1. Use four separate supply and demand diagrams to illustrate the effects of the following possible shocks on the equilibrium price and quantity of avocados. In each diagram clearly indicate the initial equilibrium price and quantity and the new equilibrium price and quantity after the shock.
a.) There is a large increase in the price of tomatoes, which is a complement of avocados (you know, because they go together in guacamole).
b.) There are significant reductions in the amount of water that avocado farmers are allowed to use in California, where most U.S. avocados are grown.
c.) A major scientific study shows that people who regularly consume avocados are much less likely to suffer from dementia.
d.) Genetically modified avocado plants that allow for greater output without increasing cost are introduced into the market.
2. Amazon recently had a very public dispute with the book publisher Hachette regarding its prices for e-books. Amazon was trying convince Hachette to lower their price for e-books, arguing that doing so would benefit both consumers and the publisher; Hachette was refusing to cut their prices, countering that lower prices would hurt both the publisher and its authors.
Amazon explained their objectives in terms of price elasticity on the following discussion board: https://goo.gl/9lEcMWRead the full post then answer the following questions.
a.) Amazon states that "For every copy an e-book would sellat $14.99, it would sell 1.74 copies if priced at $9.99." Use this information to calculate the price elasticity of demand for e-books between these two prices. Show your work.
b.) Suppose Amazon was selling 3,000,000 Hachette e-books when the price was $14.99. If their above calculations are correct, how many would they sell after the price is cut to $9.99? What would the total revenue from e-books equal before and after the price cut?
c.) Amazon claims that "e-books are highly price elastic."If this is the case, then why wouldn't Amazon want to cut prices even further? For example, why not cut the price of e-books to $1.99 instead of $9.99?
d.) Given that Amazonis arguing that cutting e-book prices to $9.99 would benefit Hachette through higher revenue, why do you think Hachette was against this price cut? It is obvious that Hachette did not agree that this move would have benefited them; otherwise they would have voluntarily cut prices. Briefly explain whyHachettemay still be against the price cut, even if Hachette does not dispute any of the estimates Amazon gives regarding the price elasticity of demand or revenue expectations. In other words, they believe everything Amazon says in the blog is completely accurate, but they're still against cutting prices because...
3. Read the following article on changes in Spain's wine industry: https://goo.gl/9fZKmlthen answer the following questions.
a.) The article notes that Spanish and Italian wine were exported for the same price in 2000, but in 2014, "Italy was selling its wine for an average of $2.78... while Spain's sold for $1.30." Use a market supply and demand diagram with separate supply and demand curves for exported wine from Italy and Spain to depict this situation. Use two sets of axes - one for 2000 and the other for 2014. Your diagram should depict that the price in 2000 was equal across countries, and in 2014 the price was lower in Spain than in Italy.
b.) The article mentions that a lot of Spanish wine producers rely on bulk and economies of scale. Suppose a typical producer has fixed costs equal to $20 million and marginal costs equal to $1 per liter. Calculate their average total costs at Q=100,000 and Q=1,000,000.
c.) Suppose costs are what is stated in part b.) andthe market price is equal to $1.30 per liter. How many liters would have to be sold for this producer to be profitable?
4. Read the following interview with John Mackey, CEO of Whole Foods: https://goo.gl/KLPBRJ Mackey talks about the "paradox of shareholder value" and criticizes the theory that purports that all firms should maximize profits. He says that the way he runs Whole Foods is not with profit maximization but with customer satisfactionas its primary purpose.
Given Mackey's point of view, do you think economists need to change the way they model firm behavior? In other words, do you think it's accurate to assume that firms make decisions with profit maximization as its primary purpose, even though the CEO of a large successful corporation is stating that he considers something other than profits as his firm's primary purpose when making decisions? Explain your answer, and refer to what is stated in the interview where appropriate.
5. Youngstown-Warren Regional Airport (YNG) had been trying to secure daily service from a major carrier for a number of years. Last year United Airlines announced that they were dropping plans to establish a daily route from Youngstown to Chicago (you can read the story hear if interested: https://goo.gl/vRNn1d). This is despite the fact that the airport was able to guarantee United approximately $1.75 million in annual revenue. Suppose United estimated that their costs to operate daily service from YNG would equal $1 million per year, which would have given them an estimated annual accounting profit from YNG equal to $750,000. Briefly explain why United might not be willing to offer daily service from YNG, even if they knew they would have had a guaranteed profit equal to $750,000.
6. Between 2002 - 2007, the number of active real estate agents practicing in California nearly doubled, from 139,000 to 262,000. From 2008 - 2014, the number of active agents declined by more than a third, from 262,000 to 171,000.
a.) What is the primary reason there has been such dramatic changes in the number of real estate agents in California since 2002?
b.) Analyze the real estate agent market in terms of the three market structure characteristics. What market structure.
c.) During the housing bubble from 2002 - 2007, real residential housing prices increased by more than 50% and the number of homes sold increased significantly. Yet, the median income of real estate agents actually declined (which means a typical real estate agent actually made less in 2007 than a typical real estate agent in 2002). Explain why this may have happened.
7. Suppose you own and manage a hotel which has 100 rooms. Your total costs (including all staff wages, utilities, insurance, lease payments, etc.) are $10,000 / night, such that your average total costs per room are $100 per night. You work with an online bidding website (like Priceline) and receive a bid of $70 for a single night in the following week. You currently have several vacant rooms available on this night. Should you accept this bid? Briefly explain what factors this decision would depend on.
8. Suppose you are a farmer who owns two plots of land, and are deciding whether to grow corn or soybeans on each plot. As a profit maximizer, you base your decision on the expected market prices, as well as the marginal costs of growing each crop, which varies depending on the arability of the land. You would pay the same amount for the land and farm equipment regardless of which crop you grow, and can only grow one type of crop on each plot. For simplicity, assume fixed costs equal zero.
On plot 1, the marginal costs for each crop are given by:Corn: P = $3 +0.2Q; Soybeans = $2+0.3Q;
On plot 2, the marginal costs are given by:Corn: P = $2 +0.2Q; Soybeans = $5 +0.1Q;
a) The price of corn is initially $5/bushel and soybeans are priced at $6/bushel. Which crop do you produce in each area? What is your operating profit on each plot and what are your implicit costs?
b) Suppose a large increase in demand for tofu increases the price of soybeans to $8/bushel, while the price of corn remains at $5/bushel. What do you produce on each plot? What is your operating profit on each plot and what are your implicit costs?
c) Given that these prices are available to all farmers, what would you expect to happen to the price of corn and the price of soybeans in the long-run? Explain why.