Practice+Final+1_Solution

Healthycustomerswereonaveragecheaptoserve

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Unformatted text preview: 
depicting
the
market
price
and
market
quantity
of
ready
mix
 concrete
in
the
small
town
of
Mountainville,
NY
over
the
period
of
72
weeks.
 
 45
 B
 A
 C
 1400
 D
 1200
 Price
(per
Cubic
Yard)
 35
 30
 1000
 25
 800
 20
 E
 15
 600
 F
 G
 10
 400
 Quantity
(Cubic
Yards)
 40
 200
 5
 0
 0
 1
 6
 11
 16
 21
 26
 31
 36
 41
 46
 51
 56
 61
 66
 71
 Week
 Quantity
 Price
 
 You
are
brought
in
as
a
consultant
to
one
of
the
concrete
producers
of
this
city.

During
 your
research,
you
uncover
some
important
facts
about
this
market:
 ‐ At
the
beginning
of
the
period
(POINT
A),
there
were
only
two
firms
active,
 Annie’s
Concrete
and
Bill’s
Concrete,
with
identical
marginal
costs.
 ‐ At
week
25
(POINT
C),
Bill’s
Concrete
abruptly
shut
down
due
to
its
owner’s
legal
 troubles.


 ‐ At
week
36,
Mountainville’s
local
government
discovered
an
accounting
error,
 leading
to
a
budget
surplus
of
$100M.

It
announced
and
began
construction
on
 a
3
year
city‐wide
improvement
project,
including
the
construction
of
new
 buildings
and
roads.
 
 
 8
 
 
 
 Firms
and
Markets

 Spring
2010
 Final
Exam
 
 
 
 
 ‐ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Soon
after
this
announcement
in
week
38
(POINT
D),
Bill’s
Concrete
re‐entered
 the
market.
 ‐ At
week
50
(POINT
E),
Charlie’s
Concrete
entered
the
market.

Charlie
has
access
 to
more
modern
production
technology,
and
thus
has
lower
marginal
cost
than
 Annie
and
Bill.
 ‐ At
Week
60
(POINT
F),
Donna’s
Concrete
entered
the
market.

Donna’s
plant
has
 the
same
marginal
cost
as
Charlie.
 ‐ At
Week
69
(POINT
G),
a
national
newspaper
article
said
that
that
some
ready‐ mix
concrete
plants
recently
began
substituting
in
low
grade
gravel
and
sand
as
 inputs
into
their
concrete.

Buyers
could
not
tell
the
difference
at
the
time
of
 purchase,
but
the
lower
quality
inputs
would
lead
to
the
concrete
cracking
and
 crumbling
within
months.
 

 a) [8
points]
Account
for
the
movements
in
price
and
quantity
in
the
first
38
weeks.

 Support
your
answer
with
evidence
and
facts
where
necessary.
 
 Between
A‐C,
firms
are
alternating
between
periods
of
collusion
and
 price
wars.

During
price
wars,
firms
engage
in
Bertrand
C...
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