1) Assume that the graph on the next page illustrates the marginal, average variable and average total cost curves of a typical coffee grower and that the wholesale market for coffee beans is a perfectly competitive market.
A) As output expands, at what level of output does this grower first start to experience diminishing marginal productivity of labor? Explain your answer in 1or 2 sentences. 2pts
B) Assume that the current market price at the wholesale level is $6 per pound. How much coffee will this typical grower produce? Explain your answer in one or two sentences. 2pts
C) Is there a price below which the grower will not bother to cultivate & harvest his crop, but will just let the beans rot on the tree? If so what is that price? Explain your answer briefly. 2pts.
D) Assume that as the industry expands (or contracts) the prices of the variable inputs it uses do not change. Is $6 per pound the long run equilibrium price in this market? If so, explain why. If not, explain why not and identify the long run equilibrium price. 4pts.
E) Suppose there is a shortage of experienced farm labor in the coffee growing regions, so that as the industry expands the wages paid to farm labor rise. How would this affect your conclusion in part (D) about the long run equilibrium price of coffee ? 2 pts
F) Suppose that technological innovation in coffee cultivation greatly reduced the amount of labor used per ton of beans harvested but required farmers to invest in substantially more large scale capital equipment and computerized hydration management systems.
Draw a diagram illustrating the effect on the typical grower's average total cost curve. (i.e. draw a "before" and "after" ATC schedule). What is the effect of this technological change on the minimum efficient scale of production? 3pts
2)Bob and Jane decide to open their own business selling ergonomically correct office furniture that Jane has designed. Assume they operate this business from leased office space near their home. Also assume that they lease their computer equipment and data base software. Their lease agreements are for 1 year.
The actual production of the furniture kits is subcontracted to various commercial factories as customer orders arrive and the unassembled kits are shipped via UPS to clients throughout the U.S. Their target market is small businesses including those run out of home offices.
They have so much faith in the potential of Jane’s designs that they quit corporate jobs in marketing and MIS administration (which jointly had earned them $300,000 per year), and sink $500,000 (.5 million) of their own funds into this venture at the start of their first year to place advertising in trade journals and on the internet. (Assume this $500,000 had previously been invested in a diversified portfolio that had been averaging a 10% annual before tax rate of return.) At the end of the year they calculated that they had the following costs and revenues.
Total Revenues: $6.0 million
Payments to furniture subcontractors $4.0 million
Shipping Costs .1 million
Lease Payments on Office Space and Computer
Equipment &Software $ .5 million
Overhead Expenses: Insurance, utilities etc. $ .1 million
Advertising on Internet & Magazines
(Purchased at start of year) $ .5 million
Additional Sales Expenses (phones, business travel, $ .2 million
Entertaining clients etc.)
Total Listed Costs = $ 5.4 million
a) What were Bob & Jane's fixed costs during their first year of operation ? Explain your answer. 3 pts
b) Bob and Jane brag to their friends that their business earned a profit of $600,000 in its first year. Would an economist agree? Explain, and if not identify their economic profit level. 4 pts
3) The music business has been in a funk ever since 2001. Sales of albums in the U.S. are down 45% from their 2000 peak. But over that same period, concert-ticket sales have more than doubled, to $4.2 billion last year, according to trade magazine Pollstar.
A) Draw a supply/demand diagram showing the changes in the market for live rock concerts over the period 1998 and 2008 that is consistent with the facts given above about ticket prices, ticket sales revenues and implied changes in numbers of concert tickets purchased. Be sure to clearly label your axes and all lines in your diagram 4pts
B) Why do you think fewer rock albums are sold now despite the surge in sales of tickets to live performances.? Explain your answer in terms of shifts in supply and/or demand shifts for albums. 3 pts
4) Briefly explain how and why the developments discussed in the Wall Street Journal Story below affect the elasticity of demand for the flat screen TV’s produced by an individual firm such as Sony or Panasonic. 3pts
As Flat-Panel TV Sales Soar,
Unlikely Retailers Step In
Want a flat-panel TV with that tool belt?
Home-improvement, clothing and office-supply stores plan to crash the party for big-screen television sets now dominated by Best Buy Co. and other electronics retailers. The development highlights the starring role that super-slim TVs are taking not just in the living room but in every nook of the home. And the new outlets could trigger ever-faster price declines as lower-cost, lesser-known brands grab shelf space and consumer recognition.
Next month, for example, Office Depot Inc. will begin selling a dozen flat-panel models. Home Depot Corp. is testing liquid-crystal and plasma TV sales in anticipation of a broad entry. Kohl's Corp., the Wisconsin department-store chain, rolled out its first line of LCD TVs this summer, and RadioShack Corp., which left the market several years ago, has returned with flat-panel sets.
All these retailers hope to tap soaring flat-TV consumer demand in the U.S. and Canada, which is expected to reach $20.2 billion this year, up 79% from last year. More stores are carrying the big-screen TVs in part because more companies are making them. Researchers count some 90 flat-panel brands sold in North America now, up from 63 last year
5)Assume that the downward sloping line in the graph on the next page represents the amount of money that a typical snowboarder /skiier visiting Mount Mogul ski resort on a typical day would be willing to pay for successive lift trips up the mountain if lift trips were charged by the individual ride and all-day ski passes were not available. (see next page).
a)Why does the typical skier’s WTP (willingness to pay)schedule slope downward ? 2pts
b)Suppose all skiers at Mount Mogul had the same WTP schedule as this skier and the resort operator charged $5 per ride up the lift. What is the elasticity of demand at this price? Show your calculations! 3pts
c)Is $5/lift ride the per ride price which maximizes revenue? Explain , using the elasticity concept in your answer. 3pts
d)show (or clearly describe) the area on the graph that would correspond to consumer's surplus earned by the typical boarder/skiier with this payment scheme. Explain your answer briefly. 3pts
e)If the ski-resort owner eliminates the possibility of buying single ride lift tickets and instead sells only an all-day lift pass, entitling the skier/boarder to as many trips up the mountain as desired, what is the maximum price that could be charged without discouraging the skier from coming to Mount Mogul. ? 2pts
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