Problem 1

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.

1. In the competitive coffee bean market, determine equilibrium price, quantity, consumer and producer surpluses.
2. 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

D.equilibrium amount.

E.Thetotalbenefitsderivedfromexchangewhencoffeebeansaresoldatthecompetitive

F.equilibrium price.

G.Noneoftheabove.

Problem 2

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.

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

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

Problem 3

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:

1. What is your monthly production of cornflakes over the next three months?
2. Write explaining your answer.

Problem 4

You are a regulator with the Country bumkins 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 bumkins ville, 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.

1. What license fee and rental car price does the regulator set?
2. Write explaining your answer.