Economics Assignment
Note: You may work on this with other students in the class. However, the Honor Code obligates you to note any help you receive. So, for example, put a note on your assignment that says something like "I worked with X on this."
You may also work in a group and turn in one copy of the assignment with, obviously, everyone's name on the assignment. If you do this, the Honor Code implies that you will not allow your name to be put on the assignment if you have not shared in the work, nor will you put someone's name on if that person has not participated seriously in the work.
I am not putting any limit on the size of a group that may work together on this assignment. Make me happy and avoid free riding.
1. Two parts in an automobile taillight are the plastic exterior cover and the light bulb. Which of these parts is an automobile company more likely to manufacture in-house? Why?
2. As I mentioned in class, U.S. automobile manufacturers have traditionally been highly vertically integrated, not only assembling parts into automobiles but also producing the parts themselves. Japanese automobile manufacturers, in contrast, are much less highly integrated. They rely on a network of supplier firms for parts.
Japanese firms sometimes share technical personnel with their suppliers. Can you explain this using the theory of the firm? What concerns would motivate the firms to share personnel?
3. A study of 130 stock purchase plans found that, on average, these plans offered about 8 percent of the corporation's stock to its managers at a discount of 12 to 15 percent off the market price. Typically, the plans allowed the managers to borrow funds at very low interest rates to buy the shares.
a. Explain the purpose of these stock purchase plans.
b. The stock market generally viewed the institution of such a plan positively.
Following the announcement of a plan, the value of a firm's shares rose, on average, 3 percent above the market trend. What does this say about the stock market's evaluation of the effectiveness of the stock purchase plan?
4. Let a firm's total cost function be given by TC = 100 + 4q + 4q2, where q is measured in millions of units of output. Does this cost function exhibit economies of scale? Explain the reasoning behind any calculations that you do.
5. Consider the following cost relationships for a firm:
TC = 50 + 0.5q for q < 7
TC = 7q for q greater than or equal to 7
a. Find the average cost and marginal cost for all integer outputs less than 7.
b. What are average and marginal costs for all outputs greater than or equal to 7?
c. Find the minimum efficient (or minimum optimal) scale of plant implied by these cost relationships. Explain your reasoning briefly.
d. Let P be industry price and Q be total industry output. If the industry demand curve is P = 84 - 0.5Q, what is the maximum number of efficient-sized firms that the industry can sustain? Explain your reasoning briefly.
6. The Elizabeth Jensen company produces a number of products including men's shirts and cologne. Let the total cost functions associated with these products be:
C(QS, 0) = 2 + √QS
C(0, QC) = 2 + QC2
C(QS, QC) = 3 + √QS + QC2
where QS is the quantity of shirts produced and QC is the quantity of cologne produced.
a. Are there economies of scale associated with the production of shirts? Explain your reasoning and show any relevant calculations.
b. Are there economies of scale associated with the production of cologne? Explain your reasoning and show any relevant calculations.
c. Why might there be economies of scope associated with the production of shirts and cologne-i.e., tell the story!
d. Given these cost functions, are there in fact economies of scope associated with the production of shirts and cologne? Explain your reasoning and show any relevant calculations.
7. Consider the owner of a junk yard. She can use one of two methods to destroy cars. The first involves purchasing a hydraulic car smasher which costs $200 a year to own and then spending $1 for every car smashed; the second method involves purchasing a shovel that will last one year and costs $10 and paying an employee to bury the cars at a cost of $5 each.
a. Explain to the owner why she should do some market research about expected demand before she makes a decision about which technology to buy.
b. Explain to the owner why she should think about the resale value of the hydraulic car smasher as she is deciding which technology to invest in. How should an increase in the resale value of the smasher affect her decision?
8. Assume that the manufacturing of cellular phones is a perfectly competitive industry. The market demand for cellular phones is given by the linear demand function:
QD = (6000 - 50P) / 9
There are fifty manufacturers of cellular phones, and each manufacturer has the same production costs. The total cost function is given by:
TC = 100 + q2 + 10q
a. Find the equation of each firm's supply curve.
b. Derive the equation of the industry supply curve.
c. Find the equilibrium market price and quantity.
d. How much output does each firm produce?
e. Find the profits of each firm at equilibrium.
f. Find consumer surplus at the competitive equilibrium.
g. Find producer surplus at the competitive equilibrium.
9. A monopoly faces market demand Q = 30 - P and has a cost function C(Q) = ½ Q2.
a. Find the profit-maximizing quantity and price and the resulting profit to the monopoly.
b. What is the socially optimal price? Calculate the deadweight loss due to the monopolistic behavior of this firm.
10. In a small town in central New York, there is only one fortune teller. The demand curve for her services is given by Q = 24 - 2P and her cost function is given by TC(Q) = 4 + 2Q.
a. Find the fortune teller's profit-maximizing level of output, price, and profit.
b. Compute the price elasticity at the profit-maximizing level of output.
11. The market demand for widgets is given by Q = 1000 - 50P. Suppose that a perfectly competitive industry produces widgets at a constant marginal cost of $10 per unit. If the industry becomes monopolized, marginal costs rise to $12 per unit because $2 must be paid to lobbyists to retain the widget producers' protected position.
a. Calculate the market output and price under perfect competition and under monopoly.
b. Calculate the total loss of consumer surplus from monopolization of widget production. Graph your results.
c. Comment on the welfare effects of monopolization that increases costs compared to monopolization that does not affect costs.