Unformatted text preview: ADDENDUM TO THE LAST PAGE OF THE LECTURE NOTES: (a) Correct as finally written, an instance of case III. (b) Correct as written, but this "onetime unavoidable cost" is a new situation we did not consider with IIV. It doesn't fit into those categories. (c) This one I misread I thought the customer would win in court when the problem clearly says the customer would not win in court. Oh well. It also doesn't fit into our categories. If Cheers doesn't pay the bribe, then by assumption it has no customers and shuts down and it has a loss equal to its fixed costs (F). If Cheers does pay the bribe AND it starts off in long run equilibrium, then its revenue covers all its fixed costs except for the new fixed cost (B). It is standard to assume it would start off in long run equilibrium. Thus, Cheers shuts down if F<B and it stays in business if B<F. (d) Correct as written, and instance of case I. (e) Assuming this is a "onetime unavoidable cost" we have the same situation as (b) although here it holds for all bars and not just Cheers. This is Landsberg's answer. If you can avoid the cost by shutting down then we have the same situation as (c), you need to compare what you owe if you shut down (F) to what you owe from producing ($30). (f) Correct as written, an instance of case III (but just for Cheers). (g) As written this is an instance of case IV, but a breakdown in family values should cause MORE alcohol consumption, not less, so demand should shift out, not back. (h) Correct as written, an instance of case I (but just for Cheers). (i) Correct as written, an instance of case I. ...
View Full Document
- Fall '07
- shut down, $30, onetime unavoidable cost, Landsberg