1. (20 points)
(a) Given that the market demand for product X is Qd = f(Px, Py, M), where Qd is the quantity of product X demanded, Px is the unit price of product X, Py is the unit price of a related product Y, and M is the income of consumers of product X. Other things equal, carefully explain the impact of:
i. an increase in consumers’ income (M) on the market demand of product X.
ii. a decrease in the price of X (Px) on the market demand for product X.
(b) The State of Georgia has decided to substantially increase the state’s subsidies to public colleges. With the theory of demand and supply, graphically illustrate and carefully explain how a huge increase in Georgia State’s subsidies to public colleges might affect tuition and enrollment in both public and private colleges in Georgia, other things equal. Hint: Use two market diagrams for your analysis – one for public colleges and one for private colleges.
2. (20 points)
(a) Assume that the supply function of product X is Qs = 95 + 3Px – 4Py – 6Pz, where Qs is the quantity of product X supplied, Px is the unit price of product X, Py is the unit price of product Y, and Pz is the unit price of an essential machine (in thousands of dollars). If the unit price of Y is $8.50, and the unit price of the machine is $12,500, clearly show your steps and derive the inverse supply function of product X.
(b) Draw the supply curve for product X. Clearly show your steps and calculate the producer surplus when the quantity supplied of product X is 12 units.
(c) Carefully interpret your estimated producer surplus in (b) above.
3. (20 points)
(a) Graphically illustrate and carefully discuss the impact of a substantial inflationary expectation on the market equilibrium conditions (equilibrium quantity and price) of cell phones in the USA.
(b) Suppose an industry expert indicates that the inflationary expectation would decrease the industry output. Do you agree? Why or why not?
4. (20 points)
(a) Assume that the market demand and supply for a product X, respectively, are Qd = 30 – 4Px and Qs = 3Px – 9, where Qd is the quantity of the product demanded, Qs is the quantity of the product supplied, and Px is the unit price of the product. Clearly show your steps and calculate the market equilibrium price and quantity of the product. Do your intermediate calculations in fractions or 4 decimal points for accurate final answers.
(b) Suppose the government imposes a $2.50/unit excise tax on the product. Clearly show your steps and calculate the new (after-tax) equilibrium price and quantity. Do your intermediate calculations in fractions or 4 decimal points for accurate final answers.
5. (20 points)
With the aid of an appropriate diagram, answer Question #22 in Chapter 2 of your textbook.
You are the manager of Local Electronics Shop (LES), a small brick-and-mortar retail camera and electronics store. One of your employees proposed a new online strategy whereby LES lists its products at Pricesearch.com—a price comparison website that allows consumers to view the prices of dozens of retailers selling the same items. Would you expect this strategy to enable LES to achieve sustainable economic profits? Explain. (LO1, LO4, LO7)
Baye, Michael. Managerial Economics & Business Strategy (p. 142). McGraw-Hill Higher Education. Kindle Edition.
1. (20 points)