MGST 611 Spring 2021, Dr. Bailey
Assignment 1
Due: Friday, May 21, 2021 by 8pm MT to D2L Dropbox.
You may work in groups to answer the following questions, but you must write up your own assignment
answers to turn in. Please make PDFs of graphical answers.
1. You’re a producer of fruits and vegetables. You supply produce to local restaurants and grocery
stores, and you directly sell to customers in local farmers’ markets. You operate in a very
competitive market for ca
ots and tomatoes due to global supply chains.
A. A US-Mexico immigration dispute has led to a transportation blockage for tomatoes from
Mexico, which provides a major share of tomato imports to Canada.
i. Describe the market for tomatoes before the transportation issue with a plot.
Identify the market equili
ium ?∗ and ?∗. Include relevant labels on the plot axes.
ii. Show how the transportation issue altered the relevant market curve(s) in the short
un and identify the new equili
ium ?∗ and ?∗. How did the equili
ium ?∗ and ?∗
change?
iii. In response to this new market equili
ium, you could change your short-run
production quantity (and necessary short-run inputs to produce a new quantity).
a. Just looking at the new market equili
ium, should you consider changing
your short-run production? If so, why? If not, why not?
. If so, what factors should you use to decide on whether you should change
your production, your new production amount, and your input amount(s)?
(Feel free to use any combination of writing and equations for this answer
and to elaborate on your potential production process.) (Ignore this
question if you think you should not consider new short-run production.)
iv. You’re constantly working to understand your customers’ demand curve for
tomatoes. What can the transportation debacle tell you about the demand curve for
tomatoes? (Assume that this was the only market shock that occu
ed at this time.)
Provide any relevant equations and interpretations of what they provide.
B. The provincial government has identified that nutrient enrichment of nea
y waterways has
ecome a major environmental and health issue, and your use of fertilizer contributes to
this problem. The government is considering a regulation limiting the use of fertilizer for
ca
ot production. Government and consulting firms estimate that this regulation would
cost ca
ot producers $2 for every 10 ca
ots produced due to decreased productivity (net of
educed fertilizer costs). Due to industry outcry over potential competitiveness effects with
imported ca
ots, the provincial government is also considering an equivalent tariff on
imported ca
ots.
i. Identify how this regulation (and associated tariff, as one policy) would impact the
provincial market for ca
ots and the market equili
ium ?∗ and ?∗ with a plot and
short explanation. Include relevant labels on the plot axes.
ii. Say the aggregate supply curve could be described by ?? = 1,000? and the
aggregate demand curve could be described by ?? = 2,000 − 1,000?. Your CFO is
MGST 611 Spring 2021, Dr. Bailey
stressed out about the regulation, saying that a $2 loss for every batch of 10 ca
ots
is a large cost for your company. Your co-founder suggests that, since the entire set
of producers faces the same cost, you’ll be fine because every company will just
aise prices.
a. What will be the new market price that consumers face after the regulation,
and how much of the cost of the regulation will they take on? What is the
formal economic term for this? (HINT: Don’t be afraid to re-a
ange the
supply or demand curve when solving this problem.)
. What is the new per-unit price that you’ll receive for every ca
ot sold?
(Note this is a regulation, not a tax…) Given the per-unit cost for you to
comply, what is the impact of the regulation on your marginal net revenue?
c. You report this to your CFO and you get into a discussion about whether you
can actually afford this new cost. Say your marginal cost curve (in the region
close to the quantity at which you’re cu
ently operating) is given by ?? =
0.1?, with ? in ca
ots produced/day. You have been operating such that
marginal revenue (??) equals ??. What has been your cu
ent level of
production (without the regulation)? If you continue to operate such that
?? = ??, how much should you produce?
d. Your company had to respond quickly to the new regulation in the short
un. What options could you consider for long-run changes, assuming this
egulation will stay in place?
e. You get into yet another internal discussion about the justification for the
fertilizer regulation. Offer some thoughts on whether this policy could be
justified.
2. Levitt et al XXXXXXXXXXcitation below) examine learning-by-doing in car manufacturing with some
unique data (data that a firm may have internally but that economists can not usually see). Read at
least the introduction of the paper and answer the following questions.
o If you are a car manufacturer, what are some key take-aways from this study for your
work? (List at least two.)
o List any takeaways you can see from the results of this study for firms that are not car
manufacturers.
o Do the results of this study raise additional questions for you? If so, how might you
investigate the answers to those questions?
o Describe at least one limitation of this study.
Levitt, S.D., List, J.A., Syverson, C., 2013. Toward an Understanding of Learning by Doing:
Evidence from an Automobile Assembly Plant. Journal of Political Economy 121, 643–681.
https:
doi.org/10.1086/671137
https:
doi.org/10.1086/671137