Economics Problems

Finish the problems from the attached file.

Write down the equation you’re using, not just the numerical answer.

Write down the equation you’re using, not just the numerical answer.

Problem 1. Competitive Coffee Bean Market.
The market demand for a standard size package of coffee beans is Qᴰ = 30 – 2P where Qᴰ is
the quantity demanded and P is the price of the beans ($ per standard size package). The
market supply is Qˢ = P where Qˢ is the quantity supplied (measured in millions of 12 packs) and
P is price. Assume that conditions in the coffee bean market are such that perfect competition is
a good description of how firms behave and how the market operates.

Q1.​ In the competitive coffee bean market, determine equilibrium price, quantity, consumer and
producer surpluses.

Q2.​ The sum of consumer and producer surplus associated with the competitive equilibrium
quantity is best described as follows:

A. The total value that consumers place on the competitive equilibrium quantity if they do
not have to pay for it.

B. The benefit to producers of the last unit produced in a competitive equilibrium.
C. The amount producers would be willing to pay to produce one unit less than the

equilibrium amount.
D. The total benefits derived from exchange when coffee beans are sold at the competitive

equilibrium price.
E. None of the above.

Problem 2. Monopoly Coffee Bean Market.
The demand for a standard size package of coffee beans is the same as it is in the competitive
market discussed above: Qᴰ = 30 – 2P. However, a series of coffee mergers have led to a
coffee bean monopoly. The mergers have created some efficiency benefits, however, so that
the coffee bean monopolist’s marginal cost is constant at 1.

Q1.​ Find optimal price and quantity for the monopolist, and determine consumer surplus at the
monopoly price.

Q2.​ Explain mathematically, graphically, or in words how the series of mergers to monopoly in
the coffee bean market affected total surplus.

Problem 3. Competitive Market Situation/Decision.
You are the strategic planner of a small company that manufacturers cornflakes. The main raw
ingredient is corn. There are many other producers, and your company is too small to
significantly affect the price of corn or cornflakes by altering production. Current demand for
corn flakes is Qᴰ = 100 – P per month where P is the market price of cornflakes and Qᴰ is the
market quantity. Your operations department estimated that your production costs were

approximately C(Q) = 2Q + (1/2)Q² at last month’s corn prices where Q is your quantity. Last
month, you believed that the price of cornflakes would be $10 per unit, and you planned your
production accordingly.
Two factors have changed. First, a record corn crop has lowered the price of corn, the key raw
ingredient in cornflakes, and your company took advantage of this to lock in lower prices for
corn over the next three months. Your operations department tells you that your new cost of
producing cornflakes is C(Q) = Q + (1/2)Q². Second, you believe that the Department of
Agriculture will announce a program tomorrow to buy enough corn to eliminate the corn price
reduction. Moreover, you believe that your rivals will not have been able to lock in lower corn
prices before the government takes this action, so that their costs will not be any lower over the
next three months than they were before the corn price reduction.

Given this information:

Q1.​ What is your monthly production of cornflakes over the next three months?

Q2.​ Write 1-2 sentences explaining your answer.

Problem 4. Monopoly Market Situation/Decision.
You are a regulator with the Country Bumpkins Ville (CBV) Airport authority. Previously, CBV
has not been served by a rental car company. However, the rental car company AbleRentals
Inc. has proposed opening rental car service at the airport. They are asking for 20 feet of
counter space in the only terminal as well as a parking facility with room for 20 vehicles. You
believe you the airport can accommodate this, and you must come up with a fixed monthly
license fee that you will collect from AbleRentals and the maximum price that AbleRentals Inc.
can charge for rental car service.
Based on the number of number of passenger arrivals and departures at CBV, as well some
demand estimates in the literature that connect arrivals and income level to rental car demand,
you believe the demand for rental cars at CBV is Qᴰ = 500 – 5P per month. You are familiar with
rental car cost structures, as you used to work for Hertz. You believe the cost of rental car
service is C(Q) = 10 + 10Q per day.
You were appointed to your post by the mayor of County Hopkinsville, and you understand that
she is not especially concerned about the rental car prices paid by people who travel to CBV.
However, she believes she can do many good things with funds collected from airport license
fees.

Suppose the regulator wishes to maximize the license fee paid by CBV.

Q1.​ What license fee and rental car price does the regulator set?

Q2.​ Write 2-3 sentences explaining your answer.

Problem 5. Competitive Beer Market with Externalities.
The supply and demand for beer are Qˢ = P, and Qᴰ = 30 – 2P. However, each unit of beer
consumption increases the likelihood that consumers of beer will be involved in accidents that
harm consumers that do not consume beer. The harm inflicted on consumers that do not
consume beer is $2 per unit of beer consumed. For simplicity, assume that the harm from
accidents due to beer consumption is inflicted entirely upon non-consumers of beer. (This is not
realistic, but it makes it simpler to make the point.) Also assume that it is too costly for beer
consumers and non-consumers to write contracts that constrain consumers’ beer consumption.

Q1.​ Which of the following is the best characterization of the harm inflicted by beer consumers
on non-consumers of beer.

A. The harm is a a pecuniary externality and does not affect social surplus.
B. The harm is an externality, but it does not affect social surplus.
C. The harm is illusory, as externalities do not distort competitive markets.
D. The harm is an externality, and the social cost of the externality is the $2 times the

number of bottles of beer consumed.
E. None of the above.

Q2.​ What are the competitive equilibrium price and output in the competitive beer market with
externalities? What is total surplus at the competitive equilibrium after taking into account the
costs associated with accidents?

Q3.​ What is the socially optimal per-unit tax on beer consumption?

Problem 6. General Review Questions For Competition and Monopoly.
Q1.​ The demand curve we draw on a graph when talking about competitive markets has two
interpretations, depending on whether we are speaking of the quantity associated with each
price or the price associated with each quantity. These interpretations are:

A. The quantity demanded at different prices and the average price paid per unit when the
customer purchases all units that have positive personal value at some positive price.

B. The quantity demanded at the average price and the marginal benefit to the producers of
the last unit produced.

C. The quantity demanded at each price and the customer’s maximum willingness to pay
for the last unit purchased when the customer purchases a given quantity.

D. All of the above.
E. None of the above.

Q2.​ The supply curve we draw on a graph when talking about an individual competitive firm’s
quantity decision describes:

A. The amount the firm will supply at a given price.

B. The maximum amount the the firm would be willing to accept for the last unit supplied
when the firm supplies a given quantity.

C. The minimum amount the firm would be willing to accept for the last unit supplied when
the firm supplies a given quantity.

D. A and B.
E. A and C.

Q3.​ In a perfectly competitive market,

A. At the equilibrium price, consumer surplus is maximized.
B. At the equilibrium price, producer surplus is maximized.
C. At the equilibrium price, total surplus (producer plus consumer surplus) is maximized.
D. None of the three surplus values—consumer-, producer-, or total surplus, is maximized.
E. None of the above.

Q4.​ Imagine a perfectly competitive industry with a downward sloping industry demand, an
industry supply curve QS = 100P, and individual firm cost functions C(Q) =(1/2)Q². Suppose the
market becomes monopolized (e.g. through a series of mergers), and the monopolist’s cost
function after the series of mergers is C(Q) =(1/200)Q² . The demand curve is the same after the
mergers as it was before. Nothing else changes. The monopolization of the market will:

A. Lead to an increase in price.
B. Lead to a decrease in price.
C. Leave price unchanged.
D. Could increase or decrease price, depending on factors omitted from the question.
E. None of the above.

Problem 7. Ticket monopoly.
You have taken a job that puts you in charge of ticket pricing for Indiana University basketball.
Although Assembly Hall holds 17472 people, you have 16,000 tickets to sell after seats have
been set aside for press and VIPs. Marginal cost is zero. For simplicity, you must charge the
same price for every ticket.

Q1.​ Suppose demand from fans other than the press and VIPs is Qᴰ = 32,000 – 320P. If your
objective is to maximize profits, which price should you set?

Q2.​ One of the games on the schedule is against Grand Canyon University, a team that is quite
deep (so to speak), but has limited talent. You estimate that the demand for tickets to that game
is only half the demand given in question 4. If your goal is to maximize profits, which price
should you set now?

Problem 8. Gasoline Industry.

The industry demand for gasoline is initially given by Qᴰ = 10 – P, and the industry supply is Qˢ =
P. The gasoline market is initially competitive.

Q1.​ Find competitive price, quantity, consumer and producer surpluses.

Q2.​ An individual gasoline refiner’s cost is C(Q) = Q + Q². The market is competitive, and this
refiner behaves as a competitive firm. If the gasoline price is 5, how much gasoline should the
refiner produce?

Q3.​ The EPA has passed a regulation that will: (1) encourage the consumption of alternative
energy and (2) make it more costly to produce gasoline. The research department at the EPA
estimates that the regulation will cause each consumer’s marginal willingness to pay for
gasoline to fall by $2 for each unit consumed, and that each supplier’s marginal cost will rise by
$1 for each unit produced. What are the new price and quantity of gasoline?

Q4.​ Suppose a coup d’état in the country causes the government to acquire all gasoline
refineries, and no additional companies can enter the business. The new government set the
regulations, which gives a demand for gasoline of Qᴰ = 8 – P and a cost function of C(Q)=Q².
The government chooses a private firm to run the refinery, sets the gasoline price, and charges
the firm a fixed license fee. If the government must allow the firm to earn nonnegative profit, and
if its objective is to maximize the license fee, what gasoline price will it set?