Unit 3b

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Unit 3B Review Problems

Please read and follow the directions carefully for each part. This assignment is due Friday, January 11 and it will count double on your homework grade. I will reward additional points for students who answer the questions in bold correctly.

Part A: Please answer one of the two problems for Chapter 14, p.308-309.

1. Suppose the book-printing industry is competitive and begins in a long-run equilibrium. a. Draw a diagram describing the typical firm in the industry. b. Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books. What happens to Hi-Tech’s profits and price of books in the short run when Hi-Tech’s patent prevents other firms from using the new technology? c. What happens in the long run when the patent expires and other firms are free to use the technology?

2. Suppose there are 1,000 hot pretzel stands operating in NYC. Each stand has the usual U-shaped ATC curve. The market demand curve for pretzels slopes downward, and the market for pretzels is in the long-run competitive equilibrium. a. Draw the current equilibrium, using graphs for the entire market and for an individual pretzel stand. b. The city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800. What effect will this action have on the market and on an individual stand that is still operating? Draw graphs to illustrate your answer. c. Suppose that the city decides to charge a fee for the 800 licenses, all of which are quickly sold. How will the size of the fee affect the number of pretzels sold by an individual stand? How will it affect the price of pretzels in the city? d. The city wants to raise as much revenue as possible, while ensuring that all 800 licenses are sold. How high should the city set the license fee? Show the answer on your graph.

Part B: Please answer three out of the five problems for Chapter 15, p.340-343.

3. Suppose the Clean Springs Water Company has a monopoly on bottled water sales in California. If the price of tap water increases, what is the change in Clean Springs’ profit maximizing levels of output, price, and profit? Explain in words and with a graph.

4. A small town is served by many competing supermarkets, which have constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus. b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?

5. The Placebo Drug Company holds a patent on one of its discoveries. a. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profit maximizing price and quantity. Also show Placebo’s profits. b. Suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo’s new price and quantity. Compare diagram to answers in part (a)? c. In your diagram, the tax reduces Placebo’s profit. Explain why this is true. d. Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of $10,000 regardless of how many bottles are produced. How does this tax affect Placebo’s price, quantity and profits? Explain.

6. Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram of the saloon’s demand curve and its cost curves, show the price and quantity combinations favored by each of the three partners. Explain.

7. Many schemes for price...
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