is a good description of how firms behave and how the market operates.
Q1. In the competitive coffee bean market, determine equilibrium price, quantity, consumer and producer surpluses.
Q2. The sum of consumer and producer surplus associated with the competitive equilibrium quantity is best described as follows:
A. The total value that consumers place on the competitive equilibrium quantity if they do not have to pay for it.
B. The benefit to producers of the last unit produced in a competitive equilibrium.
C. The amount producers would be willing to pay to produce one unit less than the equilibrium amount.
D. The total benefits derived from exchange when coffee beans are sold at the competitive equilibrium price.
E. None of the above.
Problem 2. Monopoly Coffee Bean Market.
The demand for a standard size package of coffee beans is the same as it is in the competitive market discussed above: Q? = 30 - 2P. However, a series of coffee mergers have led to a coffee bean monopoly. The mergers have created some efficiency benefits, however, so that the coffee bean monopolist's marginal cost is constant at 1.
Q1. Find optimal price and quantity for the monopolist, and determine consumer surplus at the monopoly price.
Q2. Explain mathematically, graphically, or in words how the series of mergers to monopoly in the coffee bean market affected total surplus.
Problem 3. Competitive Market Situation/Decision.
You are the strategic planner of a small company that manufacturers cornflakes. The main raw ingredient is corn. There are many other producers, and your company is too small to significantly affect the price of corn or cornflakes by altering production. Current demand for corn flakes is Q? = 100 - P per month where P is the market price of cornflakes and Q? is the market quantity. Your operations department estimated that your production costs were approximately C(Q) = 2Q + (1/2)Q² at last month's corn prices where Q is your quantity. Last month, you believed that the price of cornflakes would be $10 per unit, and you planned your production accordingly.
Two factors have changed. First, a record corn crop has lowered the price of corn, the key raw ingredient in cornflakes, and your company took advantage of this to lock in lower prices for corn over the next three months. Your operations department tells you that your new cost of producing cornflakes is C(Q) = Q + (1/2)Q². Second, you believe that the Department of Agriculture will announce a program tomorrow to buy enough corn to eliminate the corn price reduction. Moreover, you believe that your rivals will not have been able to lock in lower corn prices before the government takes this action, so that their costs will not be any lower over the next three months than they were before the corn price reduction.
Given this information:
Q1. What is your monthly production of cornflakes over the next three months?
Q2. Write 1-2 sentences explaining your answer.
Problem 4. Monopoly Market Situation/Decision.
You are a regulator with the Country Bumpkins Ville (CBV) Airport authority. Previously, CBV has not been served by a rental car company. However, the rental car company AbleRentals Inc. has proposed opening rental car service at the airport. They are asking for 20 feet of counter space in the only terminal as well as a parking facility with room for 20 vehicles. You believe you the airport can accommodate this, and you must come up with a fixed monthly license fee that you will collect from AbleRentals and the maximum price that AbleRentals Inc. can charge for rental car service.
Based on the number of number of passenger arrivals and departures at CBV, as well some demand estimates in the literature that connect arrivals and income level to rental car demand, you believe the demand for rental cars at CBV is Q? = 500 - 5P per month. You are familiar with rental car cost structures, as you used to work for Hertz. You believe the cost of rental car service is C(Q) = 10 + 10Q per day.
You were appointed to your post by the mayor of County Hopkinsville, and you understand that she is not especially concerned about the rental car prices paid by people who travel to CBV.
However, she believes she can do many good things with funds collected from airport license fees.
Suppose the regulator wishes to maximize the license fee paid by CBV.
Q1. What license fee and rental car price does the regulator set?
Q2. Write 2-3 sentences explaining your answer.
Problem 5. Competitive Beer Market with Externalities.
The supply and demand for beer are Q? = P, and Q? = 30 - 2P. However, each unit of beer consumption increases the likelihood that consumers of beer will be involved in accidents that harm consumers that do not consume beer. The harm inflicted on consumers that do not consume beer is $2 per unit of beer consumed. For simplicity, assume that the harm from accidents due to beer consumption is inflicted entirely upon non-consumers of beer. (This is not realistic, but it makes it simpler to make the point.) Also assume that it is too costly for beer consumers and non-consumers to write contracts that constrain consumers' beer consumption.
Q1. Which of the following is the best characterization of the harm inflicted by beer consumers on non-consumers of beer.
A. The harm is a a pecuniary externality and does not affect social surplus.
B. The harm is an externality, but it does not affect social surplus.
C. The harm is illusory, as externalities do not distort competitive markets.
D. The harm is an externality, and the social cost of the externality is the $2 times the number of bottles of beer consumed.
E. None of the above.
Q2. What are the competitive equilibrium price and output in the competitive beer market with externalities? What is total surplus at the competitive equilibrium after taking into account the costs associated with accidents?
Q3. What is the socially optimal per-unit tax on beer consumption?
Problem 6. General Review Questions For Competition and Monopoly.
Q1. The demand curve we draw on a graph when talking about competitive markets has two interpretations, depending on whether we are speaking of the quantity associated with each price or the price associated with each quantity. These interpretations are:
A. The quantity demanded at different prices and the average price paid per unit when the customer purchases all units that have positive personal value at some positive price.
B. The quantity demanded at the average price and the marginal benefit to the producers of the last unit produced.
C. The quantity demanded at each price and the customer's maximum willingness to pay for the last unit purchased when the customer purchases a given quantity.
D. All of the above.
E. None of the above.
Q2. The supply curve we draw on a graph when talking about an individual competitive firm's quantity decision describes:
A. The amount the firm will supply at a given price.
B. The maximum amount the the firm would be willing to accept for the last unit supplied when the firm supplies a given quantity.
C. The minimum amount the firm would be willing to accept for the last unit supplied when the firm supplies a given quantity.
D. A and B.
E. A and C.
Q3. In a perfectly competitive market,
A. At the equilibrium price, consumer surplus is maximized.
B. At the equilibrium price, producer surplus is maximized.
C. At the equilibrium price, total surplus (producer plus consumer surplus) is maximized.
D. None of the three surplus values-consumer-, producer-, or total surplus, is maximized.
E. None of the above.
Q4. Imagine a perfectly competitive industry with a downward sloping industry demand, an industry supply curve QS = 100P, and individual firm cost functions C(Q) =(1/2)Q². Suppose the market becomes monopolized (e.g. through a series of mergers), and the monopolist's cost function after the series of mergers is C(Q) =(1/200)Q² . The demand curve is the same after the mergers as it was before. Nothing else changes. The monopolization of the market will:
A. Lead to an increase in price.
B. Lead to a decrease in price.
C. Leave price unchanged.
D. Could increase or decrease price, depending on factors omitted from the question.
E. None of the above.
Problem 7. Ticket monopoly.
You have taken a job that puts you in charge of ticket pricing for Indiana University basketball. Although Assembly Hall holds 17472 people, you have 16,000 tickets to sell after seats have been set aside for press and VIPs. Marginal cost is zero. For simplicity, you must charge the same price for every ticket.
Q1. Suppose demand from fans other than the press and VIPs is Q? = 32,000 - 320P. If your objective is to maximize profits, which price should you set?
Q2. One of the games on the schedule is against Grand Canyon University, a team that is quite deep (so to speak), but has limited talent. You estimate that the demand for tickets to that game is only half the demand given in question 4. If your goal is to maximize profits, which price should you set now?
Problem 8. Gasoline Industry.
The industry demand for gasoline is initially given by Q? = 10 - P, and the industry supply is Q? =P. The gasoline market is initially competitive.
Q1. Find competitive price, quantity, consumer and producer surpluses.
Q2. An individual gasoline refiner's cost is C(Q) = Q + Q². The market is competitive, and thi refiner behaves as a competitive firm. If the gasoline price is 5, how much gasoline should the refiner produce?
Q3. The EPA has passed a regulation that will: (1) encourage the consumption of alternative energy and (2) make it more costly to produce gasoline. The research department at the EPA estimates that the regulation will cause each consumer's marginal willingness to pay for gasoline to fall by $2 for each unit consumed, and that each supplier's marginal cost will rise by $1 for each unit produced. What are the new price and quantity of gasoline?
Q4. Suppose a coup d'état in the country causes the government to acquire all gasoline refineries, and no additional companies can enter the business. The new government set the regulations, which gives a demand for gasoline of Q? = 8 - P and a cost function of C(Q)=Q².
The government chooses a private firm to run the refinery, sets the gasoline price, and charges the firm a fixed license fee. If the government must allow the firm to earn nonnegative profit, and if its objective is to maximize the license fee, what gasoline price will it set?