everything is better available in the document. but: 

1) Assume the following table shows the yields per acre of wine grapes and olive oil in two different countries. Country A and country Z. (Also assume that in each country the labor and other processing costs per acre are the same regardless of whether grape vines or olive trees are cultivated).

 

Â	Country A	Country Z
Olive Oil yield	40 barrels	30 barrels
Grape yield	90 barrels	45 barrels

 

Suppose initially each country had erected high tariff barriers to keep out foreign wine and/or olive oil and was producing for its own needs only.

Could consumers in both countries benefit if all trade barriers were dropped? If not, explain why not. If consumers could benefit, explain how and identify: 4 pts

 

a) which country has the greater opportunity cost of producing olive oil

 

b)the country which would end up exporting wine and which would export olive oil after the elimination of trade barriers.

 

2)  A) Draw a supply-demand diagram representing the effect on the market for hybrid autos of a permanent increase in the equilibrium price of gasoline from around $2.00 per gallon to around $4.00 per gallon. Although you need not include specific numbers on your axes, label the axes on your diagram clearly. Also explain in a sentence or two why you shifted any S or D schedule that you show as having moved in your diagram.  3  pts

3) Assume the price of large gulf shrimp is $18 per pound and that the price of hard shell Maine lobster tails is $36 per pound. Your professor uses ½ pound of lobster or ½ pound of shrimp with various pasta dishes. In a typical month he cooks 4 shrimp/pasta dinners and 1 lobster pasta dinner. Is his marginal utility of a lobster based dinner equal to the marginal utility of a shrimp dinner for him? If so, explain. If not, what is the approximate difference in MU of shrimp vs. lobster?   3pts.

 

 

4) The chart on the following page shows the average daily demand for tokens on a major urban rapid transit system.

 

a)What is the elasticity of demand at a fare of  $2.50/token?  (Show your calculations)                                                                                                                                                                    2pts

b) Is the revenue maximizing fare higher than, lower than or equal to $2.50/token Explain your reasoning using the concept of elasticity.                                                      2pts

 

 

 

 

 

 

 5) The music business has been in a funk ever since 2001. By 2008 sales of albums in the U.S. were down 45% from their 2000 peak. But over that same period, concert-ticket sales revenues more than doubled to 4.2 billion in 2008 despite significant increases in average concert ticket prices, according to trade magazine Pollstar. (See Charts below)

 

A) Draw a supply/demand diagram showing the CHANGES in the market for live rock concerts over the period 1998 and 2008 that is consistent with the facts given above (and in the charts below) about ticket prices and ticket sales revenue.   Be sure to clearly label your axes and all lines in your diagram. (Note: The horizontal axis should show quantity of tickets sold….Ticket Revenues = P of tickets *Q of tickets sold.)      4pts

 

B) Why do you think fewer rock albums are sold now despite the surge in sales of tickets to live performances.?     Explain your answer in terms of shifts in supply and/or demand shifts.      2 pts   

 

 

6) Bob and Jane decide to open their own business selling ergonomically correct office furniture that Jane has designed. Assume they operate this business from leased office space near their home. Also assume that they lease their computer equipment and data base software. The actual production of the furniture is subcontracted to various commercial factories as customer orders arrive and the unassembled kits are shipped via UPS to clients throughout the U.S. Their target market is small businesses including those run out of home offices.

 

They have so much faith in the potential of Jane’s designs that they quit corporate jobs in marketing and MIS administration (which jointly had earned them $300,000 per year), and sink $600,000 (.6 million) of their own funds into this venture at the start of their first year to place advertising in trade journals and on the internet. (Assume this $600,000 had previously been invested in a diversified portfolio that had been averaging a 10% annual before tax rate of return.) At the end of the year they calculated that they had the following costs and revenues.

 

Total Revenues: $8.0 million

Costs:

Payments to furniture subcontractors $6.0 million

Shipping Costs .2 million

Lease Payments on Office Space and Computer

Equipment &Software $ .2 million

Overhead Expenses: Insurance, utilities etc. $ .1 million

Advertising on Internet & Magazines

(Purchased at start of year) $ .6 million

Additional Sales Expenses (phones,business travel, $ .3 million

Entertaining clients etc.)

Total Listed Costs = $7.4. million

a) Is Bob & Jane's economic profit different from their accounting profit? If so, how much economic profit did they earn during this first year of operation?

3 pts

b) What were Bob & Jane's fixed costs during their first year of operation ? Explain briefly

 

7)

 

$Price/dozen

 

MC

 

 

 

 

 

$60

 

$40

 

$95

 

$75

 

 

 

 

 

 

 

Q/month

thousands

 

 

 

 

 

 

100     120           160       185      200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pictured above are the Marginal Cost, Average Variable Cost and Average Total Cost schedules of a contract sewing factory which produces women’s blouses for major clothing retailers. Prices are contract prices per dozen blouses.  Quantities are thousands of dozens per month. Arrows show some Price - Quantity combinations on the cost curves. Assume that there are 500 firms in the market and all are using the same technology as this firm.

 

What is the minimum efficient scale of production for this firm?  Explain in a sentence or two.   (2pts)

At what level of output does the firm start to experience diminishing marginal productivity of its variable inputs. (Explain in a sentence or two)     (2pts)

If the current market price is $95/dozen, how much will this firm produce per month?       (explain in a few sentences)          (2pts)

Is this the long run equilibrium price in this market?  Explain your answer in detail and if there is a different equilibrium price identify that price.  (4pts)

What would be the effect of a sharp rise in the price of cotton assuming the higher cotton price persisted into the long run. Which curves would be affected? How would the long run equilibrium price change? (2pts)

In (e) would the Minimum efficient scale of production change? If so, how?    (2pts)

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• 1504706617-Eco Week 7-1 MIDTERM.docx