Managerial Economics

ECN 3010 Homework #6
This homework is due at the start of class on October 28, 2014. Please complete all problems and show work for full credit.

1.   Consider a firm that sells ball bearings in two markets. The demand curve for bearings in the first market is given by 1 =160-8??1. Demand in the second market is given by ??2 =80- 2??2. The firm’s marginal cost curve is ????=5+??.
a.   In a competitive industry, what would be the market price and how many units will be sold to each group of consumers? If the firm has no fixed costs how much profit would it make? (Hint: you will first need to combine the two demand curves to get a single demand curve for total price in terms of quantity – think hard about if demand should be added vertically or horizontally).
b.   Suppose the firm is a monopoly producer of ball bearings but cannot successfully seal the market, what price should the firm charge and how many units should it sell? If the firm has no fixed costs how much profit would it make?
c.   Now assume that the firm is a monopoly and that each of the markets for bearings can be sealed off from each other. What price should the firm charge to each group and how many units will it sell to each group? If the firm has no fixed costs how much profit would it make?

2. The demand for a strong demander for a round of golf is ????=6-???? and the demand for a weak demander for a round of golf is ????=4-????. The cost of providing an additional round of golf to either individual is 2. Assume that there is a single golfer of each type. The golf club is considering implementing a two-part tariff. If the club cannot discriminate on either the entry fee or the use fee, what is its optimal use fee and entry fee for the firm to charge? With this optimal strategy does the club serve both consumers?

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ECN 4020 Professor Aspen Gorry
Intermediate Macroeconomics

ECN 4020 Homework #6
This homework is due at the start of class on October 28, 2014. Please complete all problems and show work for full credit.
1.   Using the IS-MP diagram, explain what happens to the economy if there is a temporary consumption boom that lasts for one period.
a.   Initially, suppose the central bank keeps the nominal interest rate unchanged.
b.   Suppose you are appointed to Federal Reserve chair, what monetary policy action would you take in this case and why?

2.   With the goal of stabilizing output, explain how and why you would change the interest rate in response to the following shocks. Show the effects on the economy in the short run using the ISMP diagram.
a.   Consumers become pessimistic about the state of the economy and future productivity growth.
b.   Americans develop an infatuation with all things made in Brazil and sharply increase their imports from that country.
c.   A housing bubble bursts, so that housing prices fall by 20% and new home sales drop sharply.

3.   Consider an increase in economic activity (potential output) that causes the demand for money to shift outward.
a.   What would you expect to happen to the real interest rate and short run output if the Federal Reserve Bank targets a quantity of money supply in the economy.
b.   How does your answer change if the Federal Reserve Bank instead targets a nominal interest rate?
c.   How can the Federal Reserve target the interest rate instead of the money supply?
d.   Which of these approaches would you prefer? Why?