1. (10 points) Ethanol is a fuel that is produced from corn. Ethanol can be used as a fuel in certain types of cars and some varieties of gasoline have ethanol blended in them. Producing corn for ethanol has become very popular over the last 20 years since it is very profitable. In many parts of the country there are government mandates for blending ethanol into the gasoline that is sold by gas stations. This has led to an increased production of ethanol and therefore the use of corn to produce ethanol. Ethanol producers are willing to pay higher prices for corn than consumers of corn for food. If corn is used for producing ethanol, it cannot be used as food.
What impact has this had on the supply of corn for the food industry and the price of corn for food? Please explain and show the changes on a demand-supply graph for the corn for food industry. Your graph must show any shift of the curves that occurs and explain why that shift occu
ed.
2. (10 points) (a) As long as a prescription drug is under patent, the company has a monopoly, and no one can copy the drug. When the patent expires, generic manufacturers can copy the drug legally. What impact does the patent expiry have on the price elasticity of demand for the drug? Please give an explanation.
(b) When the price of butter was "low," consumers spent $5 billion annually on its consumption. When the price doubled, consumer expenditures increased to $7 billion. Is demand for butter elastic or inelastic? Please explain.
3. (10 points) Executives at Leonesse Cellars, a premium winery in Southern California, were surprised to learn that shipping wine by sea to some cities in Asia was less expensive than sending it to the East Coast of the United States by road, so they started shipping to Asia. Because of the large U.S. trade deficit with major Asian countries, cargo ships from Asian countries a
ive at West Coast ports fully loaded but return half to completely empty. Use the concept of opportunity cost to help explain why shipping to Asian cities on these cargo ships returning to those cities would be cheaper than shipping by land to the East Coast of the United States. You must give an explanation.
4.(10 points) (a) A city has nearly 500 restaurants with new one entering regularly as the population grows. The city decides to limit the number of restaurant licenses to 500. Which characteristics of this market are consistent with perfect competition and which characteristics are not consistent with perfect competition? Please give an explanation.
(b) Does an individual perfectly competitive firm have any incentive to invest in research and development? You may assume that the market remains perfectly competitive both before and after the research and development and therefore all the assumptions of perfect competition will hold at all times. Please give an explanation.
(c) The United States Postal Service (USPS) has a constitutionally guaranteed monopoly on first class mail (mailing an envelope for $0.55). The monopoly exists to this day. Why hasn’t this monopoly enabled the USPS to earn profits (they cu
ently lose a few billion dollars every year)? Please give an explanation.
5. (10 points) The following provides information for a one-shot game.
Firm A
Firm B
Low Price
High Price
Low Price
(2, 2)
(10, −8)
High Price
(−8, 10)
(15, 15)
The first number in
ackets is Firm A’s return, and the second number in
ackets is Firm B’s return.
Firm A and Firm B operate in a duopoly in which you and a rival must simultaneously decide what price to advertise in the weekly newspaper.
(a) Does Firm A have a dominant strategy? If yes, what is that dominant strategy?
(b) Does Firm B have a dominant strategy? If yes, what is that dominant strategy?
(c) Is there a Nash equili
ium (or Nash equili
iums) for the above game? If yes, what is that
Nash equili
ium?
(d) What will the collusive outcome be for the above game?
(e) If a collusive outcome is reached, will either firm have an incentive to cheat on the
agreement? Please explain.
6. (10 points) Package deals are common in vacation travel. Paradise Vacations is selling trips to Hawaii for a weekend holiday. The tourists can buy the flights and hotel separately or they can buy the bundle.
Flight
Hotel
Bundle (Flight and Hotel)
Allen
$400
$50
$450
Ba
ara
$350
$350
$700
Colin
$50
$400
$450
The dollar values in the table are the amount each consumer is willing to pay for that particular option.
(a) Assume that the Flight and hotel are sold separately. Each consumer has to be charged the same price for a flight and the same price for a hotel. What would the optimal price be if pricing was done in this manner? Please explain.
(b) Assume that only a bundle of the Flight + Hotel are available. What is the optimal bundle price of the bundle? Please explain.
(c) Assume that the Flight and the Hotel are available separately and as a bundle. What price of the hotel and flight separately, and then as a bundle would lead to maximum revenue for Paradise Vacations (you will have to determine the individual price and the bundle price)? Please give an explanation.
7. (10 points) (a) Please explain how if the United States gives Covid-19 vaccines for free to poor developing countries, that might result in benefits for both the United States and for the developing countries. Is this an externality for the United States? You must give an explanation.
(b) Are Covid -19 vaccines in the United States a public good? Assume that there is no shortage of vaccines in the U.S. and the vaccines are paid for either by the government or by health insurance. Please explain.
(c) Are Covid-19 vaccines in India a public good? In India there is a shortage of vaccines, and the public has to pay out-of-pocket for the vaccines. Please explain.