978-0393123982 Chapter 24 Solution Manual Part 2

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NAME 303

(b) In 1990 the city council of Ham Harbor created a taxicab licensing

board and issued a license to each of the existing cabs. The board stated

that it would continue to adjust the taxicab fares so that the demand for

rides equals the supply of rides, but no new licenses will be issued in the

future. In 1995 costs had not changed, but the demand curve for taxicab

rides had become D(p)=1,220 −20p. What was the equilibrium price

with acquiring a taxicab license? $1. What was the profit per taxicab

(d) If the interest rate was 10% and costs, demand, and the number of

licenses were expected to remain constant forever, what would be the

(e) Suppose that the commission decided in 1995 to issue enough new

licenses to reduce the taxicab price per ride to $5. How many more

(f) Assuming that demand in Ham Harbor is not going to grow any

more, how much would a taxicab license be worth at this new fare?

(g) How much money would each current taxicab owner be willing to

each. What is the total amount that all taxicab owners together would

be willing to pay to prevent any new licences from ever being issued?

$4,015,000. The total amount that consumers would be willing

to pay to have another taxicab license issued would be (more than, less

24.6 (2) In this problem, we will determine the equilibrium pattern

of agricultural land use surrounding a city. Think of the city as being

located in the middle of a large featureless plain. The price of wheat at

the market at the center of town is $10 a bushel, and it only costs $5 a

bushel to grow wheat. However, it costs 10 cents a mile to transport a

bushel of wheat to the center of town.

304 INDUSTRY SUPPLY (Ch. 24)

(a) If a farm is located tmiles from the center of town, write down

a formula for its profit per bushel of wheat transported to market.

(b) Suppose you can grow 1,000 bushels on an acre of land. How much

24.7 (1) Consider an industry with three firms. Suppose the firms have

the following supply functions: S1(p)=p,S2(p)=p−5, and S3(p)=2p

respectively. On the graph below plot each of the three supply curves and

the resulting industry supply curve.

0102030

Quantity

Price

20 S

Industry

supply

(a) If the market demand curve has the form D(p) = 15, what is the

resulting market price? 5. Output? 15. What is the output

24.8 (0) Suppose all firms in a given industry have the same supply

curve given by Si(p)=p/2. Plot and label the four industry supply

curves generated by these firms if there are 1, 2, 3, or 4 firms operating

in the industry.

NAME 305

0102030

Quantity

Price

20 S

(a) If all of the firms had a cost structure such that if the price was below

$3, they would be losing money, what would be the equilibrium price and

output in the industry if the market demand was equal to D(p)=3.5?

(b) What if the identical conditions as above held except that the market

demand was equal to D(p)=8−p? Now, what would be the equilibrium

24.9 (0) There is free entry into the pollicle industry. Anybody can

enter this industry and have the same U-shaped average cost curve as all

of the other firms in the industry.

(a) On the diagram below, draw a representative firm’s average and mar-

ginal cost curves using blue ink. Also, indicate the long-run equilibrium

level of the market price.

306 INDUSTRY SUPPLY (Ch. 24)

0102030

Quantity

Price

P+t

P+l

Blue

Blue ac

Red ac

Red mc

Black ac

(b) Suppose the government imposes a tax, t, on every unit of output sold

by the industry. Use red ink to draw the new conditions on the above

graph. After the industry has adjusted to the imposition of the tax, the

competitive model would predict the following: the market price would

(increase, decrease) increase by amount t, there would

be (more, the same, fewer) fewer firms operating in the industry, and

dustry. Draw the new cost conditions on the above graph using black

ink. After the industry has adjusted to the imposition of the tax the

competitive model would predict the following: the market price would

(increase, decrease) increase , there would be (more, the same,

fewer) fewer firms operating in the industry, and the output level

stay the same, decrease).

24.10 (0) In many communities, a restaurant that sells alcoholic bev-

erages is required to have a license. Suppose that the number of licenses

is limited and that they may be easily transferred to other restaurant

owners. Suppose that the conditions of this industry closely approximate

perfect competition. If the average restaurant’s revenue is $100,000 a

year, and if a liquor license can be leased for a year for $85,000 from an

existing restaurant, what is the average variable cost in the industry?

NAME 307

24.11 (2) In order to protect the wild populations of cockatoos, the

Australian authorities have outlawed the export of these large parrots.

An illegal market in cockatoos has developed. The cost of capturing an

Australian cockatoo and shipping him to the United States is about $40

per bird. Smuggled parrots are drugged and shipped in suitcases. This is

extremely traumatic for the birds and about 50% of the cockatoos shipped

die in transit. Each smuggled cockatoo has a 10% chance of being discov-

ered, in which case the bird is confiscated and a fine of $500 is charged.

Confiscated cockatoos that are alive are returned to the wild. Confiscated

cockatoos that are found dead are donated to university cafeterias.∗

(a) The probability that a smuggled parrot will reach the buyer alive and

(b) What is the expected cost, including expected fines and the cost of

just break even?)

(d) The demand function for smuggled cockatoos in the United States is

D(p)=7,200 −20pper year. How many smuggled cockatoos will be sold

many cockatoos must be caught in Australia in order that this number of

(e) Suppose that instead of returning live confiscated cockatoos to the

wild, the customs authorities sold them in the American market. The

profits from smuggling a cockatoo do not change from this policy change.

Since the supply curve is horizontal, it must be that the equilibrium price

of smuggled cockatoos will have to be the same as the equilibrium price

when the confiscated cockatoos were returned to nature. How many live

∗The story behind this problem is based on actual fact, but the num-

bers we use are just made up for illustration. It would be very interesting

to have some good estimates of the actual demand functions and cost

functions.

308 INDUSTRY SUPPLY (Ch. 24)

(f) Suppose that the trade in cockatoos is legalized. Suppose that it

costs about $40 to capture and ship a cockatoo to the United States

in a comfortable cage and that the number of deaths in transit by this

method is negligible. What would be the equilibrium price of cockatoos

24.12 (0) The horn of the rhinoceros is prized in Japan and China for its

alleged aphrodisiac properties. This has proved to be most unfortunate for

the rhinoceroses of East Africa. Although it is illegal to kill rhinoceroses

in the game parks of Kenya, the rhinoceros population of these parks has

been almost totally depleted by poachers. The price of rhinoceros horns

in recent years has risen so high that a poacher can earn half a year’s

wages by simply killing one rhinoceros. Such high rewards for poaching

have made laws against poaching almost impossible to enforce in East

Africa. There are also large game parks with rhinoceros populations in

South Africa. Game wardens there were able to prevent poaching almost

completely and the rhinoceros population of South Africa has prospered.

In a recent program from the television series Nova, a South African game

warden explained that some rhinoceroses even have to be “harvested” in

order to prevent overpopulation of rhinoceroses. “What then,” asked the

interviewer, “do you do with the horns from the animals that are harvested

or that die of natural causes?” The South African game warden proudly

explained that since international trade in rhinoceros horns was illegal,

South Africa did not contribute to international crime by selling these

horns. Instead the horns were either destroyed or stored in a warehouse.

(a) Suppose that all of the rhinoceros horns produced in South Africa

are destroyed. Label the axes below and draw world supply and demand

curves for rhinoceros horns with blue ink. Label the equilibrium price

and quantity.

NAME 309

Price

Quantity

aQb

D (Blue)

S (Blue) S (Red)

(b) If South Africa were to sell its rhinoceros horns on the world mar-

ket, which of the curves in your diagram would shift and in what di-

rection? Supply curve to the right. Use red ink to

illustrate the shifted curve or curves. If South Africa were to do this,

would world consumption of rhinoceros horns be increased or decreased?

24.13 (1) The sale of rhinoceros horns is not prohibited because of con-

cern about the wicked pleasures of aphrodisiac imbibers, but because the

supply activity is bad for rhinoceroses. Similarly, the Australian reason

for restricting the exportation of cockatoos to the United States is not be-

cause having a cockatoo is bad for you. Indeed it is legal for Australians

to have cockatoos as pets. The motive for the restriction is simply to

protect the wild populations from being overexploited. In the case of

other commodities, it appears that society has no particular interest in

restricting the supply activities but wishes to restrict consumption. A

good example is illicit drugs. The growing of marijuana, for example, is a

simple pastoral activity, which in itself is no more harmful than growing

sweet corn or brussels sprouts. It is the consumption of marijuana to

which society objects.

Suppose that there is a constant marginal cost of $5 per ounce for

growing marijuana and delivering it to buyers. But whenever the mari-

juana authorities find marijuana growing or in the hands of dealers, they

seize the marijuana and fine the supplier. Suppose that the probability

310 INDUSTRY SUPPLY (Ch. 24)

that marijuana is seized is .3 and that the fine if you are caught is $10

per ounce.

(a) If the “street price” is $pper ounce, what is the expected revenue net

(b) Suppose that the demand function for marijuana has the equation

Q=A−Bp. If all confiscated marijuana is destroyed, what will be the

equilibrium consumption of marijuana? A−11.4B.Suppose that

confiscated marijuana is not destroyed but sold on the open market. What

(d) If there were increasing rather than constant marginal cost in mar-

ijuana production, do you think that consumption would be greater

if confiscated marijuana were sold than if it were destroyed? Ex-