03 Jun Question 1. The music business has been in a funk ev
Question
1. The music business has been in a funk ever since 2001. Sales of albums in the U.S. by 2008 were
down 45% from their 2000 peak. But over that same period, concert-ticket sales revenues have
more than doubled to 4.2 billion in 2008 despite significant increases in average concert ticket
prices, according to trade magazine Pollstar. (See Charts below)
A) Draw a supply/demand diagram showing the CHANGES in the market for live rock concerts over the
period 1998 and 2008 that is consistent with the facts given above (and
in the charts below) about ticket prices and ticket sales volume. Be sure to clearly label your axes and all
lines in your diagram 4pts
B) Why do you think fewer rock albums are sold now despite the surge in sales of tickets to live
performances.? Explain your answer in terms of shifts in supply and/or demand shifts. 4 pts
2. Bob and Jane decide to open their own business selling ergonomically correct office furniture that
Jane has designed. Assume they operate this business from leased office space near their home.
Also assume that they lease their computer equipment and data base software. The actual
production of the furniture is subcontracted to various commercial factories as customer orders
arrive and the unassembled kits are shipped via UPS to clients throughout the U.S. Their target
market is small businesses including those run out of home offices.
They have so much faith in the potential of Janes designs that they quit corporate jobs in marketing and
MIS administration (which jointly had earned them $300,000 per year), and sink $600,000 (.6 million) of
their own funds into this venture at the start of their first year to place advertising in trade journals and
on the internet. (Assume this $600,000 had previously been invested in a diversified portfolio that had
been averaging a 10% annual before tax rate of return.) At the end of the year they calculated that they had the following costs and revenues.
Total Revenues: $8.0 million
Costs:
Payments to furniture subcontractors $6.0 million
Shipping Costs .2 million
Lease Payments on Office Space and Computer
Equipment &Software $ .2 million
Overhead Expenses: Insurance, utilities etc. $ .1 million
Advertising on Internet & Magazines
(Purchased at start of year) $ .6 million
Additional Sales Expenses (phones,business travel, $ .3 million
Entertaining clients etc.)
Total Listed Costs = $7.4. million
a) Is Bob & Jane’s economic profit different from their accounting profit? If so, how much economic
profit did they earn during this first year of operation?
3 pts
b) What were Bob & Jane’s fixed costs during their first year of operation? Explain briefly. 3 pts
Pictured above are the Marginal Cost, Average Variable Cost and Average Total Cost schedules of a
contract sewing factory which produces womens blouses for major clothing retailers. Prices are
contract prices per dozen blouses. Quantities are thousands of dozens per month. Arrows show
some Price – Quantity combinations on the cost curves. Assume that there are 500 firms in the
market and all are using the same technology as this firm.
a) What is the minimum efficient scale of production for this firm? Explain in a sentence or two.
(2pts)
b) At what level of output does the firm start to experience diminishing marginal productivity of its
variable inputs. (Explain in a sentence or two) (2pts)
c) If the current market price is $95/dozen, how much will this firm produce per month? (explain
in a few sentences) (2pts)
d) Is this the long run equilibrium price in this market? Explain your answer in detail and if there is
a different equilibrium price identify that price. (4pts)
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