Managerial Economics Midterm Questions -

Q1) Let the monthly demand for cheese in Colorado be D(p) = 40,000 × (20 - p) pounds and let monthly supply be S(p) = 40,000 × (p - 4) pounds.

a) What is the price of cheese in Colorado? What are consumer and producer surplus?

b) Suppose Colorado wishes to support its cheese industry, and offers a subsidy of $4 per pound of cheese sold. What is the price consumers pay after the subsidy is imposed? What is government surplus?

Q2) In this question, you will use the skills you've acquired in this class to analyze an issue currently being debated in Congress. On September 17th, the House Energy Panel passed a bill repealing a 40 year ban on oil exports. Supporters argue that "Gasoline prices are based on global crude oil prices so an increase in global energy supply caused by the influx of U.S. crude into the market will cause a decrease in consumer fuel prices. IHS Energy predicts that consumers will save $265 billion in lower fuel prices between 2016 and 2030 if exports are allowed."1 Let's use a simple model to see whether those claims are likely to be right. Suppose that US demand for oil is D(p) = 250,000 × (80 - p) barrels per day and the supply from domestic oil producers is S(p) = 500,000 × (p - 20) barrels per day. For the purposes of this question, assume that all oil is identical and the oil market is perfectly competitive.

a) Suppose that the US makes illegal all oil imports and exports, so that all sales and purchases must come from US producers and consumers, respectively. What is the price for oil in the US? How much is sold? What are consumer and producer surplus?

b) Suppose that the supply of oil from foreign producers is given by S(p) = 2,000,000 × (p - 20) and foreign demand is D(p) = 2,250,000 × (80 - p). What is the foreign price of oil (give me a price up to two decimal points)?

c) Now suppose that the US decides to open up to international trade. It will allow imports and exports of oil. Assume that there is one "world" price of oil and that world supply must equal world demand. What is the world price? Will the US import oil, or export oil? What are producer and consumer surplus for American oil firms and consumers?

d) US Senator Heidi Heitkamp (D), North Dakota, argues that US consumers pay prices based upon the world price, which you found in parts (b) and (c). She argues that allowing the US to export oil would reduce the world price, and therefore reduce prices for US consumers. She is correct that US refineries pay for US produced oil using prices based off of foreign prices. She is also correct that allowing US exports would decrease foreign prices. But does this mean that allowing US exports would reduce US prices? For this question, fill in the blanks in each sentence below.

1. If world prices for oil fall, foreign demand of oil will ______________.

2. If US prices for oil fall, then US demand of oil will ______________.

3. If world prices for oil fall, then the world supply of oil will ______________.

4. If we are currently in equilibrium, then the ______________ of oil must equal the ______________ for oil at current prices.  

5. Therefore, to stay in equilibrium after the law is changed, the ______________ of oil must equal the ______________ for oil at the new world price.

6. Sentences (1), (2) and (3) establish that this will not be the case if Senator Heitkamp's argument is correct.

e) Using your results from (a) and (c) concerning consumer and producer surplus before and after the change in the law, explain (in two sentences or less) what interest groups are likely to be lobbying for a new law.

Q3) Circle the most appropriate answer:

a) Since August, automobile inventories have been rising. Moreover, recent unemployment numbers suggest that European economies will grow more slowly than expected. What direction are auto prices likely to go?

HIGHER or LOWER or UNCLEAR

b) The elasticity of demand for fast food meals is -1, and the elasticity of supply is 3. Suppose a new minimum wage law increases costs by $1 per meal. What is the likely effect on meal prices?

  $0    $0.25    $0.50    $0.75    $1.00    UNCLEAR

c) Suppose a cap and trade system has been put in place for SOx pollution and the current permit price is $0. Suppose the government increases the number of permits. The permit price is likely to:

INCREASE    DECREASE    STAY THE SAME    UNCLEAR

d) Suppose that demand for pineapples is highly inelastic, and that Hawaii accounts for a large fraction of world pineapple production. A hurricane has destroyed half of the pineapple plants in Hawaii. Pineapple growers are probably better off.

TRUE or FALSE

e) It is never possible for taxes and subsidies to increase total surplus.

TRUE or FALSE

f) Managers in industries with highly inelastic demand don't need to worry much about policies that have industry-wide effects on costs.

TRUE or FALSE

g) Managers in industries with highly inelastic supply don't need to worry much their own costs.

TRUE or FALSE

Q4) Let the demand for steel be D(p) = 20,000 × (80 - p) tons and the supply of steel be S(p) = 100,000 × (p - 20) tons. Each ton of steel produced creates 30 units of NOx pollution.

a) Suppose that a cap and trade scheme is in place for the steel market and the cap on NOx pollution is 24,000,000 units. What is the price of steel in this market? What is the price of a permit?

b) Suppose the government increases the number of permits to 35,000,000. What is the new price of steel and price of a permit?

c) How many permits must be issued before the price of a permit falls to zero?