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Problem set 3

Econ2101/Econ2210, Fall 2013 (Due 1pm, November 25, 2013) (20 points) 1. Please refer to gure 1 to answer the questions: In gure 1, the world price is 12,500

1) At free trade, how much is the domestic consumer surplus? 2) At free trade, how much is the domestic producer surplus? 3) At free trade, how much is the domestic consumption? And of which, how much is provided by the domestic rms and how much is from import? 4) Now suppose an import quota of 3000 trucks is imposed. How much is the total consumer surplus now? How much is the total domestic producer surplus now? How much is the government revenue from the quota? By how much will the quota decrease the revenue of foreign rms? 5) Now suppose an import quota of 3000 trucks is imposed. An alternative to the quota that would have the same impact on the number of imports would be a tari of $x. What is the value of x? 6) Now suppose an import quota of 3000 trucks is imposed. If the government wanted to cut o all international trade without changing the quota, it would allow the quota amount of 3000 trucks in at no tari and then charge a tari on all imports above the quota amount. What tari would accomplish the goal?

(25 points) 2. A rm has two factories for which costs are given by: Factory #1: C1 (Q1 ) = 10Q2 1 Factory #2: C2 (Q2 ) = 20Q2 2 The rm faces the following demand curve: P = 700 5Q where Q is total output -i.e. Q = Q1 + Q2 . 1). On a diagram, draw the marginal cost curves for the two factories, the average and marginal revenue curves, and the total marginal cost curve (i.e., the marginal cost of producing Q = Q1 + Q2 ). Indicate the prot-maximizing output for each factory, total output, and price. 2) .Calculate the values of Q1 , Q2 , Q and P that maximize prot. 3) suppose that labor costs increase in factory 1 but not in factory 2. Now should the rm adjust (i.e., raise, lower, or leave unchanged) the following: output in factory 1? Output in factory 2? Total output? Price?

(25 points) 3. Elizabeth Airlines (EA) ies only one route: Chicago-Honolulu. The demand for each ight is Q = 800 = P. EA's cost of running each ight is $80,000 plus $200 per passenger. (1) What is the prot-maximizing price that EA will charge? How many people will be on each ight? what is EA's prot for each ight? (2) EA learns that xed costs per ight are in fact $91,000 instead of $80,000. Will the airline stay in business for long? (3) Now EA nds out that two dierent types of people y to Honolulu. Type A consists of business people with a demand of QA = 400 0.25P . Type B consists of students whose total demand is QB = 300 0.8P . Because the students are easy to spot, EA decides to charge them dierent prices. What price does EA charge the students? What price does it charge other customers? How many of each type are on each ight? (4) With the price discrimination, what would EA's prot be for each ight? Would the airline stay in business?

(20 points) 4. Sam is the sole owner of a mineral water spring that costless burbles forth as much mineral water as Sam cares to bottle. It costs Sam $2 per gallon to bottle this water. The inverse demand curve for Sam's mineral water is p = 20 0.2q , where p is the 2

price per gallon and q is the number of gallons sold. (1) Write down an expression for prots as a function of q. Find the prot-maximizing choice for q for Grinch. (2) What price does Sam get per gallon of mineral water if he produce the protmaximizing quantity? How much prot does he make? (3) Suppose, now, that Sam's neighbor, Tom nds a mineral spring that produces mineral water that is just as good as Sam's water, but that it costs Tom $6 a bottle to get the water out of the ground and bottle it. Total market demand for mineral water remains as before. Suppose that Sam and Tom each believe that the other's quantity decision is independent of his own. What is the Cournot equilibrium output for Tom? For Sam? What is the price in the Cournot equilibrium? How much prot do Sam and Tom make in the Courtnot equilibrium, respectively?

(10 points) 5. The question assigned in the class.