WINTER BREAK WORK (MICROECONOMICS)

Complete ALL of the following Questions. Be careful to clearly explain your reasoning and to provide clear labels to all graph axes and curves.

  1. Salmon and tuna are substitutes in perfectly competitive markets that are experiencing long-run equilibrium.
  2. Suppose that an unforeseen change in the weather patterns of the Pacific Ocean dramatically reduces the salmon population while leaving the tuna populations unaffected. In a correctly labeled graph, show how this weather pattern initially affects:
  3. Equilibrium price and quantity in the market for salmon.
  4. Charlie owns a perfectly competitive tuna fishing boat. Explain how changes in the market for salmon affect each of the following:
  5. Price of tuna in the market.
  6. Quantity of tuna produced in the market.
  7. Quantity of tuna produced by Charlie's firm.
  8. Economic profit or loss for Charlie's firm.
  9. Describe how the situation in the tuna market described in part (B) adjusts in the long run. Be sure to predict how the following changes in the long run:
  10. Price of tuna in the market.
  11. Quantity of tuna produced in the market.
  12. Quantity of tuna produced by Charlie's firm.
  13. Economic profit or loss for Charlie's firm.
  1. Assume the following about the market for cigarettes.
  2. Cigarettes are sold in a competitive market.
  3. Cigarettes have no close substitute.
  4. The demand for cigarettes is price inelastic.

Suppose now that the government imposes a per unit excise tax on producers of cigarettes.

  1. Using a correctly labeled graph, show the impact of the excise tax on each of the following in the cigarette market:
  2. Price.
  3. Output.
  4. The area of tax revenue collected by the government.
  5. Dead weight loss from the tax.
  6. Given that demand for cigarettes is price inelastic, will consumer spending on cigarettes increase, decrease, or remain constant? How do you know?
  1. Two rival firms operate in an oligopoly and, once a year, choose an advertising strategy. The firms can choose between an expensive television and radio advertising campaign (costly ads) or an inexpensive direct mail advertising campaign (cheap ads). Television and radio cost more, but reach more potential customers. Each firm decides their advertising strategy independently on January 1, 2007 and, once chosen, cannot alter the decision until January 1, 2008. The table below summarizes the profits each firm would earn given their own, and their rival's strategy. Use this matrix to answer the following questions.
  1. Suppose Firm 1 chooses Costly Ads and Firm 2 chooses Cheap Ads.
  2. Identify the profit for Firm 1.
  3. Identify the profit for Firm 2.
  4. It is now January 1, 2007 and each firm must independently make the advertising strategy decision. Is there a dominant strategy in this game? Explain how you know.
  5. If each firm chooses the advertising strategy independently without collusion, what is the outcome of this game?
  6. Is the outcome of this game an example of a "prisoners' dilemma"? Explain your answer.
  1. Bob's Beans is a perfectly competitive soybean producer. The short-run price of soybeans is currently below average total cost, but above Bob's shut-down point.
  2. Using two correctly labeled graphs, show the soybean market side-by-side with Bob's Beans. Clearly indicate which graph represents the market and which represents Bob's Beans. In your graphs, identify:
  3. Price and quantity in the soybean market.
  4. Price and quantity for Bob's Beans.
  5. The area of economic profit or loss for Bob's Beans.
  6. In a new set of side-by-side graphs for both the market and Bob's Beans, show the longrun adjustment in each of the following:
  7. Price and quantity in the soybean market.
  8. Price and quantity for Bob's Beans.
  9. Suppose now that Bob's Beans is a monopoly producer of soybeans. In a correctly labeled graph, show a profit-maximizing monopolist and indicate each of the following:
  10. Price
  11. Output
  12. The area of economic profit or loss for Bob's Beans.
  1. Molly's lemonade stand employs only labor and lemons to produce lemonade. The table below shows how total production changes at different combinations of labor and lemons. Lemonade sells in a competitive market at $1 per cup.

  1. In competitive input markets, each hour of labor costs $6 to employ and each pound of lemons costs $2 to employ. If Molly has a $14 budget for hiring inputs, identify the least-cost combination of labor and lemons. Explain your reasoning.
  2. At the least-cost combination of labor and lemons, identify each of the following:
  3. The output produced.
  4. The economic profit earned.
  5. Identify the profit-maximizing quantities of labor and lemons. At the profit-maximizing quantities of labor and lemons, identify each of the following:
  6. The output produced.
  7. The economic profit earned.
  1. The production of pork on large corporate hog farms generates pollution that seeps into the ground and can pollute the local well-water supply.
  2. From society's perspective, use marginal analysis to explain how the competitive market creates a misallocation of resources in the market for pork.
  3. In a correctly labeled graph, illustrate the market for pork and identify:
  4. The market equilibrium price and quantity of pork.
  5. The socially optimal price and quantity of pork.
  6. Recommend an appropriate policy that would correct for the misallocation of resources in the pork industry.