1. Consider a firm that is deciding whether to operate plants only in the United States or also in either Mexico or Canada or both. Congress is currently discussing an overseas investment in new capital (OINC) tax credit for U.S. firms that operate plants outside the country. If Congress passes OINC in 2011, management expects to do well if it is operating plants in Mexico and Canada. If OINC does not pass in 2011 and the firm does operate plants in Mexico and Canada, it will incur rather large losses. It is also possible that Congress will table OINC in 2011 and wait until 2012 to vote on it. The profit payoff matrix (profits in 2011) is shown here:
In US ONlY: OINC passes, $10 million, OINC fails, -$1 million, OINC stalls, $2 million
US and Mexico: passes $15 million, fails, -$4 million, stalls, $1.5 million
US, Mexico and Canada: passes $20 million, fails, -6 million, stalls, $4 million
Assuming the managers of this firm have no idea abou the likelihood of congressional action on OINC in 2011, what decision should the firm make using each of the following rules?
a. Maximix rule
b. Maximin rule
c. Minimax regret rule
d. Equal probability rule
4. Remox Corporation is a British firm that sells high-fashion sportswear in the United
States. Congress is currently considering the imposition of a protective tariff on imported textiles. Remox is considering the possibility of moving 50 percent of its production to the United States to avoid the tariff. This would be accomplished by opening a
plant in the United States. The following table lists the profit outcomes under various
scenarios:
Profit
No tariff Tariff
Option A: Produce all output in Britain $1,200,000 $ 800,000
Option B: Produce 50% in the United States 875,000 1,000,000
Remox hires a consulting firm to assess the probability that a tariff on imported textiles
will in fact pass a congressional vote and not be vetoed by the president. The consul-
tants forecast the following probabilities:
Probability
Tariff will pass 30%
Tariff will fail 70
a. Compute the expected profits for both options.
b. Based on the expected profit only, which option should Remox choose?
c. Compute the probabilities that would make Remox indifferent between options A
and B using that rule.
d. Compute the standard deviations for options A and B facing Remox Corporation.
e. What decision would Remox make using the mean-variance rule?
f. What decision would Remox make using the coefficient of variation rule?
3. How does price ceiling undermine the rationing function of market-determined prices? How could rationing coupons insure that consumers with the highest values get the limited amount of a good supplied when government prices ceiling create shortages?
4. Do you favor anti-gouging laws as a means of protecting consumers from high prices following natural disasters, such as Hurricane Katrina in New Orleans? If so, why? If not, why not?
5. Mirk Labs is a British pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and the United States on Zatab , an allergy medication The global demand for Zatab is
Qd = 15.0 -0.2P
Where Qd is annual quantity demanded ( in millions of units) of Zatab, and P is the wholesale price of Zatab per unit. A decade ago, Mirk Labs incurred $60 million in research and development costs for Zatab. Current production costs for Zatab are constant and equal to $5 per unit.
a. What wholesale price will Mirk Labs set? How much Zatab will it produce and sell annually? How much annual profit does the firm make on Zatab?
b. The patent on Zatab expires next month, and dozens of pharmaceutical firms are prepared to enter the market with identical generic versions of Zatab. What price and quantity will result once the patent expires and competition emerges in this market? How much consumer surplus annually will allergy sufferers who take Zatab gain?
c. Calculate the annual deadweight loss to society due to drug firm's market power in Zatab. What exactly does this deadweight loss represent?
d. Given your answer to part c, would it be helpful to society for competition authorities in Europe, Canada, and the United States to limit entry of generic drugs to just five years for new drugs?