ecn multiple ques and ans 332sample packet exam iii

8/12/2019 ECN Multiple Ques and Ans 332sample Packet Exam III

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;. Short-run Firm Suppl. *at&re' et, Inc., &pp%ie apara& to canner %ocated thro&ho&t the Miiippiiver va%%e. ! 4,000 = 0P = $2.25 Q = 2,0002.25> ! 4,000 = 1,500

P = $2.;5 Q = 2,0002.;5> ! 4,000 = 2,500

8. Short-run M!r"#t Suppl. he -erti%i#er &pp% Co. i a tpica% ditri(&tor in the perfect% competitiveferti%i#er &pp% ind&tr. It marina% cot of o&tp&t i

MC = $250 + $0.05Q

6here Q i ton of ferti%i#er prod&ced per ear.

). erive the firm' &pp% c&rve, e"prein &antit a a f&nction of price.

. erive the ind&tr &pp% c&rve if the firm i one of 700 competitor.

C. Ca%c&%ate ind&tr &pp% per ear at a mar/et price of $400 per ton.

)*

). he perfect% competitive firm 6i%% &pp% o&tp&t o %on a it i profita(%e to do o. eca&eP = M in perfect% competitive mar/et, the firm &pp% c&rve i iven ( the re%ation

P = MC = $250 + $0.05Q


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6hen &antit i e"preed a a f&nction of price, the firm &pp% c&rve i

P = $250 + $0.05Q0.05Q = P ! 250Q= !5,000 + 20P

. If the compan i one of 700 &ch competitor, the ind&tr &pp% c&rve i fo&nd ( imp%

m&%tip%in the firm &pp% c&rve derived in part ) ( 700. hi i e&iva%ent to a hori#onta%&mmation of a%% 700 individ&a% firm &pp% c&rve. ?hen &antit i e"preed a af&nction of price 6e find

Q= 700!5,000 + 20P> = !2,000,000 + 8,000P

?hen price i e"preed a a f&nction of &antit

Q= !2,000,000 + 8,000P8,000P = 2,000,000 + QP = $250 + $0.000125Q

C. Q= !2,000,000 + 8,000P = !2,000,000 + 8,000$400> = 700,000

@. P#r$#%tl Comp#titi E'uili(rium.

P = $2Q &pp%>

6here P i price per %a6n mo6ed and Q i &antit of %a6n mo6ed per da.

). )%e(raica%% determine the e&i%i(ri&m ind&tr priceAo&tp&t com(ination.

. Confirm thi ( raphin ind&tr demand and &pp% c&rve.

)*

). )%e(raica%%,

P= P$;5 ! $1.;5Q= $2Q4.;5Q = ;5Q = 20

)t Q = 20, the price for demand and &pp% e&a% $70 (eca&e

emand P = $;5 ! $1.;520> = $70&pp% P = $220> = $70


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. -rom the raph, it i c%ear that Q= Q= 20 at a price of $70 per %a6n mo6ed. h&,P = $70 and Q = 20 i the e&i%i(ri&m priceAo&tp&t com(ination.

10. Comp#titi M!r"#t E'uili(rium. Bapp :a%%e &pp%, Inc., provide recc%ed toner cartride for printer.


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@ 15.;5 150.0010 15.00 180.00

. etermine price and the %eve% of ervice if competitive (iddin re&%t in a perfect%competitive priceAo&tp&t com(ination.

C. etermine price and the %eve% of ervice if the cit rant a monopo% franchie.

)*

).Hour+ o$

L!,n C!r#

p#r Month

Pri%#

p#r

Hour

Tot!l

R#nu#

M!rin!l

R#nu#

Tot!l

Co+t

M!rin!l

Co+t

0 $22.50 0.00 !!!! $ 0.00 !!!!1 21.;5 $ 21.;5 $21.;5 21.00 21.002 21.00 72.00 20.25 70.50 [email protected] 20.25 90.;5 18.;5 58.50 18.007 [email protected] ;8.00 1;.25 ;5.;5 1;.25

5 18.;5 @4.;5 15.;5 @2.25 19.509 18.00 108.00 17.25 10;.25 15.00; 1;.25 120.;5 12.;5 120.;5 14.508 19.50 142.00 11.25 142.00 11.25@ 15.;5 171.;5 @.;5 150.00 18.00

10 15.00 150.00 8.25 180.00 40.00

. In a perfect% competitive ind&tr, M = MC and P = )C o the optima% activit %eve%occ&r at Q = 8 ho&r of %a6n care per month and M = MC = $11.25 and P = )C = $19.50.*ote for Q 3 8, P = M MC and %oe 6o&%d (e inc&rred.

C. ) monopo% 6i%% ma"imi#e profit ( ettin M = MC. Bere, M = MC = $5.;5 at Q = 7

ho&r of %a6n care per month and P = [email protected] per ho&r.

1./ Monopol E'uili(rium. Q&ic/ a", Inc., enEo pricin po6er in the atona each mar/et for ta"preparation ervice. ota% and marina% reven&e re%ation for ma%% (&ine c&tomer are

= $280Q ! $0.005Q2

M = AQ = $280 ! $0.01Q

Marina% cot are ta(%e at $100 per &nit. )%% other cot have (een f&%% amorti#ed.

). ) a monopo%, ca%c&%ate Q&ic/ a"' o&tp&t, price, and profit at the profit!ma"imi#inactivit %eve%.

. ?hat price and profit %eve% 6o&%d prevai% (aed on the a&mption that perfect%competitive pricin emere in the %oca% mar/etF

)*

). et M = MC to find the profit!ma"imi#in activit %eve%


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= $25 Month% price>

P = $750 ! $0.00925,000> = $400 )nn&a% price>

= ! C

= $40025,000> ! $7,2;5,000 ! $;525,000> ! $0.001525,0002>

= $712,500

If the compan ha $1.5 mi%%ion inveted in p%ant and e&ipment, it optima% rate of ret&rn oninvetment i

et&rn on invetment =

= 0.2;5 or 2;.50

Note: Profit i fa%%in for Q 3 25,000.>

. ?ith a 15 ret&rn on tota% aet, ed6ood 6o&%d earn profit of

= )%%o6ed ret&rn ota% aet

= 0.15$1,500,000>= $225,000

o determine the %eve% of o&tp&t that 6o&%d (e conitent 6ith thi %eve% of tota% profit, 6econider the profit re%ation

= ! C

$225,000 = 750Q ! $0.009Q2! $7,2;5,000 ! $;5Q ! $0.0015Q2

225,000 = !0.00;5Q2+ 4;5Q ! 7,2;5,0000 = !0.00;5Q2+ 4;5Q ! 7,500,000

?hich i a f&nction of the form aQ2+ (Q + c = 0 6here a = !0.00;5, ( = 4;5 and c =!7,500,000, and can (e o%ved &in the &adratic e&ation.

Q =

=

=

= 20,000 or 40,000 c&tomer

eca&e p&(%ic &ti%it commiion enera%% 6ant &ti%itie to provide ervice to the reatetpoi(%e n&m(er of c&tomer at the %o6et poi(%e price, the J&pperJ Q = 40,000 i theappropriate o&tp&t %eve%. hi o&tp&t %eve% 6i%% re&%t in a month% ervice price of

P = $4;.50 ! $0.000540,000>= $22.50


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hi $22.50 per month price 6i%% provide ed6ood 6ith a fair rate of ret&rn on tota%invetment, 6hi%e en&rin ervice to a (road c&tomer (ae.

19. In (oth monopo%itic competition and o%iopo% mar/eta. there i ea entr and e"it.(. con&mer perceive difference amon the prod&ct of vario& competitor.c. economic profit ma (e earned in the %on r&n.

d. there are man e%%er.

)*

1;. Monopoli+ti% Comp#tition. oft


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(. &(idie for po%%&tion red&ction.c. ta" po%ic.d. the eta(%ihment of operatin contro%.

)* )

7. he (&rden of a per &nit ta" on a prod&ct 6i%% fa%% primari% on prod&cer 6hen

a. the ta" i co%%ected from c&tomer.(. demand i hih% e%atic 6ith repect to price.c. demand i hih% ine%atic 6ith repect to price.d. the ta" i co%%ected from prod&cer.

)*

5. ) per &nit ta" 6i%% ca&e o&tp&t price to increae %eat 6hena. marina% cot i contant.(. marina% cot i fa%%in.c. averae cot i fa%%in.d. marina% cot i riin.

)*

9. -ai%&re ( mar/et tr&ct&re can occ&r 6hena. Koint prod&ct are prod&ced in varia(%e proportion.(. Koint prod&ct are prod&ced in fi"ed proportion.c. e"terna%itie e"it.d. fe6 (&er or e%%er are preent.

)*

;. In competitive mar/eta. Bih!6ae 6or/er tend to (e thoe that are mot prod&ctive.(. companie earn e"ce profit ( (etter ervin c&tomer need.c. fairne i acrificed in the interet of efficienc.d. firm dictate the &antit and &a%it of ood and ervice provided.

)* )

8. Con&mer overeint ref%ecta. (&er po6er.(. fai%&re ( mar/et tr&ct&re.c. fai%&re ( incentive.d. e"terna%itie.

)* )

@. Competition in the ca(%e te%eviion ervice ind&tr i f&rnihed (a. import.(. potentia% entrant.c. %are n&m(er of provider in %oca% mar/et.d. overnment re&%ation.

)*

10. Prod&cer &rp%& i the


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a. amo&nt paid to e%%er a(ove and (eond the va%&e received ( con&mer.(. amo&nt paid to e%%er a(ove and (eond the re&ired minim&m.c. amo&nt paid to e%%er.d. cot of prod&ction.

)*

11. he 6e%fare %o trian%e depicta. dead6eiht %oe &ffered ( con&mer.(. dead6eiht %oe &ffered ( prod&cer.c. dead6eiht %oe &ffered ( con&mer and prod&cer.d. %ot profit.

)* C

12. Profit temmin from mar/et po6er ref%ecta. hih price.(. &perior efficienc.c. e"ceptiona% capa(i%it.d. rapid ind&tr ro6th.

)* )

14. -ai%&re ( mar/et tr&ct&re i ca&ed (a. poitive pi%%over effect.(. poitive e"terna%itie.c. neative e"terna%itie.d. none of thee.

)*

17. G"terna%itie area. difference (et6een ocia% cot and ocia% (enefit.(. difference (et6een ocia% (enefit and private (enefit.c. ocia% cot.d. ocia% (enefit.

)*

15. Dnd&e mar/et po6er i indicated 6hen (&er inf%&ence re&%t ina. hiher than competitive price.(. %e than competitive o&tp&t.c. %e than competitive cot.d. e"ce profit.

)* C

19. Dti%it price and profit re&%ation i deined to addrea. fai%&re ( incentive.(. fai%&re ( mar/et tr&ct&re.c. poitive e"terna%itie.d. neative e"terna%itie.

)*


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1;. ) per &nit ta" on po%%&tiona. re&%t in dead6eiht %o.(. raie private (enefit.c. %o6er ocia% (enefit.d. %o6er private cot.

)* )

18. -rom an economic perpective, impoition of a per &nit ta" i on% advantaeo& ifa. the ocia% (enefit derived from added ta" reven&e are &fficient to overcome the ocia%

cot at a ri/!adE&ted rate of ret&rn..(. the ocia% (enefit derived from added ta" reven&e are &fficient to overcome the private

cot at a ri/!adE&ted rate of ret&rn..c. the (enefit derived from added ta" reven&e are &fficient to overcome the economic

cot tied to the dead6eiht %o in ocia% 6e%fare.d. poitive ta" reven&e are enerated.

)* C

1@. ociet' riht to a c%ean environment i aerted thro&h

a. -ine.(. tradea(%e emiion permit.c. &(id po%ic.d. price and profit re&%ation.

)* )

20. ?ho pa the economic cot of a ta" i an6ered at the point of ta"a. (&rden.(. aement.c. co%%ection.d. incidence.

)* )

21. he cot of po%%&tion ta"e are hared ( con&mer and prod&cer 6hena. &pp% i perfect% e%atic.(. &pp% i perfect% ine%atic.c. demand i perfect% ine%atic.d. none of the a(ove.

)*

22. ) price cei%in i a cot% and e%dom &ed mechanim fora. retrainin e"ce &pp%.

(. retrainin e"ce demand.c. co&nteractin the effect of fa%%in prod&ctivit.d. co&nteractin the effect of riin prod&ctivit.

)*

24. ) price f%oor i a cot% and common% &ed mechanim fora. retrainin e"ce &pp%.(. retrainin e"ce demand.c. co&nteractin the effect of fa%%in prod&ctivit.


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d. co&nteractin the effect of riin prod&ctivit.

)*

27. Gconomic rent are profit d&e toa. %&c/.(. &ni&e% prod&ctive inp&t

c. monopo% po6er.d. re&%ation.

)*

25. )(ove!norma% ret&rn earned in the time interva% that e"it (et6een 6hen a favora(%e inf%&ence onind&tr demand or cot condition firt tranpire and the time 6hen competitor entr or ro6th fina%%deve%op are ca%%eda. die&i%i(ri&m profit.(. a norma% rate of ret&rn on invetment.c. die&i%i(ri&m %oe.d. economic rent.

)* )

PRO4LEM

1. So%i!l 5#l$!r# Con%#pt+. Indicate 6hether each of the fo%%o6in tatement i tr&e or fa%e, and e"p%ain6h.

). Prod&cer &rp%& tend to fa%% a the &pp% c&rve (ecome more e%atic.

. Con&mer &rp%& tend to rie a demand (ecome more e%atic.

C. he mar/et demand c&rve indicate the minim&m price (&er are 6i%%in to pa at each%eve% of prod&ction.

. he mar/et &pp% c&rve indicate the minim&m price re&ired ( e%%er a a ro&p to (rinforth prod&ction.

G. Con&mer &rp%& i the amo&nt that con&mer are 6i%%in to pa for a iven ood orervice a(ove and (eond the amo&nt act&a%% paid.

)*

). r&e. ?herea con&mer &rp%& i c%oe% re%ated to the demand c&rve for a prod&ct,prod&cer &rp%& i c%oe% re%ated to the &pp% c&rve for a prod&ct. It mea&re the amo&nt( 6hich the tota% reven&e e"ceed the marina% cot of prod&ction. ) the &pp% c&rve(ecome more e%atic, the amo&nt of prod&cer &rp%& can (e e"pected to fa%%.

. -a%e. Con&mer &rp%& i the area &nder the demand c&rve that %ie a(ove the mar/et price.It repreent the amo&nt that con&mer are 6i%%in to pa for a iven ood or ervice min&the amo&nt that the are re&ired to pa. ) the demand c&rve (ecome more e%atic, thedifference (et6een perceived va%&e and mar/et price tend to diminih, and con&mer&rp%& fa%%.


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C. -a%e. he mar/et &pp% demand c&rve indicate the ma"im&m price (&er are 6i%%in topa to (rin forth each %eve% of prod&ction. he heiht of the mar/et demand c&rve mea&rethe ma"im&m va%&e p%aced on prod&ction ( (&er at each prod&ction %eve%.

. r&e. he mar/et &pp% c&rve indicate the minim&m price re&ired ( e%%er a a ro&p to(rin forth prod&ction. he heiht of the mar/et &pp% c&rve mea&re minim&mprod&ction cot at each and ever activit %eve%.

G. r&e. Con&mer &rp%& i the area &nder the demand c&rve that %ie a(ove the mar/et price.It repreent the amo&nt that con&mer are 6i%%in to pa for a iven ood or ervice min&the amo&nt that the are re&ired to pa. Con&mer &rp%& repreent va%&e derived fromcon&mption that con&mer are a(%e to enEo at #ero cot. It a%o decri(e the net (enefitderived ( con&mer from con&mption, 6here net (enefit i mea&red in the ee of thecon&mer. -rom the tandpoint of ociet a a 6ho%e, con&mer &rp%& i an attractivemea&re of the economic 6e%%!(ein of con&mer.

2. Comp#titi M!r"#t E'uili(rium. &ppoe demand and &pp% condition in the competitive mar/etfor &n/i%%ed %a(or are a fo%%o6

Q= 99.25 ! 5P emand>

Q= !2;.5 + 10P &pp%>

6here Q i mi%%ion of ho&r of &n/i%%ed %a(or and P i the 6ae rate per ho&r.

). Ca%c&%ate the ind&tr e&i%i(ri&m 6aeAemp%oment com(ination.

. Confirm o&r an6er raphica%%.

)*

). )%e(raica%%,

Q= Q99.25 ! 5P = !2;.5 +10P15P = @4.;5P = $9.25

oth demand and &pp% e&a% 45 (eca&e

emand Q= 99.25 ! 59.25> = 45

&pp% Q= !2;.5 +109.25> = 45

. -rom the raph, it i c%ear that Q= Q= 45 at a 6ae rate of $9.25 per ho&r. h&, P =$9.25 and Q = 45 i the e&i%i(ri&m 6aeAemp%oment com(ination.


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4. Comp#titi M!r"#t E'uili(rium. )&me demand and &pp% condition in the competitive mar/etfor &n/i%%ed %a(or are a fo%%o6

P = $15 ! 0.4Q emand>

P = $0.2Q &pp%>


). I%%&trate the ind&tr e&i%i(ri&m 6aeAemp%oment com(ination (oth raphica%% anda%e(raica%%.

. Ca%c&%ate the %eve% of e"ce &pp% &nemp%oment> if the -edera% minim&m 6ae i raiedfrom $5.15 to $9 per ho&r.

)*

). -rom the raph, it i c%ear that the competitive mar/et e&i%i(ri&m occ&r 6hen Q= Q=40000> at a 6ae rate of $9 per ho&r. h&, P = $9 and Q = 40 i the e&i%i(ri&m6aeAemp%oment com(ination. )%e(raica%%,

P = P$15 ! 0.4Q = $0.2Q0.5Q = 15Q = 40

oth demand and &pp% e&a% 40 6hen P = $9 (eca&e

emand P = $15 ! 0.440> = $9 per ho&r

&pp% P = $0.240> = $9 per ho&r


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. If the mar/et e&i%i(ri&m 6ae rate for &n/i%%ed %a(or i $9 per ho&r, an increae in theminim&m 6ae from $5.15 to $9 6i%% have no economic effect. he 6ae rate of $9 and thee&i%i(ri&m emp%oment of 40000> mi%%ion ho&r 6i%% (e maintained.

7. Comp#titi M!r"#t Surplu+. &ppoe demand and &pp% condition in the competitive mar/et for&n/i%%ed %a(or are a fo%%o6

P = $15 ! 0.4Q emand>

P = $4 + $0.1Q &pp%>


). I%%&trate the ind&tr e&i%i(ri&m 6aeAemp%oment com(ination (oth raphica%% anda%e(raica%%.

. Ca%c&%ate the %eve% of e"ce &pp% &nemp%oment> if the -edera% minim&m 6ae i raiedfrom $5.15 to $; per ho&r.

)*

). )%e(raica%%,

P = P$15 ! 0.4Q = $4 + $0.1Q0.7Q = 12Q = 40

oth demand and &pp% e&a% 40 6hen P = $9 (eca&e

emand P = $15 ! 0.440> = $9 per ho&r

&pp% P = $4 + $0.140> = $9 per ho&r

-rom the raph, it i c%ear that the competitive mar/et e&i%i(ri&m occ&r 6hen Q= Q=40000> at a 6ae rate of $9 per ho&r. h&, P = $9 and Q = 40 i the e&i%i(ri&m


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6aeAemp%oment com(ination.

. If the mar/et e&i%i(ri&m 6ae rate for &n/i%%ed %a(or i $9 per ho&r, an increae in theminim&m 6ae from $5.15 to $; 6i%% have a materia% economic effect on (oth emp%omentand the 6ae received ( %o6!6ae 6or/er. )t a minim&m 6ae of $;, &pp% of 75000>mi%%ion ho&r of &n/i%%ed %a(or i forthcomin, (&t demand fa%% to 25000> mi%%ion ho&r.Dnemp%oment of 20000> mi%%ion ho&r of &n/i%%ed %a(or i created ee raph>.

5. Comp#titi M!r"#t Surplu+. )&me demand and &pp% condition in the competitive mar/et for&n/i%%ed %a(or are a fo%%o6

Q= 99.25 ! 5P emand>

Q= !2;.5 + 10P &pp%>


). I%%&trate the ind&tr e&i%i(ri&m priceAo&tp&t com(ination (oth raphica%% anda%e(raica%%.

. Bo6 man %o6!6ae 6or/er 6i%% et %aid off if the -edera% minim&m 6ae i raied from$5.15 to $;.25 per ho&rF

)*

). -rom the raph, it i c%ear that Q= Q= 45 at a 6ae rate of $9.25 per ho&r. h&, P =$9.25 and Q = 45 i the e&i%i(ri&m 6ae!emp%oment com(ination.


19/43

)%e(raica%%,

Q= Q99.25 ! 5P = !2;.5 +10P15P = @4.;5P = $9.25

oth demand and &pp% e&a% 45 (eca&e

emand Q= 99.25 ! 59.25> = 45

&pp% Q= !2;.5 +109.25> = 45

. ?ith an increae in the minim&m 6ae from $5.15 to $; per ho&r, 5000> mi%%ion 6or/erho&r 6i%% et %aid off. If the mar/et e&i%i(ri&m 6ae rate for &n/i%%ed %a(or i $9.25 perho&r, an increae in the minim&m 6ae from $5.15 to $; 6i%% have a materia% economiceffect on (oth emp%oment and the 6ae received ( %o6!6ae 6or/er. )t a minim&m6ae of $;.25, &pp% of 75000> mi%%ion ho&r of &n/i%%ed %a(or i forthcomin, (&tdemand fa%% to 40000> mi%%ion ho&r. Dnemp%oment of 15000> mi%%ion ho&r of &n/i%%ed%a(or i created. ota% &nemp%oment of 15000> mi%%ion ho&r i compried of 5000>mi%%ion ho&r that et %aid off p%& 10000> mi%%ion ho&r of ne6 %a(or %oo/in for firt!timeemp%oment. hee are the &nemp%oed that 6ere never (efore hired, (&t are no6 %oo/infor emp%oment ee raph>.

9. P#r Unit T!6 !n7 El!+ti% *#m!n7. )&me that the &pp% of tic/et to an o&tdoor m&ic fetiva% inho&and Ha/, Ca%ifornia, i a f&nction of price &ch that

Q= 1P &pp%>

6here Q i the n&m(er of tic/et in tho&and> and P i the tic/et price. )%o a&me that the demand for &chconcert tic/et i perfect% e%atic at a price of $40. hi mean that the tic/et demand c&rve can (e dra6n a ahori#onta% %ine that pae thro&h $40 on the L!a"i.

). raph the tic/et demand and &pp% c&rve &in the price of tic/et a a f&nction of


20/43

&antit Q>. Hn thi ame raph, dra6 another tic/et &pp% c&rve (aed &pon thea&mption that a %oca% m&nicipa%it impoe a $5 ta" on each tic/et o%d to pa for po%iceprotection and c%ean!&p cot.

. Ca%c&%ate the tic/et price and &antit effect of the m&nicipa% ta". ?ith perfect% e%aticdemand, 6ho pa the economic (&rden of &ch a ta"F

)*

). If Q= 1P, then P = $1Q. iven a perfect% e%atic demand at a price of $40, demand and&pp% c&rve can (e dra6n a fo%%o6

. -rom the raph, it i c%ear that the e&i%i(ri&m tic/et price of $40 i maintained (oth (eforeand after the %oca% ta" to pa for po%ice protection and c%ean!&p cot. Bo6ever, (eca&edemand i perfect% e%atic, the &antit demanded fa%% from 40 tho&and to 25 tho&and&nit. Price remain the ame (efore and after the impoition of the %oca% ta". iven the dropin o&tp&t, prod&cer (ear the entire (&rden of pain for the %oca% ta" in the form of %ottic/et a%e opport&nitie. If tic/et demand i %e than perfect% e%atic, and it &re% i in the%on r&n, then it i reaona(%e to e"pect (oth prod&cer thro&h %ot a%e opport&nitie> andc&tomer thro&h hiher price> to (ear the cot of a ta" impoed on prod&cer.

;. P#r%#nt!# T!ri$$ !n7 El!+ti% *#m!n7. )&me that the &pp% of imported perona% comp&ter PC>from China i iven ( the e"preion

Q= 0.04125P &pp%>

6here Q i the n&m(er of PC o%d in tho&and> and P i the PC price. iven the avai%a(i%it of PC on theInternet, a&me that the demand for PC i perfect% e%atic at a price of $800. hi mean that the PC demandc&rve can (e dra6n a a hori#onta% %ine that pae thro&h $800 on the L!a"i.

). raph the PC demand and &pp% c&rve &in price a a f&nction of &antit Q>. Hn thi


21/43

ame raph, dra6 another &pp% c&rve (aed &pon the a&mption import form China are&(Eect to an 25 import tariff ta"> that i not impoed on import from other co&ntrie.

. Ca%c&%ate the PC price and &antit effect of the 25 import tariff. ?ith perfect% e%aticdemand, 6ho pa the economic (&rden of &ch a ta"F

)*

).

-rom the &pp% c&rve,Q= 0.04125PP = $42Q

he effect of the 25 import tariff i to hift the &pp% c&rve &p6ard. ?ith the 25 tariff

P = 1.25$42Q> = $70Q

. -rom the raph, it i c%ear that the e&i%i(ri&m PC price of $800 i maintained (oth (eforeand after impoition of the import tariff. eca&e demand i perfect% e%atic, the &antitdemanded fa%% from 25 tho&and to 20 tho&and &nit. Price remain the ame (efore andafter the impoition of the import ta". iven the drop in o&tp&t, Chinee prod&cer (ear theentire (&rden of pain for the import tariff in the form of %ot a%e opport&nitie. If PCdemand i %e than perfect% e%atic, and it &re% i in the %on r&n, then it i reaona(%e to

e"pect (oth prod&cer thro&h %ot a%e opport&nitie> and c&tomer thro&h hiherprice> to (ear the cot of an &ch ta" impoed on prod&cer.

8. S!l#+ T!6 !n7 El!+ti% *#m!n7. )&me that the &pp% of a (et!e%%in (oo/ at %oca% (oo/ torethro&ho&t the Dnited tate i a f&nction price &ch that

Q= !50 + 5P &pp%>

6here Q i the n&m(er of (oo/ o%d in tho&and> and P i the (oo/ price. iven the avai%a(i%it of thi (oo/on ama#on.com for $20, demand i perfect% e%atic at a price of $20.


22/43

). erive the (oo/ &pp% c&rve 6here price i e"preed a a f&nction of o&tp&t. Ca%c&%ate thee&i%i(ri&m %eve% of o&tp&t and %oca% (oo/tore a%e reven&e.

. erive a econd (oo/ &pp% c&rve (aed &pon the a&mption %oca% a%e are &(Eect to an8 a%e ta" that i not impoed on Internet a%e. Ca%c&%ate the (oo/ price and &antiteffect of the %oca% 8 a%e ta". ?ith perfect% e%atic demand, 6ho pa the economic

(&rden of &ch a ta"F

)*

). ?ith perfect% e%atic demand at a price of $20, the &pp% c&rve indicate the e&i%i(ri&m%eve% of o&tp&t a

Q= !50 + 5P = !50 + 520> = 50000>

= 50$20>

= $1,000000>

. -rom the &pp% c&rve, 6hen price i e"preed a a f&nction of o&tp&t

Q= !50 + 5P5P = 50 + QP = $10 + $0.2Q

he effect of the a%e ta" i to hift the &pp% c&rve &p6ard. ?ith the 8 a%e ta", the ne6&pp% c&rve i

P = 1.08$10 + $0.2Q>

= $10.8 + $0.219Q0.219Q= !10.8 + PQ= !50 + 7.94P

?ith perfect% e%atic demand at a price of $20, thi pot!ta" &pp% c&rve indicate thee&i%i(ri&m %eve% of o&tp&t a

Q= !50 + 7.94P = !50 + 7.9420> = 72.9000>

= 72.9$20>

= $852000> = $852000>

It i c%ear that the e&i%i(ri&m (oo/ price of $20 i maintained (oth (efore and afterimpoition of the a%e ta". eca&e demand i perfect% e%atic, the &antit demanded from%oca% (oo/tore fa%% from 50 tho&and to 72.9 tho&and &nit. Price remain the ame(efore and after the impoition of the a%e ta". iven the drop in %oca% a%e, %oca%(oo/tore (ear the entire (&rden of pain for the a%e ta" in the form of %ot a%eopport&nitie. In the %on r&n, demand tend to (e ome6hat e%atic and it i reaona(%e toe"pect (oth prod&cer thro&h %ot a%e opport&nitie> and c&tomer thro&h hiher


23/43

price> to (ear the cot of an &ch ta" impoed on prod&cer.

@. R#%%lin F## !n7 El!+ti% *#m!n7. )&me that the 6ee/% &pp% of 19!o&nce (ott%e of oda atconvenience tore in the 6in Citie of Minneapo%i and t. Pa&% i a f&nction of price &ch that

Q= !20 + 80P &pp%>

6here Q i the n&m(er of oda o%d in convenience tore in tho&and> and P i the oda price. )&medemand i perfect% e%atic at a price of $1.

). erive the oda &pp% c&rve 6here price i e"preed a a f&nction of o&tp&t. Ca%c&%ate thee&i%i(ri&m %eve% of o&tp&t and convenience tore a%e reven&e.

. erive a econd c&rve (aed &pon the a&mption convenience tore a%e (ecome &(Eect toa 5 cent recc%in fee. Ca%c&%ate the price and &antit effect of the recc%in fee. ?ithperfect% e%atic demand, 6ho pa the economic (&rden of &ch a fee

)*

). ?ith perfect% e%atic demand at a price of $1, the &pp% c&rve indicate the e&i%i(ri&m%eve% of o&tp&t a

Q= !20 + 80P = !20 + 801> = 90000>

= 90$1> = $90000>

. -rom the &pp% c&rve, 6hen price i e"preed a a f&nction of o&tp&t

Q= !20 + 80P80P = 20 + QP = $0.25 + $0.0125Q

he effect of the recc%in fee i to ca&e a para%%e% &p6ard hift the &pp% c&rve. ?ith the5 cent recc%in fee, the ne6 &pp% c&rve i

P = $0.25 + $0.0125Q+ $0.05 = $0.4 + $0.0125Q0.0125Q= !0.4 + PQ= !27 + 80P

?ith perfect% e%atic demand at a price of $1, thi pot!recc%in fee &pp% c&rve indicatethe e&i%i(ri&m %eve% of o&tp&t a

Q= !27 + 80P = !27 + 801> = 59000>

= 59$1> = $59000>


24/43

It i c%ear that the e&i%i(ri&m oda price of $1 i maintained (oth (efore and afterimpoition of the recc%in fee. eca&e demand i perfect% e%atic, the &antit demandedfrom %oca% convenience tore fa%% from 90 tho&and to 59 tho&and &nit per 6ee/. Priceremain the ame (efore and after the impoition of the recc%in fee. iven the drop ina%e, convenience tore (ear the entire (&rden of pain for the recc%in fee in the form of%ot a%e opport&nitie. In the %on r&n, demand tend to (e ome6hat e%atic and it ireaona(%e to e"pect (oth prod&cer thro&h %ot a%e opport&nitie> and c&tomer

thro&h hiher price> to (ear the cot of an &ch fee impoed on con&mer.

10. Fr!n%hi+# T!6 !n7 In#l!+ti% *#m!n7. )&me the &pp% of (road(and ervice in the Cit of?i%%iam(&r can (e decri(ed a

Q= 1P &pp%>

6here Q i tho&and of home erved per month 6ith (road(and ervice, and P i the price per month. )%oa&me that (road(and ervice demand i perfect% ine%atic at a &antit of 40000>. hi mean that the(road(and demand c&rve can (e dra6n a a vertica% %ine that pae thro&h 40000> on the N!a"i.

). raph the (road(and demand and &pp% c&rve &in price a a f&nction of the &antit of

ervice demanded Q>. Hn thi ame raph, dra6 another &pp% c&rve (aed &pon thea&mption that the Cit of ?i%%iam(&r impoe a franchie ta" that increae providercot ( $5 per c&tomer ever month.

. Ca%c&%ate the price and o&tp&t effect of the Cit of ?i%%iam(&r franchie ta". ?ithperfect% ine%atic e%atic demand, 6ho pa the cot of thi ta"F

)*

). If Q= 1P, then P = $1Qif price i e"preed a a f&nction of &antit. iven a perfect%ine%atic demand for (road(and at a &antit of 40000>, (road(and demand and &pp%c&rve can (e dra6n a fo%%o6


25/43

. -rom the raph, it i c%ear that the e&i%i(ri&m month% o&tp&t %eve% of 40000> homeerved i maintained (oth (efore and after impoition of the Cit of ?i%%iam(&r franchieta". Bo6ever, (eca&e the demand for (road(and ervice i perfect% ine%atic, the erviceprice rie from $40 to $45 per month. he n&m(er of home erved remain the ame (&tcon&mer price rie after the impoition of the Cit of ?i%%iam(&r franchie ta". iventhe $5 rie in ervice price, con&mer (ear the 6ho%e (&rden of pain for the Cit of

?i%%iam(&r franchie ta" 6hen demand i perfect% ine%atic. In the %on r&n, demandtend to (e ome6hat e%atic and it i reaona(%e to e"pect (oth prod&cer thro&h %ot a%eopport&nitie> and c&tomer thro&h hiher price> to (ear the cot of an &ch ta"impoed on prod&cer. Hf co&re, the theoretica% cae of perfect% ine%atic demand i thepo%ar oppoite of the perfect% e%atic demand c&rve faced ( firm in perfect% competitivemar/et. Conideration of thi po%ar e"treme i a he%pf&% mean for &ndertandin the effectof the price e%aticit of demand on price, marina% cot and &pp% in competitivemar/et.

11. Fr!n%hi+# T!6 !n7 In#l!+ti% *#m!n7. )&me the &pp% of e6er and 6ater ervice in the Cit ofPort%and can (e decri(ed a

Q= !20 + 0.5P &pp%>

6here Q i tho&and of home erved per month 6ith e6er and 6ater ervice, and P i the price per month.)%o a&me that e6er and 6ater ervice demand i perfect% ine%atic at a &antit of 25000>. hi mean thatthe e6er and 6ater demand c&rve can (e dra6n a a vertica% %ine that pae thro&h 25000> on the N!a"i.

). raph the e6er and 6ater demand and &pp% c&rve &in price a a f&nction of the&antit of ervice demanded Q>. Hn thi ame raph, dra6 another &pp% c&rve (aed&pon the a&mption that the Cit of Port%and impoe a franchie ta" that increae providercot ( $10 per c&tomer ever month.

. Ca%c&%ate the price and o&tp&t effect of the Cit of Port%and franchie ta". ?ith perfect%

ine%atic demand, 6ho pa the cot of thi ta"F

)*

). -rom the &pp% c&rve, (efore impoition of the franchie ta"

Q= !20 + 0.5P0.5P = 20 + QP = $70 + $2Q

)fter impoition of the franchie ta",

P = $70 + $2Q+ $10 = $50 + $2Q

iven a perfect% ine%atic demand for e6er and 6ater at a &antit of 25000>, e6er and6ater demand and &pp% c&rve can (e dra6n a fo%%o6


26/43

. -rom the raph, it i c%ear that the e&i%i(ri&m month% o&tp&t %eve% of 25000> homeerved i maintained (oth (efore and after impoition of the Cit of Port%and franchie ta".Bo6ever, (eca&e the demand for e6er and 6ater ervice i perfect% ine%atic, the erviceprice rie from $@0 to $100 per month. he n&m(er of home erved remain the ame (&tcon&mer price rie after the impoition of the Cit of Port%and franchie ta". iven the $10rie in ervice price, con&mer (ear the 6ho%e (&rden of pain for the Cit of Port%andfranchie ta" 6hen demand i perfect% ine%atic. In the %on r&n, demand tend to (eome6hat e%atic and it i reaona(%e to e"pect (oth prod&cer thro&h %ot a%eopport&nitie> and c&tomer thro&h hiher price> to (ear the cot of an &ch ta"impoed on prod&cer. Hf co&re, the theoretica% cae of perfect% ine%atic demand i the

po%ar oppoite of the perfect% e%atic demand c&rve faced ( firm in perfect% competitivemar/et. Conideration of thi po%ar e"treme i a he%pf&% mean for &ndertandin the effectof the price e%aticit of demand on price, marina% cot and &pp% in competitivemar/et.

12. Fr!n%hi+# T!6 !n7 In#l!+ti% *#m!n7. )&me the &pp% of e6er and 6ater ervice in the Cit ofreenvi%%e, *orth Caro%ina, can (e decri(ed a

Q= !150 + 2P &pp%>

6here Q i tho&and of home erved per month 6ith e6er and 6ater ervice, and P i the price per month.)%o a&me that e6er and 6ater ervice demand i perfect% ine%atic at a &antit of 50000>.

). erive the e6er and 6ater ervice &pp% c&rve 6here price i e"preed a a f&nction ofo&tp&t. Ca%c&%ate the e&i%i(ri&m %eve% of o&tp&t and e6er and 6ater &ti%it a%e reven&e.

. erive a econd e6er and 6ater ervice &pp% c&rve (aed &pon the a&mption that evermonth the Cit of reenvi%%e impoe a $25 per c&tomer franchie ta". Ca%c&%ate thee&i%i(ri&m %eve% of o&tp&t and e6er and 6ater &ti%it a%e reven&e 6ith the ta". ?ithperfect% ine%atic demand, 6ho pa the economic (&rden of &ch a ta"F

)*


27/43

). ?ith perfect% ine%atic demand at a &antit of 50000>, the &pp% c&rve indicate thee&i%i(ri&m price a

Q= !150 + 2P2P = 150 + QP = $;5 + $0.5Q

= $;5 + $0.550> = $100

= 50$100> = $5,000000>

. he effect of a $25 per c&tomer franchie fee i to hift the &pp% c&rve &p6ard in apara%%e% fahion. ?ith the franchie fee

P = $;5 + $0.5Q+ $25 = $100 + $0.550> = $125 inc%&din the $25 ta">

= 50$100> = $5,000000>

?ith perfect% ine%atic demand and a &antit of 50000>, 6ater and e6er &ti%it reven&eare &naffected ( the franchie ta" 6hich i 6ho%% paed a%on to con&mer. he price tocon&mer E&mp to $125 per month, (&t the reven&e received ( the &ti%it remain fi"ed at$100 per c&tomer. eca&e demand i perfect% ine%atic, the c&tomer (ear a%% of theeconomic (&rden of the ta". In the %on r&n, demand tend to (e ome6hat e%atic and it ireaona(%e to e"pect (oth prod&cer thro&h %ot a%e opport&nitie> and c&tomerthro&h hiher price> to (ear the cot of an &ch ta" impoed on prod&cer. Hf co&re,the theoretica% cae of perfect% ine%atic demand i the po%ar oppoite of the perfect% e%atic

demand c&rve faced ( firm in perfect% competitive mar/et. Conideration of thi po%are"treme i a he%pf&% mean for &ndertandin the effect of the price e%aticit of demand onprice, marina% cot and &pp% in competitive mar/et.

14. P#r%#nt!# T!6 !n7 In#l!+ti% *#m!n7. )&me the &pp% of ca(%e : ervice in the Cit of anMarco, e"a, can (e decri(ed a

Q= !5 + 0.5P &pp%>

6here Q i tho&and of home erved per month 6ith ca(%e : ervice, and P i the price per month. )%oa&me that ca(%e : ervice demand i perfect% ine%atic at a &antit of 25000>.

). erive the ca(%e : ervice &pp% c&rve 6here price i e"preed a a f&nction of o&tp&t.Ca%c&%ate the e&i%i(ri&m %eve% of o&tp&t and ca(%e : &ti%it a%e reven&e.

. erive a econd ca(%e : ervice &pp% c&rve (aed &pon the a&mption that ever monththe Cit of an Marco impoe a 25 of reven&e franchie ta" on the %oca% ca(%e :compan. Ca%c&%ate the e&i%i(ri&m %eve% of o&tp&t and ca(%e : a%e reven&e 6ith the ta".?ith perfect% ine%atic demand, 6ho pa the economic (&rden of &ch a ta"F

)*


28/43

). ?ith perfect% ine%atic demand at a &antit of 25000>, the &pp% c&rve indicate thee&i%i(ri&m price a

Q= !5 + 0.5P0.5P = 5 + QP = $10 + $2Q = $10 + $225>

= $90

= 25$90> = $1,500000>

. he effect of a 25 of reven&e franchie fee i to hift the &pp% c&rve &p6ard. ?ith thefranchie fee

P = 1.25$10 + $2Q> = $12.5 + $2.525> = $;5 inc%&din ta"e of $15>

= 25$90> = $1,500000>

?ith perfect% ine%atic demand and a &antit of 25000>, ca(%e : compan reven&e are&naffected ( the franchie ta" 6hich i 6ho%% paed a%on to con&mer. he price tocon&mer E&mp to $;5 per month, (&t the reven&e received ( the &ti%it remain fi"ed at$90 per c&tomer. eca&e demand i perfect% ine%atic, the c&tomer (ear a%% of theeconomic (&rden of the ta". In the %on r&n, demand tend to (e ome6hat e%atic and it ireaona(%e to e"pect (oth prod&cer thro&h %ot a%e opport&nitie> and c&tomerthro&h hiher price> to (ear the cot of an &ch ta" impoed on prod&cer. Hf co&re,the theoretica% cae of perfect% ine%atic demand i the po%ar oppoite of the perfect% e%aticdemand c&rve faced ( firm in perfect% competitive mar/et. Conideration of thi po%ar

e"treme i a he%pf&% mean for &ndertandin the effect of the price e%aticit of demand onprice, marina% cot and &pp% in competitive mar/et.

17. R#ul!tion Co+t+. Ointon Component, Inc., prod&ce e%ectronic component for ca(%e : tem.iven vioro& import competition, price are ta(%e at $7,500 per &nit in thi dnamic and ver competitivemar/et. Ointon' ann&a% tota% cot C> and marina% cot MC> re%ation are

C = $;,000,000 + $500Q + $0.5Q2

MC = CAQ = $500 + $1Q

6here Q i o&tp&t.

&ppoe the Hcc&pationa% Bea%th and afet )dminitration HB)> ha recent% r&%ed that the compan m&tinta%% e"penive ne6 hie%din e&ipment to &ard aaint 6or/er inE&rie. hi 6i%% increae the marina% cotof man&fact&rin ( $100 per &nit. Ointon' fi"ed e"pene, 6hich inc%&de a re&ired ret&rn on invetment,6i%% (e &naffected.

). Ca%c&%ate Ointon' profit!ma"imi#in priceAo&tp&t com(ination and economic profit(efore inta%%ation of the HB)!mandated hie%din e&ipment.

. Ca%c&%ate the profit!ma"imi#in priceAo&tp&t com(ination and economic profit after


29/43

Ointon ha met HB) &ide%ine.

C. Compare o&r an6er to part ) and . ?ho pa the economic (&rden of meetin HB)&ide%ineF

)*

). If price are ta(%e at $7,500 per &nit, Ointon 6i%% ma"imi#e profit ( ettin M = MC =$7,500. efore the HB)!mandated increae in cotM = MC$7,500 = $500 + $1QQ = 7,000

Gconomic Profit = PQ ! C = $7,5007,000> ! $;,000,000 + $5007,000> + $0.57,0002> = $1,000,000

eca&e economic profit are poitive, thi competitive mar/et i not in %on!r&ne&i%i(ri&m.

. )fter the HB)!mandated increae in cot of $100, Ointon' optima% activit %eve%chane a fo%%o6

M = MC + $100$7,500 = $900 + $1QQ = 4,@00

Gconomic Profit = PQ ! C = $7,5004,@00> ! $;,000,000 + $9004,@00> + $0.54,@002> = $905,000

C. In thi intance, Ointon and it emp%oee pa the entire cot of meetin HB)&ide%ine. he n&m(er of &nit o%d fa%% from 7,000 to 4,@00 in repone to the $100increae in marina% cot, from $500 to $900. Gconomic profit fa%% from $1 mi%%ion to$905,000 per ear, o the o6ner of Ointon &ffer a a re&%t of the HB) mandate.Gmp%oee &ffer too, (eca&e the drop in prod&ction 6i%% &ndo&(ta(% %ead to a drop inemp%oment opport&nitie. iven the e%atic nat&re of the firm' demand c&rve, price do notrie at a%%. C&tomer (ear none of the (&rden of the HB)!mandated cot increae.

15. Compul+or 4#n#$it Co+t+. Co%&m(ia -edera% avin R . ) a re&%t,Co%&m(ia' marina% cot of doin (&ine 6i%% rie ( $25 per &nit. Co%&m(ia' fi"ed e"pene, 6hich inc%&dea re&ired ret&rn on invetment, 6i%% (e &naffected.


30/43

). Ca%c&%ate Co%&m(ia' profit!ma"imi#in priceAo&tp&t com(ination and economic profit(efore meetin H< &ide%ine.

. Ca%c&%ate the profit!ma"imi#in priceAo&tp&t com(ination and economic profit afterCo%&m(ia ha met H< &ide%ine.

C. Compare o&r an6er to part ) and . ?ho pa the economic (&rden of meetin H and marina% cot MC> re%ation for a tpica% forein &pp%ier of codechec/in and oft6are verification ervice Q> are

C = $1,500,000 + $0.00005Q2

MC = CAQ = $0.0001Q

). Ca%c&%ate the optima% priceAo&tp&t com(ination and economic profit for a tpica% forein&pp%ier prior to impoition of the tariff.

. Ca%c&%ate the optima% priceAo&tp&t com(ination and economic profit for a tpica% forein&pp%ier after impoition of the tariff.

C. Compare o&r an6er to part ) and . ?ho pa the economic (&rden of the import tariffF

)*

). he tpica% &pp%ier of code chec/in and oft6are verification ervice 6i%% ma"imi#e

profit ( ettin M = MC. Prior to impoition of the tariff, et

M = MC$25 = $0.0001QQ = 250,000000>

Gconomic Profit = PQ ! C = $25250,000> ! $1,500,000 + $0.00005250,0002> = $1,925,000

. )fter impoition of the tariff, marina% cot a%o ref%ect the import tariff

M = MC + Import fee25 =1.25$0.0001Q>25 =$0.000125QQ = 200,000

Gconomic Profit = PQ ! C = $25200,000> ! 1.25$1,500,000 + $0.00005200,0002>= $925,000

C. hi competitive ind&tr i in die&i%i(ri&m (eca&e economic profit are (ein earned (


34/43

the tpica% forein &pp%ier of code chec/in and oft6are verification ervice (oth (eforeand after impoition of the e"port fee. he effect of the e"port d&t on code chec/in andoft6are verification ervice i to c&t economic profit ( $1 mi%%ion per ear for a tpica%firm, and to red&ce o&tp&t ( 50,000 &nit per ear. H6ner of the compan and itemp%oee hare the economic (&rden of pain for the e"port fee in term of %ot profitand %ot emp%oment opport&nitie, repective%. iven the e%atic nat&re of the firm demandc&rve, price do not rie at a%%. eatt%e oft6are and other %are c&tomer (ear none of the

(&rden of the tariff!mandated cot increae.

1@. Pri%# Floor+ !n7 Con+um#r Surplu+. he D. . 6heat crop averae a(o&t 2 (i%%ion (&he% per ear,and i a(o&t 10 percent of the 20 (i%%ion!(&he% forein 6heat crop. pica%%, the mar/et ha a re%ative% oodetimate of the 6heat crop from the Dnited tate and Canada, (&t 6heat crop from the o&thern Bemiphereare m&ch harder to predict. )rentina' 6heat acreae varie dramatica%% from one ear to another, for e"amp%e,and )&tra%ia ha hard!to!predict rainfa%% in /e 6heat prod&ction area. o i%%&trate ome of the cot in ocia%6e%fare from aric&%t&ra% price &pport, a&me the fo%%o6in mar/et &pp% and demand condition for 6heat

P = $2 + 0.001Q Mar/et &pp%>

P = $7,80 ! $0.0007Q Mar/et emand>

6here Q i o&tp&t in (&he% of 6heat in mi%%ion>, and P i the mar/et price per (&he%.

). raph and ca%c&%ate the e&i%i(ri&m priceAo&tp&t o%&tion.

. De thi raph to he%p o& a%e(raica%% determine the %o in con&mer &rp%& d&eimpoition of a $7.70 per (&he% price &pport proram. G"p%ain.

)*

).


35/43

o find the mar/et e&i%i(ri&m &antit, et e&a% the mar/et &pp% and mar/et demandc&rve 6here price i e"preed a a f&nction of &antit, and Q= Q

&pp% = emand$2 + $0.001Q = $7.8 ! $0.0007Q0.0017Q = 2.8Q = 2,000 mi%%ion>

herefore, the e&i%i(ri&m price!o&tp&t com(ination i a mar/et price of $7 6ith ane&i%i(ri&m o&tp&t of 2,000 mi%%ion> (&he%.

. *ote that 6ith a $7.70 price &pport, mar/et demand 6i%% e&a%

Q= 12,000 ! 2,500P = 12,000 ! 2,5007.70> = 1,000 mi%%ion>

?ith a $7.70 overnment price &pport, the va%&e of con&mer &rp%& i e&a% to the reion(e%o6 the mar/et demand c&rve et a(ove the price f%oor of $7.70. eca&e the area of a&ch a trian%e i one!ha%f the va%&e of the (ae time the heiht, the va%&e of con&mer

&rp%& e&a%

Con&mer &rp%&P= 1,000 $7.80 ! $7.70>

= $200 mi%%ion>

In a free mar/et, the va%&e of con&mer &rp%& i e&a% to the reion a(ove the mar/et&pp% c&rve at the mar/et e&i%i(ri&m price of $7. eca&e the area of a &ch a trian%e ione!ha%f the va%&e of the (ae time the heiht, the va%&e of con&mer &rp%& e&a%


36/43

Con&mer &rp%&-M= 2,000 $7.80 ! $7>

= $800 mi%%ion>

herefore, the %o in con&mer &rp%& ca&ed ( the $7.70 overnment price &pportproram i

hi %o in con&mer &rp%& ca&ed ( the $7.70 overnment price &pport proram iho6n in the raph ( the reion $7$7.70).

20. Pri%# Floor+ !n7 Pro7u%#r Surplu+. he D. . 6heat crop averae a(o&t 2 (i%%ion (&he% per ear,and i a(o&t 10 percent of the 20 (i%%ion!(&he% forein 6heat crop. pica%%, the mar/et ha a re%ative% oodetimate of the 6heat crop from the Dnited tate and Canada, (&t 6heat crop from the o&thern Bemiphereare m&ch harder to predict. )rentina' 6heat acreae varie dramatica%% from one ear to another, for e"amp%e,and )&tra%ia ha hard!to!predict rainfa%% in /e 6heat prod&ction area. o i%%&trate ome of the cot in ocia%

6e%fare from aric&%t&ra% price &pport, a&me the fo%%o6in mar/et &pp% and demand condition for 6heat

Q= !2,000+ 1,000P Mar/et &pp%>

Q= 12,000 ! 2,500P Mar/et emand>

6here Q i o&tp&t in (&he% of 6heat in mi%%ion>, and P i the mar/et price per (&he%.

). raph and ca%c&%ate the e&i%i(ri&m priceAo&tp&t o%&tion. De thi raph to he%p o&a%e(raica%% determine the amo&nt of &rp%& prod&ction the overnment 6i%% (e forced to(& if it impoe a &pport price of $7.70 per (&he%.

. De thi raph to he%p o& a%e(raica%% determine the ain in prod&cer &rp%& d&e to theprice &pport proram. G"p%ain.

)*

). he mar/et &pp% c&rve i iven ( the e&ation

Q= !2,000 + 1,000P

or, o%vin for price,

1,000P = 2,000 + Q

P = $2 + $0.001Q

he mar/et demand c&rve i iven ( the e&ation

Q= 12,000 ! 2,500P

or, o%vin for price,

2,500P = 12,000 ! QP = $7.8 ! $0.0007Q


37/43

o find the mar/et e&i%i(ri&m %eve% for price and &antit, imp% et the mar/et &pp%and mar/et demand c&rve e&a% to one another o that Q= Q. o find the mar/ete&i%i(ri&m price, e&ate the mar/et demand and mar/et &pp% c&rve 6here &antit ie"preed a a f&nction of price

&pp% = emand

!2,000 + 1,000P = 12,000 ! 2,500P4,500P = 17,000P = $7

o find the mar/et e&i%i(ri&m &antit, et e&a% the mar/et &pp% and mar/et demandc&rve 6here price i e"preed a a f&nction of &antit, and Q= Q

&pp% = emand$2 + $0.001Q = $7.8 ! $0.0007Q0.0017Q = 2.8Q = 2,000 mi%%ion>

herefore, the e&i%i(ri&m price!o&tp&t com(ination i a mar/et price of $7 6ith ane&i%i(ri&m o&tp&t of 2,000 mi%%ion> (&he%. he effect of a overnment price &pport can(e een ( notin that 6ith a $7.70 mar/et price &pp% 6i%% e&a%

Q= !2,000 + 1,000P = !2,000 + 1,0007.70> = 2,700 mi%%ion>

?ith a $7.70 price &pport, mar/et demand 6i%% e&a%

Q= 12,000 ! 2,500P = 12,000 ! 2,5007.70>

= 1,000 mi%%ion>

herefore, 6ith a $7.70 price &pport, &rp%& prod&ction i

&rp%& Prod&ction = Q! Q = 2,700 ! 1,000 = 1,700 mi%%ion>


38/43

. ?ith a $7.70 overnment price &pport, the va%&e of prod&cer &rp%& i e&a% to the reiona(ove the mar/et &pp% c&rve at the mar/et price of $7.70. eca&e the area of a &ch atrian%e i one!ha%f the va%&e of the (ae time the heiht, the va%&e of con&mer &rp%&e&a%

Prod&cer &rp%&P= 2,700 $7.70 ! $2>

= $2,880 mi%%ion>

In a free mar/et, the va%&e of prod&cer &rp%& i e&a% to the reion a(ove the mar/et

&pp% c&rve at the mar/et e&i%i(ri&m price of $7. eca&e the area of a &ch a trian%e ione!ha%f the va%&e of the (ae time the heiht, the va%&e of con&mer &rp%& e&a%

Prod&cer &rp%&-M= 2,000 $7 ! $2>

= $2,000 mi%%ion>

herefore, the ain in prod&cer &rp%& ca&ed ( the $7.70 overnment price &pportproram i $880 mi%%ion and i ho6n in the raph ( the reion $7$7.70).

ain in Prod&cer &rp%& = Prod&cer &rp%&P! Prod&cer &rp%&-M = $2,880 ! $2,000

= $880 mi%%ion>

21. R#ul!tion Co+t+. -in%andia, Inc., man&fact&rer mo%ded p%atic prod&ct &ed to improve ind&tria%prod&ctivit. &ppoe the Hcc&pation Bea%th and afet )dminitration HB)> ha re&ired the firm toenhance the d&ra(i%it of it pop&%ar afet he%met at a cot of $10 per &nit. Prior to thee cot, -in%andia'ann&a% man&fact&rin cot of thi item are

C = $225,000 + $20Q + $0.001Q2

MC = CAQ = $20 + $0.002Q


39/43

6here Q i &nit prod&ced per ear and C inc%&de a norma% rate of ret&rn on invetment.

). Ca%c&%ate -in%andia' profit at the profit!ma"imi#in activit %eve% if price in the ind&trare ta(%e at $50 per &nit, and therefore P = M = $50.

. Ca%c&%ate -in%andia' optima% price, o&tp&t, and profit %eve% if the HB) mandated cot

increae can (e f&%% paed onto c&tomer.

C. etermine the effect on o&tp&t and profit if -in%andia i not a(%e to pa onto con&mer anof the proEected cot increae, and m&t intead a(or( it.

)*


M = MC$50 = $20 + $0.002Q0.002Q = 40

Q = 15,000

= ! C

= $5015,000> ! $225,000 ! $2015,000> ! $0.00115,0002> = $0

. If the $10 re&%ation!ind&ced cot increae can (e f&%% paed onto c&tomer, then M =$90 = $50 + $10. herefore, the optima% P = M = $90 and the optima% activit %eve% i&naffected (eca&e

M + $10 = MC + $10$90 = $40 + $0.002Q

0.002Q = 40Q = 15,000

= ! C

= $9015,000> ! $225,000 ! $4015,000> ! $0.00115,0002> = $0

C. In the hort!r&n, price remain at P = M = $50 6hi%e marina% cot rie ( $10 per &nitand the compan 6i%% (e forced to c&rtai% o&tp&t and &ffer %oe

M = MC + $10$50 = $40 + 0.0029Q

0.002Q = 20Q = 10,000

= ! C

= $5010,000> ! $225,000 ! $4010,000> ! $0.00110,0002> = !$125,000 a %o>

iven thee ann&a% %oe, the compan 6o&%d no %oner (e earnin a norma% rate of ret&rnon invetment, and 6o&%d event&a%% (e forced o&t of (&ine.


40/43

22. R#ul!tion Co+t+. Htta6a Contr&ction,


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Q = 8

= ! C

= $100,0008> ! $100,000 ! $90,0008> ! $2,50082> = $90,000

eca&e Htta6a i ti%% ma/in an e"ce profit, the compan 6i%% contin&e to operate in the

%on!r&n.

24. Co+t+ o$ R#ul!tion. he )ppa%achian Coa% Compan e%% coa% to e%ectric &ti%itie in the o&theat.Dnfort&nate%, )ppa%achian' coa% ha hih partic&%ate content and, therefore, the compan i advere% affected( tate and %oca% re&%ation overnin mo/e and d&t emiion at it c&tomer' e%ectricit!eneratin p%ant.)ppa%achian' tota% cot and marina% cot re%ation are

C = $250,000 + $5Q + $0.0002Q2

MC = CAQ = $5 + $0.0007Q

6here Q i ton of coa% prod&ced per month and C inc%&de a norma% rate of ret&rn on invetment.

). Ca%c&%ate )ppa%achian' profit at the profit!ma"imi#in activit %eve% if price in the ind&trare ta(%e at $25 per ton, and therefore P = M = $25.

. Ca%c&%ate )ppa%achian' optima% price, o&tp&t, and profit %eve% if a ne6 tate re&%ationre&%t in a $400,000 fi"ed cot increae that cannot (e paed onto c&tomer.

)*


M = MC

$25 = $5 + $0.0007Q0.0007Q = 20Q = 50,000

= ! C

= $2550,000> ! $250,000 ! $550,000> ! $0.000250,0002> = $250,0000

. If the $400,000 re&%ation!ind&ced cot increae cannot (e paed onto c&tomer, then M= $25 a (efore. herefore, the optima% P = M = $25 and the optima% activit %eve% i&naffected (eca&e

M = MC$25 = $5 + $0.0007Q0.0007Q = 20Q = 50,000

Bo6ever, profit i affected (eca&e

= ! C

= $2550,000> ! $550,000 ! $550,000> ! $0.000250,0002>


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= !$50,000 a %o>

iven thee month% %oe, )ppa%achian 6o&%d no %oner (e earnin a norma% rate of ret&rnon invetment, and 6o&%d event&a%% (e forced o&t of (&ine.

27. Comp#titi Str!t#. Carr Dnder6ood r&n a" Preparation ervice, Inc., a ma%% firm that offertime% ta" preparation ervice in H/%ahoma Cit. iven the %are n&m(er of competitor, the fact that ta"

preparer re% heavi% &pon tandard ta"!preparation oft6are, and the %ac/ of entr (arrier, it i reaona(%e toa&me that the ta" form preparation mar/et i perfect% competitive and that the averae $150 price e&a%marina% reven&e, P = M = $150. )&me that P' ann&a% operatin e"pene are tpica% of evera% &chfirm operatin in the %oca% mar/et, and can (e e"preed ( the fo%%o6in tota% and marina% cot f&nction

C = $840,000 + $10Q + $0.005Q2

MC = $10 + $0.01Q

6here C i tota% cot per ear, MC i marina% cot, and Q i the n&m(er of c%ient erved. ota% cot inc%&de anorma% profit and a%%o6 for Dnder6ood' emp%oment opport&nit cot.

). Ca%c&%ate P' profit!ma"imi#in o&tp&t %eve%.

. Ca%c&%ate P' economic profit at thi activit %eve%. I thi activit %eve% &taina(%e in the%on r&nF

)*

). he optima% o&tp&t %eve% can (e determined ( ettin marina% reven&e e&a% to marina%cot and o%vin for Q

M = MC$150 = $10 + $0.01Q

0.01Q = 170Q = 17,000 ta" form per ear

. eca&e the cot of capita% and o6ner!operator emp%oment opport&nit cot are a%readinc%&ded in the tota% cot f&nction, an e"ce of reven&e over tota% cot repreenteconomic profit. )t thi o&tp&t %eve%, ma"im&m economic profit are

= ! C

= $150Q ! $840,000 + $10Q + $0.005Q2 = $15017,000> ! $840,000 + $1017,000> + $0.00517,0002>= $150,000

he Q = 17,000 activit %eve% re&%t in economic profit of $80,000 per ear, meanin thatP i a(%e to provide Dnder6ood 6ith an income %eve% that i a(ove Dnder6ood'emp%oment opport&nit cot and a%o cover the norma% or ri/!adE&ted rate of ret&rn oninvetment. Gither the %oca% mar/et i in die&i%i(ri&m and Dnder6ood i earnin temporardie&i%i(ri&m profit, or Dnder6ood i an epecia%% capa(%e ta" preparer and i earnineconomic rent icardian rent>.


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25. Comp#titi Str!t#. o( Ice o6n and operate o(' M&ic Center, ! $100,000 + $105,000> + $0.0055,0002> = $25,000

he Q = 5,000 activit %eve% re&%t in economic profit of $25,000, meanin that o(' ia(%e to provide it o6ner!manaer 6ith an income %eve% that i a(ove emp%omentopport&nit cot and a%o cover the norma% or ri/!adE&ted rate of ret&rn on invetment.Gither the %oca% mar/et i in die&i%i(ri&m and o(' i earnin temporar die&i%i(ri&mprofit, or o(' i epecia%% capa(%e and earnin economic rent icardian rent>.

ecn multiple ques and ans 332sample packet exam iii

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