ECON 6921 – Fall 2016 – Assignment 1This assignment is due on BlackBoard by midnight on Monday, 10/3. Late submissio...

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ECON 6921 - Assignment 1 -A few years ago, Amazon

April 14, 2018

ECON 6921 – Fall 2016 – Assignment 1
This assignment is due on BlackBoard by midnight on Monday, 10/3. Late submissions will be
penalized.
1. (20) A few years ago, Amazon had a very public dispute with the book publisher Hachette regarding its prices
for e-books. Amazon was trying to convince Hachette to lower its price for e-books, arguing that doing
so would benefit both consumers and the publisher; Hachette was refusing to cut their prices, countering
that lower prices would hurt both the publisher and its authors.
Amazon explained their objectives in terms of price elasticity on the following discussion board:
http://goo.gl/9lEcMW
Read the full post then answer the following questions.
a.) Amazon states that "For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced
at $9.99." Use this information to calculate the price elasticity of demand for e-books between these two
prices (use the arc formula). Show your work.
b.) Suppose Amazon was selling 1,000,000 Hachette e-books when the price was $14.99. If their above
calculations are correct, how many would they sell after the price is cut to $9.99? What would the total
revenue from Hachette e-books equal before and after the price cut?
c.) Amazon claims that “e-books are highly price elastic.” If this is the case, why wouldn't Amazon want
to cut prices even further? For example, why not cut the price of e-books to $0.99 instead of $9.99?
d.) Given that Amazon is arguing that cutting e-book prices to $9.99 would benefit both Amazon and
Hachette, why do you think Hachette was against this price cut? It is obvious that Hachette did not agree
that this move would have benefited them; otherwise they would have voluntarily cut prices. Briefly
explain what might be wrong with Amazon’s reasoning from Hachette’s perspective.

2. (8) A study of 130 stock purchase plans found that on average, these plans offered about 8 percent of the
corporation’s stock to its managers at a discount of 12 to 15 percent off the market price.
a. Briefly explain the purpose of these stock purchase plans.
b. Do you think the stock market would view these plans favorably or negatively (i.e., do you think the
value of the stock would rise or fall after the announcement of these plans)? Briefly explain why.
3. (20) In Smalltown, PA, the demand function for men’s haircuts is Qd = 500 – 30p + 0.08 Y (where Qd is
quantity demanded per month, p is the price of a haircut, and Y is the average monthly income in the
town). The supply function for men’s haircuts is Qs = 100 + 20p – 20w (where Qs is the quantity
supplied and w is the average hourly wage of barbers).
Answer the following questions (use Excel if you wish).
a. If Y = $5,000 and w = $10, calculate quantity demanded and quantity supplied for p=$5, p=$10,
p=$15, p=$20, p=$25, and p=$30. Calculate Excess Demand or Excess Supply at each price (you may
express Excess Supply as negative Excess Demand). Show your results in a table. Determine the

equilibrium price and quantity. Draw the Demand and Supply curves (use Excel’s charting tools or use
graphing paper; be sure the graphs are well labeled, and show the amounts on both axes).
b. Assume that Y increases to $6,875 and w increases to $15. Recalculate Qd, Qs, and Excess Demand /
Excess Supply at each price (p=$5, p=$10, p=$15, p=$20, p=$25, and p=$30), and show your results in a
table. Determine the new equilibrium price and quantity. Draw the new Demand and Supply curves.
How can you explain the change in equilibrium?
4. (10) a. Fill in the blanks in the following table:
Q
0
1
2
3
4
5

FC

TVC

TC
40
52

MC

AFC

AVC

ATC

10
10
80
21

b. Draw a graph that shows MC, AVC, and ATC.
5. (8) Which market structure best describes: (a) airplane manufacturing; (b) electricians in a small town; (c)
farms that grow tomatoes; and (d) cable television in a city. Explain your answer for each of these.
6. (22) Use the figure below to answer the following questions:

a. How can you determine that the figure represents a graph of a perfectly competitive firm? Be specific;
indicate which curve gives you the information and how you use this information to arrive at your
conclusion.
b. What is the market price?

c. What is the profit-maximizing output?
d. What is total revenue at the profit-maximizing output?
e. What is the total cost at the profit-maximizing output?
f. What is the profit or loss at the profit-maximizing output?
g. What is the firm's total fixed cost?
h. What is the total variable cost?
i.

Identify the firm's short-run supply curve.

j.

Is the industry in a long-run equilibrium?

k. If it is not in long-run equilibrium, what will happen in this industry to restore long-run equilibrium?
l.

7. (4)

In long-run equilibrium, what is the firm's profit maximizing quantity?

The International Space Station (ISS) is a habitable satellite that was launched by NASA and space
agencies of other countries. In 2009, NASA was considering shutting down the ISS within the next five
to six years. Among those who were opposed to this idea of de-orbiting the ISS was Senator Bill Nelson,
who was quoted as saying, “If we’ve spent a hundred billion dollars, I don’t think we want to shut it down
in 2015.” Identify the flaw in the Senator’s reasoning.

8. (4) You've been hired by an unprofitable firm to determine whether it should shut down its operation. The
firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is
$100, and the price of the firm's output is $30. The cost of other variable inputs is $500 per day. Although
you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its
total revenue. You know that the marginal cost of the last unit is $30. Should the firm continue to operate
at a loss? Carefully explain your answer.
9. (4)

Most of the markets and industries in the world are highly competitive, and presumably most CEOs of
businesses know that competition will mean they will only earn normal profits in the long run. Given this
analysis, why do they bother to stay in business, since any economic profits will vanish in the long run?










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