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*** WRITE YOUR NAME AND COHORT (BLUE OR GOLD) ONLY ON THE BACK OF THE LAST PAGE *** UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS EWMBA 201A—Economic Analysis for Business Decisions Fall 2007 Professor Catherine Wolfram MIDTERM EXAM Instructions: The number in brackets ( e.g., [5]) indicates the points for each question. Total: 90 points. Note that you also have 90 minutes to do the exam, so you should spend no more than 1 minute per point. Please Write Legibly. Briefly explain your answers (that is, don’t just write “yes” or “no” and don’t just write down a numerical answer without showing how you derived it). Write only on this exam. Short answer questions The following three questions require only short answers (1-3 sentences). Use any graphs that will help your explanation. Be sure to label graphs clearly. 1. [10] Which do you think is more elastic? The daily demand for Starbucks lattes in the Bay Area or the daily demand for all warm caffeinated beverages in the Bay Area? Why? The daily demand for Starbucks lattes is likely to be more elastic. There are lots of substitutes for Starbucks lattes, including Peet’s lattes, Starbucks espressos, and even McDonald’s coffee. All these products are part of the larger category of all warm caffeinated beverages, and there are fewer substitutes for the larger category, so its demand is likely to be more inelastic.
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EWMBA 201a Fall 2007—Prof. Wolfram 2 2. [10] Airports restrict the number of planes that can land at a given time. Individual airlines are allocated a certain number of “landing slots” for each hour that the airport is open, and can only land as many planes as they have slots. At many major US airports, the number of landing slots is scarce, especially during heavy travel times. (At small airports, such as Ithaca, NY where no more than 20 flights go in and out on any given day, the number of slots is never scarce.) Recently, the US Federal Aviation Administration announced that it was considering banning airlines from using landing slots at congested airports for small aircraft, defined as aircrafts carrying fewer than 100 passengers. Is this likely lead to an economically efficient allocation of landing slots? Why or why not? Such a policy may not be economically efficient because there may be airlines that value landing small airplanes at the congested airports more than other airlines value landing large airplanes (e.g. think of a small airplane filled with the NY Yankees landing at LaGuardia in time for a game compared to a large airplane that has only 14 people on it). If the landing slots were allocated through a market with a price, the airlines could trade slots until the airlines that valued each slot the most were awarded them, and then they could use them for any kind of plane they chose. 3. [10] B&B Shampoo buys a special seaweed extract for one of its shampoos from Joe’s
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