Assignment:
1. The process for buying a car in the U.S. seems to usually exhibit the following characteristics (it may differ from these, but I'm not an expert in the auto industry so just take these as given for the sake of argument):
a. A car dealership purchases cars from a manufacturer at a specific wholesale price, set by the manufacturer.
b. The car dealership puts a sticker in the car window which includes the MSRP, or manufacturer suggested retail price.
c. The car dealership negotiates the actual selling (retail) price with individual customers, such that the same car may sell for different retail prices for different customers.
For the three prices mentioned above (wholesale price, MSRP, and retail/selling price) describe how much market power an individual car dealership would have in setting each price. In terms of just the retail/selling price, how might an individual car dealership's potential market power be affected by the presence of other car dealerships in town? (E.g., a small town that has one dealership vs. a larger city where several car dealerships usually cluster in a certain area).
Given that car dealerships always ensure that the retail/selling price exceeds the wholesale price, such that customers pay more for the car than the dealership itself does, why do customers continue using car dealerships instead of purchasing the car directly from the manufacturer at its factory?
2. Your company has a Division of Utilizing Labor Logically, which has decided to create an ad hoc committee of twenty existing employees who, in addition to their regular jobs, will meet weekly and brainstorm ideas about improving company efficiency and morale. In its initial submission to the accounting department, D.U.L.L. forecast the benefits from such meetings and indicated that the cost of the proposal was zero, since the twenty employees were already on payroll. As a member of the accounting department, how might you critique the D.U.L.L. cost-benefit analysis?
3. The following represents demand for widgets (a fictional product):
QD = 13,000 - 270P + 0.0001M + 0.5PR
where P is the price of widgets, M is income, and PR is the price of a related (fictional) good, the wodget. Supply of widgets is determined by
QS = 350P - 5
a. Determine whether widgets are a normal or inferior good, and whether widgets and wodgets are substitutes or complements.
b. Assume that M = $55,000 and PR = $19.00. Solve algebraically to determine the equilibrium price and quantity of widgets.
c. Generate a supply/demand graph in Excel. Be sure that P is the vertical axis and Q the horizontal. Does the graphical equilibrium correspond to your algebraic equilibrium?
d. Now assume two events occur: demand changes such that the intercept in the demand equation rises to 13,005 and supply conditions change such that
QS = 390P + 150. Solve algebraically for the new equilibrium price and quantity of widgets after these two changes.
4. As mentioned, market forces usually put pressure on prices to adjust to equilibrium; surpluses and shortages are generally undesirable by both buyers and sellers. But occasionally, you can observe firms knowingly setting prices above or below the equilibrium price. One example (discussed in detail on the EconTalk podcast) is the market for sneakers, where "a sneaker might cost $200 at retail and might sell for $1000 on the secondary market, just because of that difference between supply and demand."
a. Why do you think a company like Nike would find it beneficial or advantageous to sell its sneakers at a retail price that is so far below the market equilibrium price?
b. Do you think Nike would likewise set its employee wages significantly below the market equilibrium wage?
c. Can you think of some reasons why Nike might choose to pay its managers a wage that is above the market equilibrium wage for comparable managers?