At the start of 2009, following the bankruptcy of its competitors, Katalina Yachts was the only supplier
Question:
At the start of 2009, following the bankruptcy of its competitors, Katalina Yachts was the only supplier of luxury sailing yachts in the North American market. The figure above shows the transaction prices for yachts sold by Katalina during this period (starting at point A) andthe periods that followed. At point B, one competitor, Flying Fifteen Yachts, makes it out of bankruptcy proceedings and starts trading again. Both Katalina and Flying Fifteen have massive production facilities that can easily accommodate the market demand at the time and neither are producing at anything close to capacity. Further, their yachts are regarded as essentially perfect substitutes (that said, each yacht is very slightly different due to the owner's specific tastes and so prices differ from yacht to yacht slightly). Finally, it is well understood in the market that, due to being able to restructure labor contracts during the bankruptcy process, Flying Fifteen has a marginal cost $1 lower than that of Katalina.
Given the above information, answer the following questions:
a) How would you describe the market structure prior to point B? (one word)
b) What do you think a reasonable approximation of the marginal cost of Katalina is? Why?
c) Given your previous answer, what is the elasticity of demand, during the period between A and B, when the price is equal to $10? Explain your reasoning.
d) How would you interpret this elasticity, if you had to explain what it meant to someone who had never taken an economics class?
e) In the period between B and C, Katalina sold 9 Yachts - an outcome referred to by the president of Katalina, as 'Pathetic. The worst on record. Beyond abysmal.'. What is a reasonable approximation of Katalina's (economic) profit during this period? Explain your reasoning.
f) In the period between B and C, Flying Fifteen sold 850 Yachts - widely regarded as an outstanding sales outcome by historical standards. What is a reasonable approximation of Flying Fifteen's (economic) profit during this period? Explain your reasoning.
g) Account for the price movements during the time period between C and D, using a model/models discussed in class.
Expert Answer:
