PART III: PERFECT COMPETITION he following information applies to questions 13 thru 18: Consider the following information on production capacities for the market for a (commodity) metal and its associated marginal costs (all other costs have been sunk). Please select the correct answer and then explain graphically. Graphs must be accurate and can be drawn in pen or pencil.
|
Country
|
Annual production (t)
|
Marginal cost ($/t)
|
|
Argentina
|
2500
|
25
|
|
Brazil
|
3000
|
30
|
|
Canada
|
2000
|
70
|
|
Congo
|
2000
|
45
|
|
Indonesia
|
1000
|
20
|
|
Russia
|
3000
|
50
|
|
South Africa
|
2000
|
40
|
|
Zimbabwe
|
500
|
45
|
Global annual demand (in t) is given by: QD= 10000 - 50P
Question 13: What is the equilibrium price in this perfectly competitive market?
a) $25/t
b) $30/t
c) $35/t
d) $40/t
e) $45/t
f) $50/t
g) $55/t
h) None of the above
Question 14: How much of the global metal supply will be produced in Africa?
a) Nothing
b) More than 0t but less than 2000t
c) 2000t
d) More than 2000t but less than 4000t
e) 4000t
f) 4500t
Question 15: Suppose the South American countries manage to improve their production processes resulting in a 20% decrease in marginal cost. What will happen to the world equilibrium price? (3 points)
a) Nothing
b) It will drop by 5%
c) It will drop by 10%
d) It will drop by 20%
e) None of the above
Question 16: Suppose that in addition to all of the above information, Brazil experiences a mining disaster, effectively eliminating 20% of its mining capacity (from 3000t to 2400t initially, but at the 20% lower marginal cost). What will happen to the world equilibrium price?
a) It will be $35/t
b) It will be $40/t
c) It will be $42/t
d) It will be $45/t
e) It will be $50/t
f) It will be $53/t
g) None of the above
Suppose that all of the above information holds with the exception of the information on global demand for the metal. Suppose global demand has increased to QD= 16000 - 40P.
Question 17: What will now happen to the global equilibrium price? (3 points)
a) It will eventually reach $40/t
b) It will eventually reach $45/t
c) It will eventually reach $50/t
d) It will eventually reach $55/t
e) It will eventually reach $60/t
f) It will eventually reach $65/t
g) It will eventually reach $70/t
h) It will eventually exceed $70/t
Question 18: How much of the metal will now be produced worldwide?
a) 13000t
b) 13200t
c) 14000t
d) 14200t
e) 14400t
f) 14800t
g) 15000t
h) None of the above
The following information applies to questions 19 & 20: You are a manager in a perfectly competitive market. The price in your market is $22. Your total costs are C(Q) = 40 + 2Q + 2Q2.
Question 19: What level of output will you produce in the short-run? (6 points)
Question 20: How much profit will you make? (4 points) Please show your work.
PART IV: MONOPOLY (10 points)
The following information applies to questions 21 & 22: You are a strategy consultant to Heineken and have estimated that the daily demand for Heineken beer is given by:
QH = 7 - 3PH + 2PG + PS + A, where
QH = the daily volume of Heineken beer sold (in liters)
PH = the price per liter of Heineken beer (in €)
PG = the price per liter of Grolsch beer (in €)
PS = the price per liter of Stella Artois beer (in €)
A = the level of advertising of Heineken (in €)
One can rewrite the above equation as
PH = ((7 + 2PG + PS + A - QH)/3
to obtain a typical demand function
Suppose that the marginal cost of a liter of Heineken beer is constant at €1.?Suppose that currently PH = 3, PS = 2 and PG = 3 and that and suppose that historically neither Grolsch nor Stella Artois have followed Heineken's price hikes or price cuts.
Question 21: What price would you recommend to Heineken if its goal is to maximize profits, knowing that Heineken has decided to keep advertising expenditures at ? Please show your work. (6 points)
Question 22: What price would you recommend to Heineken if its goal is to maximize revenues, knowing that Heineken has decided to keep advertising expenditures at ? Please show your work.