1. Sam Smith owns an internet radio company that has subscribers in Houston and Dallas. The demand functions for the 2 markets are:
Q(Houston) = 50-0.35P(Dallas)
Q(Dallas) = 80-0.40P(Houston) Quantities are in thousands of subscriptions per year.
The cost of providing internet radio service is TC = 800+50Qt
a. What price should Sam charge and how many subscribers will he have if he treats Houston and Dallas as one market?
b. What is the total quantity of subscribers for one market?
c. What is the quantity in the Houston market?
d. What is the quantity in the Dallas market?
e. What prices should Sam charge and what are the associated quantities if he wants to maximize profits?
2. Coal produces a large amount of pollution in Kentucky. As a consultant to the governor your job is to determine the best public policy in regards to this monopoly. The demand curve for coal is:
P= 600-12Q (qty in thousands of units)
The long run cost of producing coal exhibits constant returns to scale so LAC=LMC=$125. Also, the production of one unit of coal generates one unit of pollution where marginal external cost (MEC) is estimated to be $90 per additional unit of pollution.
a. What is the equilibrium price and quantity if there is no government intervention?
b. What is the equilibrium price and quanity if the industry operates as a perfectly competitive industry?
c. What is the equilibrium price and quantity if a tax equal to the MEC of pollution is charged (with the industry operating as a monopoly)?
d. What is the equilibrium price and quantity if regulation is imposed to have the industry operate as a perfectly competitive industry and a tax equal to the MEC is charged?
3. The market for corn in Brazil has a demand and supply of the following:
QD=42-6P
QS= -14+3P (quantities in thousands of bushels per day)
a. If the domestic market is perfectly competitive, find the equilibrium price and quantity of corn.
b. Compute consumer surplus and producer surplus
c. Imagine if there are no trade barriers and the world price of corn is $4, confirm that the country will import corn
- Show the QD, Q and level of imports
- Is Brazil better off with free trade? As compared to the consumer surplus and producer surplus
d. The Brazil government believes in free trade but feels political pressure to help its own corn growers. So, the Brazil government decides to provide $2 per bushel subsidy to their growers.
- Is Brazil better off with the subsidy as compared to the situation in part C?