04 Jun Question Eco 661 Assignment 1 Spring 2015
Question
Eco 661
Assignment 1
Spring 2015
1. For each of the industry listed below, identify the market structure that best matches the competitive characteristics found in the market where the products are produced and sold. Justify your answer. Note: you may have to conduct some research in answering this question. (5 pts each)
a. Running (athletic) shoes
b. Soft Drinks
c. Dry cleaning
2. Mark quits his job as a company financial officer (CFO), where he was earning $50,000 per year to start his own financial consulting firm. He converts a building that he owns, which was previously rented for $12,000 per year, into and office. Also, he withdraws and uses his $100,000 savings, on which he was earning $5,000 (5 percent) interest per year, to start his business. In his first year of business, he earns $150,000 and has the following expenses: Utilities, $12,000; wages (paid to an assistant), $30,000, and materials, $20,000. Mark tells his friends that despite making profit, it is too costly for him to continue running his consulting firm. How do you justify Mark’s claim (Show all your work). (10 pts)
3. Consider the market for minivans is at equilibrium. Determine, using the supply and demand model, how the following events might affect the equilibrium price and quantity for minivans. Explain why fully. Consider each separately. (5 pts each)
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans
d. The price of station wagon rises.
e. An economic slowdown in the United States causes household income to decrease.
f. Both event in part a and part c above takes place simultaneously and you don’t have other information.
g. Both event in part a and part c above takes place simultaneously and you have the additional information that the effect of the event described in item c is relatively large while the effect of the event described in part a is small.
4. Consider that the general demand function for a product X is estimated to be
Qd = 500 – 5P + 0.5M + 10PY – 2PZ
Where Qd is quantity demanded of good X, P is price of good X, M is consumer income (in thousands), PYis price of good Y, and PZ is price of good Z. (5 pts each)
a. Based on the estimated demand function, what is the relationship between good X and good Y; between good X and good Z? Explain?
b. Based on the estimated demand function, is good X a normal good or an inferior good? Explain.
c. Derive the equation of the (direct) demand function if consumer incomes are $30,000, the price of good Y is $10 and the price of good Z is $20.
d. Derive the inverse of the demand function in part c. Using the derived inverse demand function, calculate the demand price for 380 units of the good. Give an interpretation of this demand price and its importance in making managerial decisions..
e. Based on the supply function above, what is the relationship between good X and good R? Explain.
f. Derive the equation for the supply function if the input prices are $10, and the price of R is $20.
g. What is the minimum price at which the producer will supply any of the good X at all?
h. Based on your results above, determine the equilibrium price and quantity of good X.
i. What is the market outcome if price is $40? What do you expect to happen in the market? Why?
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