POM Wonderful has recently developed a juice drink that it claims has several powerful benefits of pomegranate fruit owing to a high level of antioxidants. A successful marketing campaign has resulted in the following market demand for POM's pomegranate juice:

QD =400?50P

where the price P is measured in $s/bottle and quantity demanded QD is measured in thousands of bottles. POM wonderful had a fixed cost of $100,000, and faces a constant marginal cost. POM Wonderful's optimal price is $5.50/bottle.

(a) Calculate POM Wonderful's profit. Clearly show all calculations, and illustrate your answer using a well-labeled graph. [Note: The optimal price is $5.50/bottle, but we do not know the marginal cost. All we know is that the marginal cost is constant. Drawing a graph will be helpful.] (10 points)

(b) Sambazon, another company, enters the health fruit juice market and produces a juice drink that is based on Acai fruit that is also known to be a good source of antioxidants. Sambazon faces the same fixed cost, but has a lower marginal cost compared to POM Wonderful. Sambazon's marginal cost is 25% lower compared to POM Wonderful. Now, POM Wonderful and Sambazon face the following demand curves:

QP =300?50PP +25PS

QS =100?30PS +5PP

where QP is the quantity of POM Wonderful, QS is the quantity of Sambazon, PP is the price of POM Wonderful, and PS is the price of Sambazon. Calculate the price, quantity, and profits for POM Wonderful and Sambazon. Clearly show all calculations, and illustrate your answer using well-labeled graph(s). (15 points)

(c) Discuss the implications in this market if consumers perceive the juice from POM Wonderful and Sambazon to virtually indistinguishable. [You do not have to show any calculations for this part of the question. However, you need to discuss all possible scenarios that might emerge in this market when the juices produced by each company are perfect substitutes.] (10 points).

Section 2.

Problem 1. (7 points) A monopolist faces the following average revenue (demand) curve: P = 300 0.3Q and the monopolist's cost function is given by 0022) = 8000 + 03. (a) Derive the monopolist's marginal revenue equation. (2 pts) (b) Derive the mon0polist's marginal cost equation. (1 pt) (c) What level of output will the monopolist choose in order to maximize its prots? (2 pts) ((1) What price will the monopolist receive at the prot-maximizing level of output? (1 pt) (e) Calculate the monopolist's prot when they produce at the prot-maximizing level. (1 pt) Classify the actions as either discretionary spending or automatic stabilizers. Place each item into one of the two categories. Discretionary spending Automatic stabilizers Answer Bank A recession that reduces personal income and corporate profits results in a reduction in tax revenue. The government increases tax rates to prevent inflation. The government implements cuts in spending in order to balance the budget. Economic growth increases personal and corporate income, increasing tax payments. The government cuts taxes to stimulate consumer spending. An increased number of layoffs increases government spending on unemployment benefits. A bill is passed to increase unemployment benefit payments. A law is enacted that increases Canada Pension Plan benefits. An increase in applicants leads to an increase in government spending on welfare.There were many causes that contributed to the financial crisis of 2007-2008. Which of the following most accurately describes the role of securitization in contributing to the crisis? Globalization has increased the connectedness of the major economies of the world. O Correspondingly, there has been a decrease in the economic security of the U.S., where the U.S. has been adversely affected by the many European nations that have suffered recessions. Banks bundled mortgages together and then sold them on the market as a financial asset. O However, the risk level of these securitized assets was often much higher than the purchaser thought. In providing aid to firms that were at risk of becoming insolvent, the U.S. government O securitized these firms. In the future, firms are more now likely to engage in risky investments since the government securitizes these behaviors. Banks failed to securitize their loans by requiring sufficient down payments from home O buyers. This resulted in even small declines in housing prices causing many homes to go into foreclosure