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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
(c) What was the profit per ride in 1995, neglecting any costs associated
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
(c) How far away from the market do you have to be for land to be worth
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
40
5
10
15
Quantity
Price
20 S
2S
1S
3
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
40
5
10
15
Quantity
Price
20 S
2
S
1S
3S
4
(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
40
5
10
15
Quantity
Price
20
P
P+t
P+l
Blue
mc
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
(c) What if the government imposes a tax, l,oneveryfirm in the in-
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
(c) The supply schedule for smuggled parrots will be a horizontal line at
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
P
P
a
b
Q
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
(c) The price of marijuana will (increase, decrease, stay the same)
(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-
