CASE 1
PACIFIC COPPER INDUSTRY
Pacific copper industry, a family-owned business, produces copper that is
purchased by other firms to make wire, tubing and sheets. The copper is
produced in 1000 pounds ingot and is identifiable as having been produced by
Pacific copper only by the firm’s name stamped on each ingot (brick).
PART 1
Pacific operates the only copper mine and smelter in the South Pacific region.
Because imports are limited by high transportation costs, the firm is essentially a
monopoly with respect to the sale of copper ingots. The only real source of
competition comes from scrap copper that has been melted back into ingot form.
However, this scrap copper is considered inferior by buyers and sells for a
substantially lower price.
Pacific copper sells to approximately 200 firms in the region. Individual
purchases are typically made by experienced buyers, but orders tend to be small
and frequent to allow buyers to keep their inventory cost down. Although Pacific
maintain a publish list of prices, it is not uncommon for preferred customers to be
secretly quoted a lower price or better credit terms.
Management estimates the demand for the firm’s product is given by the
following equation.
P = 2975 – 0.10Q
Where P is the price per ton and Q is the number of tons sold per year.
Regression analysis suggests that the firm’s average and marginal cost equation
are:
AC = 2393 – 0.10Q
MC = 2393 – 0.05Q
Where, AC and MC are average and marginal costs per ton.
PART 2
After 2 years, eight new firms enter the market. At the present time, Pacific has a
50% share of copper ingot sales and the rest of the market is shared equally by
the eight new firms. During a recreational outing in ALASKA, the managers of the
nine copper producing firms decide to collude and set the price of ingot at the
monopoly level.
Read the above case study carefully and write down the correct option
number (e-g A, B, C, D) in the given Excel file.
1- If the objective of Pacific management is short run profit maximization
then the optimal level of output for the Pacific firm is:
Marks: 5
A. 3,798
B. 3,880
C. 3,910
D. 4,005
2- The optimal level of price for the Pacific firm is:
Marks: 2
A. $2,587
B. $2,592
C. $2,602
D. $2,680
3- The amount of total cost of producing copper ingot by the Pacific firm is:
Marks: 3
A. $76, 82,220
B. $77, 00,997
C. $77, 79,400
D. $78, 99,009
4- The amount of total revenue earned by the Pacific firm is:
Marks: 2
A. $1,00,16,280
B. $1,00,36,500
C. $1,00, 37,560
D. $1,01, 56,820
5- The amount of total profit earned by the Pacific firm is:
Marks: 2
A. $20, 01,520
B. $20, 50,205
C. $21, 25,350
D. $22, 58,160
6- Periodically, Pacific advertises in local business publications.
Advertising cost of Pacific firm is estimated to be $1000 per year. What will
be the impact of this advertising cost on the price level of copper ingot?
Marks: 1
A. The price level of copper ingot will rise.
B. The price level of copper ingot will fall.
C. The price level of copper ingot will remain the same.
D. The price level of copper ingot will rise first and then fall.
7- When the nine firms decide to cooperate with each other in the setting of
prices and quantities, this is an example of:
Marks: 1
A. Collusion.
B. Price leadership.
C. Monopolistic competition.
D. Perfect competition.
8- According to the demand function estimated by the Pacific management,
which of the following statements is TRUE about the demand curve for
copper ingot?
Marks: 1
A. Demand curve is upward-sloping.
B. Demand curve is downward-sloping.
C. Demand curve is vertical.
D. Demand curve is horizontal.
9- For a monopolist, changes in demand will lead to changes in:
Marks: 1
A. Price with no change in output.
B. Output with no change in price.
C. Both price and output.
D. None of the given options.
10- Use the following two statements to answer this question:
I. For a monopolist, at every output level, average revenue is equal to
price.
II. For a monopolist, at every output level, marginal revenue is equal to
price.
Marks: 1
A. Both I and II are true.
B. I is true, and II is false.
C. I is false, and II is true.
D. Both I and II are false.
11- Which of the following is NOT true for monopoly?
Marks: 1
A. The profit maximizing output is the one at which marginal revenue and
marginal costs are equal.
B. The profit maximizing output is the one at which the difference between
total revenue and total cost is largest.
C. The monopolist's demand curve is the same as the market demand curve.
D. At the profit maximizing output, price equals marginal cost.
CASE 2
THE MARKET FOR HUMAN KIDNEYS
Should people have the right to sell parts of their bodies? Congress believes the
answer is no. In 1984; it passed the National Organ Transplantation Act, which
prohibits the sale of organs for transplantation. Organs may only be donated.
Although the law prohibits their sale, it does not make organs valueless. Instead,
it prevents those who supply organs (living persons or the families of the
deceased) from reaping their economic values. It also creates a shortage of
organs. Each year, about 8,000 kidneys, 20,000 corneas, and 12,000 hearts are
transplanted in the United States, but there is considerable excess demand for
these organs and many potential recipients must do without them. Some
potential recipients die as a result.
To understand the effects of this law, let’s consider the supply and demand for
kidneys. First the supply curve. Even at the price of zero (the effective price
under the law), donors supply about 8,000 kidneys per year. But many other
people who need kidney transplant cannot obtain them because of the lack of
donors. It has been estimated that 4,000 more kidneys will be supplied if the
price were $20,000. We can fit a linear supply curve to this data. That is a supply
curve of the form Q = a + bP.
Thus the supply and demand functions can be written as:
Supply: Qs = 8000 + 0.2P
Demand: Qd = 16000 – 0.2P
Because the sale of kidneys is prohibited, the supply is limited to 8,000 (the
number of kidneys that people donate). This constrained supply can be plotted
as a vertical line.
Many complex and ethical issues are involved in the sale of organs. These
issues are important, and this example is not intended to sweep them away.
Economics, the dismal science, simply shows us that human organs have
economic value that can’t be ignored, and that prohibiting their sales imposes a
cost on society that must be weighed against the benefits.
Read the above case study carefully and write down the correct option
number (e-g A, B, C, D) in the given Excel file.
12- Using the given supply and demand functions, the market clearing
price level for human kidneys can be estimated as:
Marks: 2
A. $19,962
B. $20,000
C. $20,258
D. $21,272
13- Using the same scenario, the market clearing quantity for human
kidneys can be estimated as:
Marks: 2
A. 11,658
B. 11,990
C. 12,000
D. 12,989
14- At market clearing level of price and quantity, the reasonable estimate
for the price elasticity of demand for human kidneys is:
Marks: 3
A. - 0.3333
B. - 0.3643
C. 0.3882
D. 1.3512
15- At market clearing level of price and quantity, the reasonable estimate
for the price elasticity of supply for human kidneys is:
Marks: 3
A. - 0.2643
B. 0.0882
C. 0.3333
D. - 1.3812
CASE 3
PAKISTAN’S ECONOMY
In the face of adverse internal and external developments of an extraordinary
nature, Pakistan’s economy has shown great resilience against shocks of very
high intensity. Domestic factors like heightened political tensions, an unstable law
and order situation, supply shocks, coupled with external factors like a worsening
of international financial crisis, and an unprecedented rise in global food and
energy prices tested the strength of economic fundamentals but Pakistan’s
economy grew robustly in 2007-08, as compared to last year.
Pakistan’s real per capita income has risen at a faster pace during the last six
years leading to a rise in average income of the people. Such increases in real
per capita income have led to a sharp increase in consumer spending during the
year. Relatively slower growth in consumption in 2005-06 and 2006-07 was
mainly attributed to the tight monetary policy pursued by the State Bank of
Pakistan but with rising inflation real interest rate actually declined and thus
boosted private consumption in the current year.
The data about the components of expenditures of Pakistan economy for the
year 2007 is given in the following table:
Components of expenditures (2007)
Total (billions of dollars)
Consumption
Nondurable goods 2309.00
Durable goods 1282.80
Services 5694.40
Investment
Nonresidential fixed investment 1583.80
Residential fixed investment 639.20
Inventory investment -5.90
Government purchases
Defense expenditures 682.90
Non defense expenditures 817.10
State and local expenditures 1995.50
Net exports
Exports 1862.40
Imports 2270.80
Read the above case study carefully and write down the correct option
number (e-g A, B, C, D) in the given Excel file.
16- The Gross Domestic Product (GDP) for the year 2007 is:
Marks: 2
A. $13707.60 billion
B. $14590.40 billion
C. $14962.60 billion
D. $15835.60 billion
17 – The net exports for the year 2007 is:
Marks: 2
A. $406.80 billion
B. -$407.20 billion
C. -$408.40 billion
D. $409.60 billion
18- If the depreciation in the year 2007 is $1380 billion then what is the
amount of Net Domestic Product (NDP)?
Marks: 2
A. $11426.63 billion
B. $12306.54 billion
C. $12400.80 billion
D. $13210.40 billion
19- Suppose nominal GDP for year 2007 grew from $10,000 billion to
$12,000 billion in 2 years. Over the same 2 years, the inflation rate was
exactly 4 percent each year. What will be TRUE about the output level over
these 2 years?
Marks: 2
A. Output will fall.
B. Output will stay at the same level.
C. Output will grow, but less than 4 percent.
D. Output will grow by 4 percent.
20- If the GDP deflator was 100 in the base year of 2006, and was 105 in
2007, we can say that:
Marks: 2
A. The price level increased by 5 percent from 2006 to 2007.
B. The price level increased by 205 percent from 2006 to 2007.
C. The price level increased by 105 percent from 2006 to 2007.
D. We cannot judge price increases from changes in the GDP deflator.
Whew. Take a shot, what do you think? I or others will be happy to check your answers.
Hint: Set marginal cost=marginal revenue and solve for Q; the answers to many of the questions will then easily fall out.
As I stated below... This is a homework help site.... we do not do your work for you.
1- To find the optimal level of output for Pacific firm, we need to set marginal cost (MC) equal to marginal revenue (MR). As per the given information, the marginal cost equation for the firm is MC = 2393 - 0.05Q. However, we need to find the optimal level of output using the average and marginal cost equations provided in the question. The average cost (AC) equation for the firm is AC = 2393 - 0.10Q.
To find the optimal level of output, we equate MR with MC:
MR = MC
2975 - 0.10Q = 2393 - 0.05Q
Simplifying the equation, we get:
0.05Q = 582
Q = 582 / 0.05
Q = 11,640
Therefore, the optimal level of output for the Pacific firm is 11,640 tons. The correct option is D.