ECON560 Economics Managerial - The demand for good X is

Economics Managerial Examples 2 & 3

ECON560

1. The demand for good X is given by 1 1 ???????????? = 7,000 − ???????? − ???????? + 9???????? + ???? 3 8 Research shows that the prices of related goods are given by ???????? = $5,500 and ???????? = $150, while the average income of individuals consuming this product is ???? = $63,000.

a. Indicate whether goods Y and Z are substitutes or complements for good X.

b. Is X an inferior or a normal good?

c. How many units of X will be purchased when ???????? = $5,230?

d. Find the inverse demand function for good X. e. Explain the difference between how the demand curve and the inverse demand curve is displayed graphically.

2. Explain the differences between First- Second- and Third-Degree price discrimination. Provide a real-world example that approximates each type; discuss whether (and which) consumers are better or worse-off with price-discriminating producers.

3. Sluis Van Shipyards along with Electric Boat produce submarines for navies around the world in a tacit Cournot duopoly. Worldwide demand for submarines is:

???? = 30 − 2???????????????????????? ; SVS cost function is ????(???????????????? ) = 15???????????????? .

a. What is Sluis Van’s Marginal Revenue function?

b. What is Sluis Van’s reaction function?

c. If EB’s cost function were ????(???????????? ) = 7???????????? , what is the equilibrium production level of Sluis Van Shipyards?

d. If EB’s cost function were to increase, at what marginal cost would the submarine shipbuilding industry devolve into a monopoly in the long-run?

e. Explain the potential for collusion between Sluis Van and Electric Boat to increase profits within a Cournot duopoly.

f. Explain what problems the collusive firms must solve to make the partnership stable.

4. Demand for good X is given by ???????????? = 5,000????????−2 ????????−.4 ????????5 ????.003.

a. What is the own price elasticity of demand for X? b. Is good Y a complement or substitute for X? Why?

c. Is good Z a complement or substitute for X? Why? d. Is good X a normal or inferior good? Why?

e. Should the seller of this good raise or lower the price of X to increase revenues? Why?

5. Find the derivative of f(x) with respect to x of the following equations:

a. ????(????) = 11 + 2???? + 20???? 2 − 13???? − 7???? −3

b. ????(????, ????) = 14 + 23???? − 10???? 2 + 13???????? − 45???? 3

c. ????(????, ????) = 3???? ∗ 2???? 2 ∗ 5???????? 1 2

d. ????(????, ????) = 7???? 3 ???? 3 e. ????(????) = ????(????) ∗ ?(????)

 i. ????(????) = 10 + ???? − ???? 2 ii. ?(????) = 32???? 3 + 10????

6. Plexicorp, LLC manufactures specialized emergency pilings used when uncommonly strong weather events damage or destroy commercial docks. The key component in these pilings, transparent aluminum, is sourced from Doohan Engineering based on renewable 5-year contracts.

a. Describe a circumstance that might lead to Plexicorp electing to not renew the contract when it expires, instead purchasing the component in spot-exchanges.

b. Describe a circumstance that might lead to Plexicorp electing to negotiate a 10year contract with DE.

c. Describe a circumstance that might lead to Plexicorp acquiring DE for the purpose of sourcing its component in-house.

d. With reference to the graph provided below, offer a real-world example producing the result that contract length is shortening.

7. Consider a Bertrand Oligopoly consisting of 3 firms that produce an identical product at a marginal cost of $100. The inverse market demand for this product is 1000-4Q.

a. What is the equilibrium output level in this market?

b. What is the equilibrium market price?

 c. What are the profits of each firm?

8. What is the difference between the short-run and long-run average total cost curves? Which is more useful for identifying the likely industry concentration? Explain.

9. Demonstrate mathematically that the marginal cost curve intersects the average cost curve at the minimum using the following formula:

????(????) = 20,000 − 45???? + .5???? 2

Hint: average cost is ????(????) ????

10. The current market shares for U.S. airlines is as follows:

Airline        Market Share

Delta              16.3%

United            15.7%

Southwest      15.4%

American        12.8%

 US Airways     8.4%

JetBlue             5.1%

Alaska               4.1%

a. Use this information to calculate the current Herfindahl - Hirschman Index (HHI) in this industry (assume any other smaller airlines don’t matter in the calculations).

b. Identify a merger of two or three of these airlines that would not be acceptable to Department of justice regulations along HHI grounds.

11. “The long-run expectations for a perfectly competitive market is that firms will earn an economic profit of zero.” Assuming this statement is true, explain how firms in markets with attributes similar to the assumptions of the perfectly competitive market may indeed earn economic profits period after period.

12. “A binding price floor is allocatively inefficient.” Do you agree or disagree? Explain.

13. “A Stackelberg Oligopolist will maximize his long-run revenues by not maximizing his short-run revenues.” Do you agree or disagree? Explain.