Problem Set 4

Problem Set 4 - Problem Set 4 Due Economics 231 Fall 2006...

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Problem Set 4 Due: October 30, 2006 Economics 231 Fall 2006 Professor John Conley Vanderbilt University 1. Fred Funfactor owns Funfactor’s fantastic fabrication firm, one of many companies in the highly competitive Wack-a-Mole industry. A key component to Wack-a-Mole games is the cute little carved wooden mole heads. Only 30 old world craftsmen still know the how to make these so that they will hold up all the wacking, As a result, this input is supplied along an upward sloping supply curve. Unfortunately 10 of these craftsmen take in ill-fated road trip to scenic Modesto California. The classic 1973 Dodge Dart (Swinger) in which they are all traveling goes off the road and these 10 master craftsmen go on their final reward. What happens in the long run and short run to price and quantity of Wack-a-Moles games in the industry? Can you say for certain what happens to Fred’s output in the long run? 2. Boy George is in town for one night only and gives a concert in a 1000 seat auditorium. Tickets cost $15 each, but at that price, 2000 people want to see his show. a. Suppose that tickets are sold on a first come, first served basis. Using a diagram, show the consumer surplus and producer surplus. Compare this to the consumer and producer surplus when tickets are sold at an equilibrium price. Who gains and who looses? Is there a deadweight loss? (Hint: Think carefully about the supply curve. How many tickets are supplied at any given price?) b. Suppose instead that tickets are allocated using a lottery, and that people can costlessly resell tickets on the scalper's market. Using a diagram, show the equilibrium price of tickets on the resale market. Show the consumer surplus and producer surplus in this case.
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Problem Set 4 - Problem Set 4 Due Economics 231 Fall 2006...

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