Question Details

Answered: - Does anyone can help me the Question 4 in this homework. T


Does anyone can help me the Question 4 in this homework. Thank you.


Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 1

 


 

1. (6 Points) Suppose that AmazonFresh and Peapod compete in the online grocery delivery

 

business. Both firms are considering entering the Chicago market and offering online grocery

 

delivery in Chicago, IL. The payoffs are as follows:

 

?

 


 

If both companies enter the Chicago market, next year AmazonFresh earns $400 million

 

in profit and Peapod earns $200 million in profit.

 


 

?

 


 

If neither company enters the Chicago market, next year AmazonFresh earns $360

 

million in profit and Peapod earns $200 million in profit.

 


 

?

 


 

If AmazonFresh enters the Chicago market and Peapod does not enter the Chicago

 

market, next year AmazonFresh earns $450 million in profit and Peapod earns $225

 

million.

 


 

?

 


 

If AmazonFresh does not enter the Chicago market and Peapod enters the Chicago

 

market, next year AmazonFresh earns $350 million in profit and Peapod earns $250

 

million.

 


 

Complete the payoff matrix to answer the following questions:

 

AmazonFresh

 

Enter Chicago

 

Don?t Enter Chicago

 

Enter

 

Chicago

 

Peapod

 

Don?t Enter

 

Chicago

 

a) (2 Points) Indicate the dominant strategy ? if any ? for AmazonFresh and Peapod:

 

AmazonFresh

 


 

Peadpod =

 


 

b) (2 Points) What is the Nash Equilibrium of the game?

 


 

c) (2 Points) The repeated interaction of people and firms in the real world leads to more

 

cooperation than economists would predict in the standard prisoner?s dilemma.

 

_________.

 

A. True.

 

B. False.

 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 2

 


 

2. (10 Points) Sunny weather is here and it?s time to garden! The graphs below depict the

 

perfectly competitive seed market and a representative firm, Sid?s Seeds.

 

Sid?s Seeds

 


 

The Seed Market

 


 

$8

 


 

$8

 


 

$7

 


 

$7

 


 

$6

 


 

MC

 

ATC

 


 

$5

 


 

$6

 

$5

 


 

$4

 


 

$4

 


 

$3

 


 

S

 


 

$3

 


 

AVC

 


 

q

 


 

1400

 


 

1200

 


 

1000

 


 

800

 


 

600

 


 

400

 


 

200

 


 

D

 

0

 


 

24

 


 

22

 


 

20

 


 

18

 


 

16

 


 

14

 


 

12

 


 

10

 


 

$0

 


 

8

 


 

$0

 

6

 


 

$1

 


 

4

 


 

$1

 


 

2

 


 

$2

 


 

0

 


 

$2

 


 

Q

 


 

a) (2 Point) The market equilibrium price is ____ and the market equilibrium quantity is _____.

 

b) (2 Points) In the short-run, each firm produces at q=_____.

 

c) (2 Points) On the graph, shade in the firm?s profits.

 

d) (4 Points) Explain what will happen in the long-run by describing the full market adjustment

 

process. Provide specific numbers for the number of firms in the industry in the long-run,

 

the long-run market equilibrium price, and the long-run market quantity.

 


 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 3

 


 

3. (10 Points) Many patients need blood transfusions. Below is the daily market for blood. In the

 

US, the Food and Drug Administration (FDA) is responsible for ensuring the safety of the blood

 

supply. FDA rules say that blood for transfusions cannot be bought, thereby ensuring a price

 

ceiling of $0.

 

P

 


 

30

 


 

K

 


 

F

 


 

A

 


 

25

 

20

 


 

G

 


 

B

 


 

15

 


 

J

 


 

E

 


 

L

 


 

10

 

5

 


 

M

 


 

D

 


 

C

 


 

I

 


 

H

 


 

0

 

0

 


 

20

 


 

40

 


 

60

 


 

80

 


 

100

 


 

120

 


 

140

 


 

160

 

Quantity

 


 

a) (1 Point) Show the effect of the price ceiling by clearly labeling on the graph:

 

o Quantity Supplied after the price ceiling, QS.

 

o Quantity Demanded after the price ceiling, QD

 

b) (1 Point) After the price ceiling, there is a _____________ of ___________ units of blood.

 

c) (6 Points) For each item below, indicate the corresponding area(s) from the graph:

 

1)

 


 

Consumer Surplus, before the FDA Rule

 


 

2)

 


 

Producer Surplus, before the FDA Rule

 


 

3)

 


 

Total Revenue, before the FDA Rule

 


 

4)

 


 

Consumer Surplus, after the FDA Rule

 


 

5)

 


 

Producer Surplus, after the FDA Rule

 


 

6)

 


 

Total Economic Surplus, after the FDA Rule

 


 

d) (2 Points) Does the FDA Rule make the market more or less equitable? Defend your answer.

 


 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 4

 


 

4. (25 Points) Suppose only two firms ? Spotify and Pandora ? provide streaming music services

 

and they behave like a duopoly. The market demand for streaming music services is depicted on

 

the graph below. Assume neither firm has fixed costs and the average variable costs are a

 

constant $4.

 

Price (per month)

 


 

$25

 


 

Market for Streaming Music Services

 

$20

 


 

$15

 


 

$10

 


 

$5

 


 

Demand

 


 

Quantity

 


 

a) (4 Points) Suppose Spotify and Pandora successfully collude as a cartel and split output and

 

profit evenly. Indicate the following:

 

Price Charged by Spotify:

 


 

Quantity Produced by Spotify:

 


 

Price Charged by Pandora:

 


 

Quantity Produced by Pandora:

 


 

b) (3 Points) On the graph above, clearly indicate the Total Profits of the Industry.

 

c) (4 Points) Is the market efficient? Explain why or why not. Indicate any inefficiency on the

 

graph.

 


 

d) (4 Points) Assume Spotify and Pandora engage in a price war. The long-run equilibrium is:

 

Price Charged by Spotify=

 


 

Quantity Produced by Spotify=

 


 

Economic Profits of Spotify =

 


 

12,000

 


 

11,500

 


 

11,000

 


 

10,500

 


 

10,000

 


 

9,500

 


 

9,000

 


 

8,500

 


 

8,000

 


 

7,500

 


 

7,000

 


 

6,500

 


 

6,000

 


 

5,500

 


 

5,000

 


 

4,500

 


 

4,000

 


 

3,500

 


 

3,000

 


 

2,500

 


 

2,000

 


 

1,500

 


 

1,000

 


 

500

 


 

0

 


 

$0

 


 

Deadweight Loss in the Market=

 


 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 5

 


 

e) (4 Points) Examine the Consumer Surplus in the market when the duopolists are colluding

 

and after the price war. Explain the two reasons that Consumer Surplus changes:

 

1)

 


 

2)

 


 

f) (2 Points) To many consumers, mobile phones and streaming music services are

 

complements. If the price of mobile phones were to rise, the price charged when Spotify and

 

Pandora collude would: _______

 

A. Rise

 

B. Fall

 

C. Stay the same

 

g) (4 Points) Yesterday, the attorneys general of Connecticut and New York announced they

 

were opening an antitrust investigation regarding Apple?s dealings with music companies for

 

Apple?s new subscription music service. The attorneys general wanted to know whether

 

Apple pressured the music companies ? or whether the companies conspired with Apple

 

and one another ? to stop supporting free streaming services in favor of paid streaming

 

music services.

 

The Attorney General of New York released a statement saying, in part that ?the attorney

 

general was looking into Apple?s negotiations with music labels to preserve the benefits

 

consumers have enjoyed from these new streaming services. ?It?s important to ensure that the

 

market continues to develop free from collusion and other anticompetitive practices.?

 

Why is it important that a market develop from free collusion?

 


 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 6

 


 

Price

 


 

5. (22 Points) Deforestation is a problem around the world. Logging of trees for lumber damages

 

recreational areas, erodes the soil, and eliminates wildlife habitats. But, wood from this lumber is

 

needed to build houses, decks, and other structures. The market for lumber has the following

 

supply (private marginal cost) and demand (private marginal benefit). Assume that the

 

production of each piece of lumber causes $15 in marginal damage to society.

 

$80

 


 

Market for Lumber

 


 

$70

 

$60

 

$50

 


 

S

 


 

$40

 

$30

 


 

D

 


 

$20

 

$10

 


 

Quantity

 


 

a) (2 Points) Label the Social Marginal Benefit (SMB) and Social Marginal Cost (SMC) curves.

 

b) (4 Points) Indicate the following:

 

Price set in Private Market=

 


 

Quantity set in Private Market=

 


 

Socially efficient Price=

 


 

Socially Efficient Quantity =

 


 

c) (2 Points) The appropriate Pigouvian tax would a tax = _________.

 

d) (3 Points) After implementing the appropriate Pigouvian tax, label the following on the

 

graph:

 

? Price Buyers Pay (PB)

 

? Price Sellers Receive (PS)

 

? Tax Revenue (TR)

 

e) (2 Points) What is the economic incidence of the appropriate Pigouvian Tax?

 


 

Points

 

Earned:

 


 

1,500

 


 

1,450

 


 

1,400

 


 

1,350

 


 

1,300

 


 

1,250

 


 

1,200

 


 

1,150

 


 

1,100

 


 

1,050

 


 

1,000

 


 

950

 


 

900

 


 

850

 


 

800

 


 

750

 


 

700

 


 

650

 


 

600

 


 

550

 


 

500

 


 

450

 


 

400

 


 

350

 


 

300

 


 

250

 


 

200

 


 

150

 


 

100

 


 

50

 


 

0

 


 

$0

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 7

 


 

f) (2 Points) What is the Deadweight Loss in the market after the Pigouvian Tax? Explain.

 


 

g) (2 Points) Assume that the US emerges from a recession and consumer income rises. On the

 

graph below, show what will happen to the private market for lumber. (Note: No specific

 

price or quantity is required, but please indicate the direction of the effect.) Describe your

 

economic reasoning, including any assumptions you are making about the market for lumber.

 

Economic

 

Reasoning:

 


 

Price

 


 

$80

 


 

Market for Lumber

 


 

$70

 

$60

 

$50

 

$40

 


 

S

 


 

$30

 

$20

 


 

D

 


 

$10

 


 

1,500

 


 

1,400

 


 

1,300

 


 

1,200

 


 

1,100

 


 

1,000

 


 

900

 


 

800

 


 

700

 


 

600

 


 

500

 


 

400

 


 

300

 


 

200

 


 

100

 


 

0

 


 

$0

 


 

Quantity

 


 

h) (2 Points) After consumer income rises, at the quantity chosen by the private market, will the

 

total value of damage to the environment change? Explain.

 


 

i) (3 Points) Assume an engineering firm found a way to reduce the marginal damages

 

associated with logging. With the engineering firm?s approach, the marginal damages

 

associated with logging are $10 per each piece of lumber (rather than $15). However, the

 

Pigouvian Tax you suggested in part c) remains in place. Explain how that would change the

 

results for the tax you implemented earlier. Be sure to address the prices buyers pay and

 

sellers receive, the tax revenue, and efficiency of the market.

 


 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 8

 


 

$210

 

$200

 

$190

 

$180

 

$170

 

$160

 

$150

 

$140

 

$130

 

$120

 

$110

 

$100

 

$90

 

$80

 

$70

 

$60

 

$50

 

$40

 

$30

 

$20

 

$10

 

$0

 


 

Market for Celebrex

 


 

ATC

 


 

2,000

 


 

1,900

 


 

1,800

 


 

1,700

 


 

1,600

 


 

1,500

 


 

1,400

 


 

1,300

 


 

1,200

 


 

1,100

 


 

1,000

 


 

900

 


 

800

 


 

700

 


 

600

 


 

500

 


 

400

 


 

300

 


 

200

 


 

100

 


 

Demand

 

0

 


 

Price

 


 

6. (10 Points) Pfizer, one of the largest pharmaceutical companies enjoyed large accounting

 

profits in recent years. One reason for this was that it owned the patent to Celebrex, a drug to

 

reduce joint pain caused by arthritis. The Marginal Cost per unit of Celebrex is a constant $20.

 


 

Quantity (in Thousands)

 


 

a) (1 Point) Draw in the Marginal Cost curve.

 

b) (2 Points) What is the profit-maximizing price and quantity?

 

Price=

 


 

Quantity=

 


 

c) (2 Points) Explain why this outcome may be good for Pfizer but bad for society.

 


 

d) (2 Points) Acupuncture is another way of treating arthritis. Assume acupuncture and Celebrex

 

are substitutes. If the price of acupuncture falls, the price of Celebrex would: ______.

 

A. Fall

 

B. Rise

 

C. Stay the same.

 

e) (3 Points) If Pfizer could perfectly price discriminate, provide the following:

 


 

Quantity=

 


 

Consumer Surplus=

 


 

Deadweight Loss=

 


 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 9

 


 

7. (8 Points) One hundred people want to purchase unemployment insurance. They include:

 

? 20 people with a high probability of losing their job, each willing to pay $6,000

 

? 60 people with an average probability of losing their job, each willing to pay $4,000

 

? 20 people with a low probability of losing their job, each willing to pay $750

 

The insurance company does not know the probability that anyone will lose their job. They do

 

know that 20% of people will have a high probability of losing their job and cost $5,000 each;

 

60% of people will have an average probability of losing their job and cost $3,000; 20% of

 

people have a low probability of losing their job and will cost $500.

 

a) (2 Points) What is the actuarially fair price of unemployment insurance?

 


 

b) (2 Points) If they charge the actuarially fair price, the insurance company?s profits are ____.

 

A. Positive

 

B. Zero

 

C. Negative

 


 

c) (4 Points) Is this an efficient outcome? Explain using appropriate economic terms and

 

reasoning.

 


 

Points

 

Earned:

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 10

 


 

11. (10 Points) Consider the market for cotton t-shirts. The market in the US is depicted below:

 

$25

 

$24

 

$23

 

$22

 

$21

 

$20

 

$19

 

$18

 

$17

 

$16

 

$15

 

$14

 

$13

 

$12

 

$11

 

$10

 

$9

 

$8

 

$7

 

$6

 

$5

 

$4

 

$3

 

$2

 

$1

 

$0

 


 

US T-Shirt Market

 

Supply

 


 

A

 


 

N

 


 

L

 


 

I

 


 

a) (3 Points) If the world price was $9 and the U.S. trades with the rest of the world, indicate the

 

following area(s) from the graph:

 

1. Consumer Surplus: _______________

 

2. Producer Surplus: ________________

 

3. Gains from Trade: ________________

 

b) (2 Point) If the world price was $9 and the U.S. puts a $2 tariff on imports of T-Shirts,

 

consumer surplus will be _________ than the consumer surplus under free trade.

 

A. larger

 

B. smaller

 

c) (2 Points) Clearly shade in the Deadweight Loss on the graph when the world price is $9

 

and the U.S. places a $2 tariff on imports of T-Shirts.

 

d) (3 Points) How much would advocates of the $2 tariff be willing to pay to put the tariff in

 

place? Show your work.

 


 

Points

 

Earned:

 


 

2000

 


 

1900

 


 

1800

 


 

1300

 


 

1200

 


 

Demand

 

1100

 


 

1000

 


 

900

 


 

800

 


 

700

 


 

J

 


 

H

 


 

G

 

600

 


 

500

 


 

400

 


 

300

 


 

200

 


 

100

 


 

F

 


 

K

 


 

1700

 


 

M

 


 

E

 


 

Q

 


 

P

 


 

O

 


 

1600

 


 

D

 


 

R

 


 

1500

 


 

C

 


 

0

 


 

S

 


 

T

 


 

1400

 


 

B

 


 

Section III. Multiple Choice (2 Points Each)

 

For the first two questions, the following table provides the U.S. market share of the major car

 

manufacturers. Use the table to answer the next two questions.

 

General Motors

 

Ford Motor Company

 

Toyota Motor Sales

 

Chrysler LLC

 

Honda Motor Company

 

Nissan Inc.

 

Hyundai Motors

 

Mazda Motors

 

All Other Companies

 


 

Market Share

 

20%

 

17%

 

13%

 

10%

 

10%

 

8%

 

5%

 

2%

 

15%

 


 

1. Using the above information, the HHI in this market is currently:

 

A. 20 + 17 + 13 + 10 + 10 = 70

 

B. 202 + 172 + 132 + 102 + 102 + 82 + 52 + 22 + 152 = 1,376

 

D. (20 + 17 + 13 + 10 + 10)2 = 5,600

 

2. A merger of Honda and Hyundai would change the HHI to:

 

A. 20 + 17 + 13 + 10 + (10 + 5) = 75

 

B. 202 + 172 + 132 + 102 + (10+5)2 + 82 + 22 + 152 = 1,476

 

C. (20 + 17 + 13 + 10 + (10+5))2 = 5,625

 

D. It would have no effect.

 

3. A perfectly competitive firm is a:

 

A. Price-taker.

 

B. Price-searcher.

 

C. Cost-maximizer.

 

D. Quantity-taker.

 

4. The absolute value of the price elasticity of demand for coffee is 0.25. This means coffee is:

 

A.

 

B.

 

C.

 

D.

 


 

An inferior good.

 

A normal good.

 

An inelastic good.

 

An elastic good.

 


 

5. As discussed in the podcast ?Your Doctor is Like a Mechanic? and in class, asymmetric

 

information prevents the health care market from working like any other market.

 

A. True.

 

B. False.

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 12

 


 

6. A monopolist will ______ and _____ than a perfectly competitive firm.

 

A. produce more; charge more

 

B. produce less; charge more

 

C. produce more; charge less

 

D. produce less; charge less

 


 

7. Some costs do not vary with the quantity of output produced. These are

 

A.

 

Marginal costs

 

B.

 

Fixed costs

 

C.

 

Explicit costs

 

D.

 

Average costs

 


 

8. According to the podcast ?Mavericks, Monopolies, and Beer? and discussed in class, a

 

maverick is a

 

A. A small company that does not profit maximize.

 

B. A small company that is essential for keeping a market competitive.

 

C. A small company that does not exit the market even when profits are negative.

 

D. A small company that price discriminates.

 


 

9. Which of the following is an example of moral hazard?

 

A. many individuals listen but do not donate to public radio.

 

B. healthy individuals are priced out of insurance markets.

 

C. doctors are more likely to prescribe a medication when a drug company provides

 

them free samples of medications.

 

D. Individuals with renters insurance are more likely to leave their doors unlocked.

 


 

10. Which of the following is a type of firm that cannot price discriminate?

 

A. Monopoly

 

B. Natural Monopoly.

 

C. Perfectly Competitive Firm.

 

D. Duopoly.

 


 

Points

 

Earned:

 


 

Four ?Free? Points for Completing!

 

I found this Exam: ______

 

A. Incredibly Difficult

 

B. Difficult but Manageable

 

C. Not too Difficult

 

D. Very Easy

 

I spent ___________ hours studying for this Final.

 

I found Econ 2110: ______

 

A. Incredibly Difficult

 

B. Difficult but Manageable

 

C. Not too Difficult

 

D. Very Easy

 

This quarter, outside of lecture, I have spent an average of ___________ hours a week on Economics

 

2110 reading and coursework.

 


 

Professor Katie Fitzpatrick

 


 

Final, Spring 2015, Version 2

 


 

Page 14

 


 

Directions:

 

1. DO NOT turn over the Final until told so.

 

2. All cell phones must be turned OFF. ANY sound arising from your phone will receive a 5

 

point penalty.

 

3. You have 1 hour and 50 minutes to complete the Final

 

4. The Final is worth 125 Points towards your Final Grade.

 

5. You may NOT leave the room during the Final.

 

6. You do not NEED a calculator but you may use one.

 

7. Please use a straight edge so you can draw straight lines.

 

8. Complete multiple choice questions by placing the letter on the line provided.

 


 

Print Name _________________________________________

 

I have abided by the Seattle University Academic Integrity Standards during this exam.

 

Signature

 


 

Points

 

Earned:

 


 

 


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