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Practice_Midterm_3 - FirmsandMarkets PracticeMidterm...

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Firms and Markets Practice Mid‐term Practice Mid‐term You have 75 minutes for this exam. There are 75 points available, you should budget your time accordingly. You may consult one page of notes and a calculator. I understand that the honor code applies: I will not lie, cheat, or steal to gain an academic advantage, or tolerate those who do. _______________________________________ (Name and Signature)
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Practice Mid‐term Page 2 YOU MUST ANSWER THIS QUESTION (1) Cargo Shipping (30 points) The cargo shipping industry is in the business of shipping freight between ports all over the world. It is a fragmented industry consisting of a large number of independent ship owners. For all intents and purposes, firms act as price takers and the industry is perfectly competitive. The figure below shows the path of real prices (i.e., adjusted for the effects of inflation) in the cargo shipping industry between 1991 and 2004. You are a member of a consulting team that is conducting a study of the cargo industry, and you and your colleagues want to try to make sense of price movements in this market since 1990. After a day or so of quick fact‐finding, you learn the following. 1. Cargo shipping takes place in large ocean‐going vessels. These ships are manufactured in a handful of shipyards in Northern Europe and North America. 2. Depending on a shipper's type and geographic location, the best available substitutes for shipment by cargo ship are to ship by rail or by air freight. For
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