Spring 2016

Questions answered without showing the work will only be awarded half credit.

Question #1 (One Plant/Two Markets—Price Discrimination)

Co manufactures a proprietary pesticide that can is made at a plant in the United States and a plant in South Korea:

South Korean Cost Function: TCSK= Q2SK+ 2QSK

United States Cost Function: TCUSA= ½Q2USA+ 4QUSA

The market demand is: P = 220 – ½Q

A. What is the profit-maximizing price? (4 Points)

B. What is the Quantity produced in each Country? (4 Points)

C. What are RussCo’s total profits if the firm is effectively able to produce in both Countries? (4 points)

D. Calculate the profit-maximizing level of price and output if RussCo closes its United States factories? What are RussCo’s profits this condition? (8 points)

Question #2 (Oligopoly Question)

Motors has determined that the price elasticity of demand for two customer segments (A Luxury Car and a Premium Car) is -1.35 and -1.55. Based on their expectations of profitability, Kashian realizes the price of a Luxury Car should be $51,500. How much should Kashian charge for its Premium Car? (20 Points)

Question #3 (Regulation)

In 2000, the town of Brother’s Bay in Door County Wisconsin had a more-or-less free market in boat services. Any adult citizen could provide boat services as long as the drivers and the boats satisfy certain safety standards. As a result, the market is competitive. Suppose that the marginal cost per trip of a boat ride is constant, where MC = $5 (the boats are fully depreciated and there are no fixed costs), and that each boat can operate 10 trips per day. 15 passengers can board a boat. Boats are completely full prior to launching.

If the demand function for boat rides was Qd= 850 – 20P, where demand is measured in rides per day. Assume that the industry is perfectly competitive.

What is the competitive equilibrium price per ride? (4 points)

What is the equilibrium number of rides per day? (2 Points) How many boats will there be in equilibrium? (2 Points)

In this competitive market, what is the aggregate profit? (4 points)

In 2005, the town board of Brother’s Bay created a boat licensing board and issued a license to each of the existing boats. The board stated that it would continue to adjust the boat fares so that the demand for rides equals the supply of rides, but no new licenses will be issued in the future. In effect, all profit would be turned over to the township for licenses. How many licenses would be sold? (3 Points)

In 2013, costs had not changed, but the demand curve for boat rides had become Qd= 1200 – 20P. However, the number of boats and overall capacity has not changed. What was the equilibrium price of a ride in 2013? (3 Points)

In 2015, how much money would each current boat license owner be willing to pay to prevent any new licenses from being issued? (2 Points)

Question 4 (Taxation Question)

Suppose that the demand curve (hundreds) for apples is given by Qd = 140 – 5P, where Qd is the number of pounds demanded per year and p is the price per pound. The supply of apples can be described

by Qs = 40 + 3P, where Qs is the number of pounds provided.

A What is the equilibrium price? (Hint: At the equilibrium, quantity demanded and

quantity supplied are equal, Qd = Qs.) (2 Points)

B What is the equilibrium quantity supplied and demanded? (2 Points)

C Calculate the consumer surplus at the equilibrium price. (3 Points)

D Calculate the producer surplus at the equilibrium price. (3 Points)

E Calculate the total surplus at the equilibrium price. (4 Points)

F Now suppose that the government imposes a tax of $8 per each pound sold, paid by

the consumers,. In this case, what are the price and the consumer surplus? (6 Points)

Question #5

Strategy

Advertise

Don’t Advertise

Firm A

Advertise

$4, $4

$20, $1

Don’t Advertise

$1, $20

$10, $10

Does anyone have a dominant strategy? (6 points)

What is the Nash Equilibrium? (6 points)

What is the socially optimal solution (at what point is total profit maximized)? (6 points)

How would a negotiated solution lead to this socially optimal solution (technically this is called a Coase Solution—however, the path to this solution is straight-forward)? (1 point)

If you had to call in a mediator to negotiate this socially optimal solution, how much would they charge and why? (1 point)

Question #6 (3rdDegree Price Discrimination)

A Monopolist selling a commodity I two separate markets must decide how much to sell in each market in order to maximize their total profits.

The demand in the Japanese Market is : QJapan= 120 – 10PJapan

The demand in the United States Market is: QUSA= 120 – 20PUSA

If Total Cost is: TC = 90 + 2(QUSA+QJapan)

Calculate the Price and Quantity if the Monopolist Maximized their profit and sells in both markets? (6 Points)

Calculate the Profit if he Monopolist Maximized their profit and sells in both markets? (6 Points)

In the absence of 3rdDegree Price Discrimination, and the firm must sell at the same price in both markets, what is the price, quantity and total profit? (6 Points)