Answers of ManageriaHWl Economics Homework 2

8/11/2019 Answers of ManageriaHWl Economics Homework 2

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Answers of Managerial Economics Homework #2

Chapter 5~Chapter 9

1.Using figre 5.! as a "asis constrct a series of for figres to show the effect of anincrease in the $eman$ for tanker ser%ice on the market price when &a' $eman$ is

e(tremel) inelastic &"' $eman$ is e(tremel) elastic &c' sppl) is e(tremel) inelastic

an$ &$' sppl) is e(tremel) elastic.

Answer*



2.+n$str) researchers ,.-. lato pre$icte$ that "etween 2//!0/ oil prices wol$

fall ") 5 pro$ction of oil ") 3EC an$ the former -o%iet Union wol$ increase

an$ $eli%eries of new tankers wol$ e(cee$ scrappage of ol$er %essels. &-orce*

Platou Report 2004 www.plato.com'.

a. Using sita"le $iagrams e(plain how each of the following wol$ affect

the market for tanker ser%ices* &i' a fall in oil prices4 &ii' an increase in

pro$ction ") 3EC an$ the former -o%iet Union4 &iii' new tanker

$eli%eries4 an$ &i%' scrappage of ol$er %essels.

". -ppose that the net effect is to increase tanker rates. +llstrate the net

effect on a single $iagram. E(plain the impact on the antit) of tanker

ser%ices se$.

c. +n actalit) oil prices increase$ ") 25 "etween 2//! an$ 2// an$

3EC an$ the former -o%iet Union pro$ction increase$ ") a"ot 1/.

Mo$if) )or anal)ses in &a' for these changes.

http://www.platou.com/

http://www.platou.com/



Answer*

&a' 6all in oil price wol$ re$ce the operating costs of tankers an$ hence

increase the sppl) of tanker ser%ices. +ncrease in oil pro$ction wol$

increase the $eman$ for tanker ser%ices. 7ew tanker $eli%eries wol$ increase

the sppl) of tanker ser%ices while scrappage wol$ re$ce the sppl).

&"' lease refer to $iagram "elow. 8antit) of tanker ser%ices se$ col$ "e

higher or lower $epen$ing on the elasticities of $eman$ an$ sppl).

&c' +n actalit) oil prices increase$ rather than fell. he net impact on the sppl)is am"igos* it $epen$s on which effect is larger 0 the increase in oil prices

on the cost of tanker operations or the net increase in the tanker capacit). he

re%ise$ figre is as follows*



!.+n 2//2 +ra:s ;irkk region e(porte$ /.50/.< million "arrels of cr$e oil per $a)

&mp$' ") pipeline to the rkish port of Ce)han. 6ollowing the U.-.=le$ coalition

attack against +ra the pipeline was sa"otage$ an$ ;irkk oil e(ports were $isrpte$.

,efineries in western Erope switche$ to ")ing oil from the Urals in ,ssia which

pro$ce oil that is chemicall) similar to ;irkk. Urals oil is shippe$ to western

Erope ") tanker from the >lack -ea throgh the >ospors an$ ?ar$anelles.

Howe%er ") earl) 2// the srge in Eropean $eman$ an$ congestion in the

>ospors an$ ?ar$anelles ha$ lifte$ spot tanker rates to @!9/// per $a) &-orce*

>ospors anker Congestion hreatens -hortage of 3ilB Financial Times anar)

12 2//'.

a. Using sita"le $eman$ an$ sppl) cr%es illstrate the short=rn effects of

pipeline $isrption on the tanker ser%ices market.

". Using )or $iagram for &a' illstrate the long=rn effects of the pipeline

$isrption.

c. Dhen political con$itions in +ra are restore$ to normal e(ports ")

pipeline will resme an$ the $eman$ for tanker ser%ices will fall. Dith

lower charter rates the owner of a tanker mst $eci$e whether to contine

operating temporaril) la) p or scrap the %essel. E(plain how the ownershol$ choose among these alternati%es.

Answer*

&a' ipeline $isrption increase$ the $eman$ for tanker ser%ices.



&"' +n the long rn the price wol$ "e higher than the original eili"rim "t

lower than @!9/// per $a). he antit) of tanker ser%ices wol$ "e higher

than in the short rn eili"rim an$ in trn higher than in the original

eili"rim.

&c' he choice "etween operating an$ la)ing p is a short rn $ecision. +f the

short rn rate is "elow the a%erage %aria"le cost the owner shol$ la) p the

tanker. he choice "etween operating an$ scrapping is a long rn $ecision. +f

the long rn rate is "elow the a%erage cost the owner shol$ scrap the tanker.

.)pical real=estate "roker* +n California the seller alwa)s pa)s the "rokerFs

commission so ")ers get "rokerage ser%ices free.

M>A* +f the cstom were for the ")er to pa) the commission then wol$

sellers get "rokerage ser%ices freeG

,eal=estate "roker clearl) losing patience* hat is a prel) h)pothetical scenario

"t if that sitation were to arise )es + gess )oFre right.

a. Assme that each seller pa)s a "rokersF commission of 1<///. hen thesppl) of hoses incl$es the cost of "rokerage. +llstrate the market

eili"rim with a price of !1//// per hose an$ sale of 2///// hoses

a )ear.

b. 7ow sppose that ")ers rather than sellers pa) the 1</// commission.

Using )or figre illstrate the following* &i' shift the sppl) cr%e $own

") 1</// since sellers $o not pa) the commission an$ &ii' shift the

$eman$ cr%e $own ") 1</// since ")ers now pa) the commission.



c. Compare the market eili"ria of &a' an$ &"' in terms of &i' the net price

recei%e$ ") sellers an$ &ii' the net price pai$ ") ")ers. &7et prices are

net of "rokerage commission if an)'.

Answer*

he net price wol$ not "e affecte$ for either ")er or seller.

5.E=commerce is pre$icte$ to re$ce the cost of interme$iar) ser%ices sch as those of

tra%el agencies real=estate "rokers an$ in%estment a$%isors. Consi$er the market for

air tra%el. -ppose that with con%entional tra%el agencies the market eili"rim

price is !// per ticket incl$ing a 15 interme$iation cost. he antit) "oght is 2

million tickets a )ear. Dith e=commerce howe%er the interme$iation cost falls to 2

per ticket.

a. Using sita"le $eman$ an$ sppl) cr%es illstrate the original

eili"rim with con%entional tra%el agencies. ,epresent the

interme$iation cost ") shifting the sppl) cr%e.

". +llstrate the new eili"rim with e=commerce.

c. Dhat factors $etermine the e(tent to which consmers will "enefit from e=

commerceG E(plain )or answer with $eman$ an$ sppl) cr%es.

Answer*

+n the market for air tra%el the $eman$ arises from "siness an$ leisre tra%elers

while airlines pro%i$e the sppl).



&a' he 15 interme$iation cost shifts p the sppl) cr%e an$ the eili"rim is

at m with a price of !// an$ antit) of 2 million tickets per )ear.

&"' Dith e=commerce the cost of interme$iation falls to 2 an$ the new

eili"rim is at n with a lower price an$ larger antit).

&c' he elasticities of $eman$ an$ sppl) with respect to price.

I.8antas operates a fleet of o%er 1// >oeing Jet aircraft. Commercial passenger Jets

mst "e operate$ ") a pilot an$ co=pilot. Man) Jets carr) cargo in their "ellies

n$er the passenger seating areas. Consi$er each of the following costs. +$entif)

which are Joint costs of passenger an$ "ell) cargo ser%ices which are fi(e$ costs of

passenger ser%ice an$ which are "oth.

a. Cockpit personnel* All Jets large an$ small reire a pilot an$ co=pilot.>ell) cargo ser%ice reires no a$$itional officers in the cockpit.

". Airport lan$ing fees* -ome airports charge lan$ing fees ") weight of the

aircraft while others le%) a fi(e$ fee regar$less of weight.

c. 6el* Karger aircraft an$ those carr)ing hea%ier loa$s will consme

relati%el) more fel.

Answer*

&a' oint cost an$ also a fi(e$ cost.



&"' +f the lan$ing fee %aries with weight then it is not Joint or fi(e$. +f a Jet

carries an a$$itional 1// pon$s of cargo the airline mst pa) a$$itional

fees. -imilarl) if the Jet carries an a$$itional passenger. +f the lan$ing fee

is fi(e$ then it is a Joint cost an$ a fi(e$ cost.

&c' 7either a Joint cost nor a fi(e$ cost. +f a Jet carries an a$$itional 1// pon$s

of cargo the airline mst spen$ more on fel. -imilarl) if the Jet carries an

a$$itional passenger.

L.+n April 199I the -ingapore echnologies rop acire$ $isk=$ri%e manfactrer

Micropolis for -</ million. Micropolis was hit ") a se%ere $owntrn in the $isk

$ri%e in$str) an$ $espite -55/ million in loans the compan) ha$ to "e lii$ate$

in late 199L. Kii$ators estimate$ the market %ale of Micropolis:s assets to "e -LI

million as compare$ with their -2L million "ook %ale. a"le L.1 lists the

estimates for %arios categories of assets.

a. Dhich of the following "est $escri"es the $ifference "etween "ook %ale

an$ estimate$ realiNa"le %ale* &i' snk cost &ii' opportnit) cost &iii'

fi(e$ costG E(plain )or answer.

". ?efine specificit)B as the ratio of "ook %ale less estimate$ realiNa"le

%ale to "ook %ale in percentage terms. Calclate the specificit) of &i'

in%entories an$ work=in=progress &ii' pro$ction eipment an$ &iii'

factor).

c. E(plain the relation "etween snk costs an$ specificit).

$. E(plain wh) Micropolis:s in%entories an$ work=in=progress an$

pro$ction eipment ha%e a higher specificit) than the factor).

a"le. Micropolis* Assets ?ecem"er 199L &- million'

>ook %ale Estimate$

realiNa"le %ale

-pecificit)

&'

+n%entories an$ work=in=

progress 1!/ 1! 9/

ro$ction eipment ! <<

6actor) L/ 5 !I

3ther items / 1

otal 2L LI



Answer*

&a' -nk cost. here is no wa) to sell the assets for their "ook %ale. he

$ifference "etween the "ook an$ realiNa"le %ale cannot "e a%oi$e$.

&"' -ee a"le L.1 last colmn.

&c' he higher is $egree to which the cost of an asset is snk the higher is its

specificit).

&$' +n%entories an$ work=in=progress ma) "e ite specific to Micropolis in the

sense that other manfactrers cannot easil) integrate them into their

pro$ction processes. >) contrast the factor) might "e easil) con%erte$ into

other ses.

<.a"le <.2 $escri"es the $eman$ an$ costs for -olar harmaceticalFs amma=1 $rg.

-ppose that the costs ha%e "een change$ to a fi(e$ cost of L5 million an$ a

constant marginal cost of 5/ per nit. he $eman$ remains the same.

a. repare a new ta"le of re%enes an$ costs accor$ing to the new $ata.

". Dhat is the profit=ma(imiNing price an$ pro$ction scaleG

c. At that pro$ction scale what are the marginal re%ene an$ the marginal

costG

Answer*

&a' Mo$ifie$ %ersion of a"le <.2.

rice -ales otal Marginal otal Marginal rofit

,e%ene re%ene cost cost

&' &' &' &' &' &'

2// /./ / L5 =L5

19/ /.2 !< 19/ <5 5/ =L

1</ /. L2 1L/ 95 5/ =2!

1L/ /.I 1/2 15/ 1/5 5/ =!

1I/ /.< 12< 1!/ 115 5/ 1!

15/ 1./ 15/ 11/ 125 5/ 25

1/ 1.2 1I< 9/ 1!5 5/ !!

1!/ 1. 1<2 L/ 15 5/ !L

12/ 1.I 192 5/ 155 5/ !L



11/ 1.< 19< !/ 1I5 5/ !!

1// 2./ 2// 1/ 1L5 5/ 25

9/ 2.2 19< =1/ 1<5 5/ 1!

7ote* -ales total re%ene total cost an$ profit in millions

(b) wo prices )iel$ the same ma(imm profit of !L million a )ear. 3ne of the

profit=ma(imiNing prices is 12/ per nit an$ the correspon$ing scale is 1.I

million nits per )ear. Comment* +f we anal)Ne$ the $eman$ in greater

$etail with price increments of 5 we wol$ $etermine that the actal profit=

ma(imiNing price is 125 which )iel$s a profit of !L.5 million a )ear.

(c) At that scale the marginal re%ene O marginal cost O 5/ per nit.

9.Hong ;ong ?irector=eneral of elecommnications Anthon) Dong e(presse$

concern a"ot the effect of license actions on the price of telecommnications*

here:s goo$ an$ "a$ in actioning off spectrm P it ma) raise costs for telecoms

pro%i$ersB &elecoms chief sees frther fall in long=$istance tariffsB South China

Morning Post ?ecem"er !1 1999 >siness 1.'

a.)picall) licenses are transfera"le "t the one=time license fee once pai$ is not

refn$a"le. 6rom an operational stan$point how $oes the cost of a license $epen$ on

the price if an) that the owner pai$ for itG

".How $oes the one=time license fee affect the marginal cost of pro%i$ing

telecommnications ser%iceG How $oes it affect the profit=ma(imiNing scale of

operationsG

c.-ppose that the one=time license fee is change$ to an annal charge "ase$ on the

telecommnications pro%i$er:s re%ene. How wol$ the new polic) affect the ser%ice

pro%i$er:s profit=ma(imiNing scale of operationsG

Answer*

&a' he cost of a license $epen$s on the pre%ailing market price of licenses

which ma) ha%e little or no relation to the price that the owner pai$ for it at

an earlier time.

&"' he one=time license fee is a fi(e$ cost with respect to the scale of operations

an$ $oes not affect the marginal cost. Hence it $oes not affect the profit=

ma(imiNing scale of operations.



&c' he annal charge "ase$ on the telecommnications pro%i$er:s re%ene

wol$ raise the pro%i$er:s marginal cost an$ hence re$ce the profit=

ma(imiNing scale.

1/.,eferring to figre 9.1 sppose that Mercr) Airlines: marginal re%ene an$

$eman$ cr%es cross the marginal cost cr%e at antities of !/// an$ I/// seats

a week respecti%el). All other $ata remain the same.

a. Calclate the profit n$er policies of &i' niform pricing an$

&ii' complete price $iscrimination.

". -ppose that Mercr) implements complete price $iscrimination. E(plain

wh) it shol$ sell p to the antit) where the ")er:s marginal "enefit

eals Mercr):s marginal cost.

c. E(plain wh) Mercr):s profit is higher with complete price $iscrimination

than with niform pricing.

Answer*

&a' he "est wa) to answer this estion starts from a $iagram.

p

quan y sea s per wee

&i' Un$er niform pricing the profit=ma(imiNing antit) is where M,OMC

or 8O!///. ,eferring to the figre at that 8 the price p on the $eman$

cr%e mst "e halfwa) "etween <// an$ ///. Hence p O 2//

$irhams an$ profit O &2// = <//' ( !/// O 5<///// $irhams.

&ii' Un$er complete price $iscrimination the seller shol$ sell the antit)

where M> O MC. ,eferring to the 6igre that antit) is 8 O I///.

hen total re%ene is the area n$er the $eman$ cr%e p to 8 O I///



hence , O Q&///R<//'S2T ( I/// O 1///// $irhams. 7ow total

cost C O <// ( I/// O <///// $irhams hence the profit O

1///// 0 <///// O 9I///// $irhams.

&"' Mercr) ma(imiNes its profit ") pro$cing the antit) where the ")er:s

marginal "enefit eals Mercr):s marginal cost. +f it sol$ a larger antit)

so that the marginal "enefit is less than the marginal cost then its profit

wol$ "e lower. >) contrast if it sol$ a smaller antit) it col$ increase

profit ") selling more.

&c' Complete price $iscrimination )iel$s more profit than niform pricing

"ecase it e(tracts a higher price from e(isting ")ers an$ e(ten$s sales to

new ")ers who wol$ not "e ser%e$ n$er niform pricing.

11.Microsoft offers special $isconts to st$ents. 3ther p"lishers ha%e $e%elope$

special st$ent e$itions of their software with fewer featres than the reglar

packages.

a. Dh) $o p"lishers offer $isconts to st$entsG

". Dhat is the prpose of $e%eloping less powerfl st$ent e$itionsG

c. -hol$ software p"lishers also offer $isconts to senior citiNens or

$e%elop senior citiNen e$itionsG

Answer*

&a' -t$ent $eman$ is relati%el) more elastic than that of the a%erage software

ser for se%eral reasons* the) ha%e relati%el) lower income an$ st$ents ma)

ha%e more opportnit) to an$ less inhi"ition a"ot cop)ing software.

-t$ents can "e $irectl) segmente$ throgh st$ent +?s. Accor$ingl)

software p"lishers can se $irect segment $iscrimination. hen the) shol$

set a lower price to st$ents.&"' 3ne pro"lem with $iscrimination is that potential sers of the high=price item

sch as "sinesses might prchase software from st$ents. -oftware

p"lishers can $eter this ar"itrage ") targeting less powerfl e$itions at

st$ents.

&c' he answer $epen$s on whether the $eman$ of senior citiNens for software is

more or less elastic relati%e to the a%erage ser. +f the $eman$ is more

elastic then the p"lisher shol$ engage in price $iscrimination.



12.+n 2// U.-. consmer pro$cts manfactrers $istri"te$ 2L.5< "illion

copons with a face %ale of o%er 2</ "illion of which a mere 1.2 were

re$eeme$ ") consmers. Dh) $o manfactrers spen$ millions of $ollars to

$istri"te copons when the re$emption rate is so lowG Dh) $on:t the)

manfactrers $irectl) ct the wholesale prices of the pro$cts which wol$ "e

mch cheaper to a$ministerG

a. -ome sa) that retailers wol$ a"sor" a $irect wholesale price ct instea$ of

passing it on to consmers. he) arge that ") contrast retailers cannot

a"sor" the %ale of copons. -ppose that the retail sector is perfectl)

competiti%e. Compare the $eman$=sppl) eili"rim in the retail market

with &i' a wholesale price ct of 5/ cents an$ &ii' wi$esprea$ $istri"tion

of 5/=cent copons. 6or this part )o shol$ appl) the anal)sis of ta(

inci$ence from chapter I treating a price ct or copon like a negati%e ta(

an$ ma) assme that all consmers se copons.

". Dol$ there "e an) $ifference "etween the wholesale price ct an$ sing

copons if the retailer were a monopol)G &Contine to treat a price ct or

copon like a negati%e ta( an$ assme that all consmers se copons.'

c. E(plain how copons ma) "e se$ to $iscriminate among consmers on

price. Compare this e(planation to the argment that retailers wol$

a"sor" a wholesale price ct.

Answer*

&a' Competiti%e retail market &i' he 5/=cent wholesale price ct will shift

$own the retail sppl) cr%e ") 5/ cents &increase the sppl)' reslting in a

lower retail price an$ larger antit). ,eferring to the 6igre the original

eili"rim is at a. he new eili"rim is at c with price : an$ antit) 8.

How mch the retail price falls will $epen$ on the price elasticities of

$eman$ an$ sppl). &ii' he issance of copons will affect the $eman$ si$e.Assming that all consmers se 5/=cent copons this will shift the retail

$eman$ p ") 5/ cents &increase the $eman$' reslting in a higher retail

price an$ larger antit). ,eferring to the 6igre the original eili"rim is

at a. he new eili"rim is at " with price :: an$ antit) 8. he net

price to the consmer is :: = 5/ O :. Comparing &i' an$ &ii' the final

eili"rim in the retail market will "e the same == the new antit) of sales

an$ the net price to the consmer will "e the same.



&"' Monopol) retail in$str) &i' hen a wholesale price ct wol$ re$ce the

monopol):s marginal cost ") 5/ cents. he monopol) wol$ ma(imiNe

profit at the sales antit) where the &nchange$' M, O the new MC. he

new price is : an$ the sales are 8:. &ii' Assming all consmers se the 5/=

cent copons then the copons wol$ shift the retail $eman$ p ") 5/ cents.

his wol$ shift p the monopol):s M, ") 5/ cents also. he monopol)

wol$ ma(imiNe profit at the sales antit) where the new M, O the

&nchange$' MC. he new price is :: an$ the sales are 8:. he net price to

the consmer is :: = 5/ O :. he figre shows the impact on the retail

market will "e the same == the new antit) of sales an$ the net price to the

consmer will "e the same. Hence there is no $ifference "etween thewholesale price ct an$ sing copons.



sales

0

p’

Q

p”

50 cents

original marg. cost

Q’

marginal cost ater

w!olesale price cut

cents per unit

&c' +n realit) not all consmers se copons. Assming that consmers with

more elastic $eman$ are more likel) to se copons the retailer can se

copons to target a $iscont &an$ hence a lower price' at the consmer

segment with the more elastic $eman$. his is a case of in$irect segment

$iscrimination.

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Answers of ManageriaHWl Economics Homework 2

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