NAME:
ANSWERS Tansey-Ec. 4550
July 17, 2016
EXAM FINAL (vertical market portion of final)
PART I. Do as many of these as possible. Each article adds
ABOUT 30 points to the exam. For each of the following
articles, there is an underlined event in bold letters that causes a shift in demand
or supply. There is also a market failure [bracketed in italicized bold letters].
In each of the five answer sheets provided for each article:
A.
Set up and write down the LONGEST POSSIBLE supply chain that uses ALL
BUT ONE of the markets and participants listed under the article. Each market
and participant can be used at most one time.
B.
In the market where the underlined event first has its impact, circle the letter of
the appropriate shift on the answer sheet:
"A" represents a leftward (upward) shift in supply.
"B" represents a rightward (downward) shift in supply.
"C" represents a leftward (downward) shift in demand.
"D" represents a rightward (upward) shift in demand.
C.
To indicate the vertical impacts of the underlined initial event, place "X"'s on
the answer sheet over the appropriate letter in the rest of the markets in your supply chain
based on the rules of supply and demand transmission to vertical markets that we studied
in class.
(Every market must have a shift that is circled or have an X, but no market should have
more than one circle (or “X”).
D.
On your answer sheet describe each market as monopoly, oligopoly,
monopolistic competition, perfect competition, monopsony, oligopsony,
bilateral monopoly, or bilateral oligopoly. Support your description first by:
(a)
Circling the size of the market? Circle if it is international (“I”), national
(“N”), regional (“R”), statewide, or local (“L”)
(b)
Circling “Y” if there is product differentiation and “N” if there isn’t.
(c)
Circling on the answer sheet “m” if there are many, “f” if there are few,
and “1” if there is only one firm in the market place. Do this for both the
buyers and sellers in a market.
E.
Answer the additional questions for each article.
1
Article 1. Slow Harvest Prompts USDA to Raise Crop-Price Outlook
http://online.wsj.com/article/SB125789919795042543.htm
Business, November 12, 2009
Wall Street Journal/Online Issue
The slowest harvest season in decades across the Midwest and South forced the U.S. Agriculture
Department to trim its huge production forecasts and raise its price outlook for everything from corn and rice
to cotton. The USDA said in its monthly crop report Tuesday that it expects U.S. corn farmers to harvest
12.9 billion bushels, down 1% from its October forecast. While corn production would still be the second
highest on record, and up 7% from last year, demand for corn to make things such as ethanol fuel is so
strong that the department's economists raised the price they expect U.S. farmers to receive on average to
$3.55 a bushel, give or take 30 cents. That is up 6% from the one-month-old forecast. Much of the middle of
the nation -- from the Great Lakes to the Mississippi Delta -- received at least twice the normal amount of
rainfall in October. That, combined with unusually cool temperatures, slowed crop development and made
fields too wet for farmers to navigate with harvesting equipment. By Sunday, farmers in the major corn
states had managed to harvest just 37% of that crop compared with 82% on average by that point over the
past five years. This harvest is the slowest since at least the mid-1970s, when the federal government
began tracking harvest progress. In addition to lower-than-expected yields, the rainy fall is stinging
recession-weary farmers who now are spending more on propane to dry their crops than they had planned.
The rain delay also means some farmers won't be able to clear their fields of corn and soybeans in time to
plant wheat this fall. Dave Koons, a 61-year-old farmer in Tower Hill, Ill., said Tuesday that he was able to
plant only 100 acres of wheat this fall, half of what he had planned. "A lot of farmers around here have never
seen anything like this," said Mr. Koons, who also grows 800 acres of corn and soybeans. The rainy weather
also is muddying the U.S. farm sector's response to the food crisis that in 2007 and 2008 roiled prices for
consumers and the food industry. Late last year, the global recession punctured sky-high agricultural
commodity prices, and a world-wide planting boom has helped replenish grain supplies strained by demand
from the biofuels industry and the growing middle class in emerging nations such as China. But weather
problems in the U.S., as well as rice-production problems in countries such as India and the Philippines,
mean that prices of some major crops probably won't fall back anytime soon to their pre-2007 levels. In the
Mississippi Delta, where some areas received 400% of normal rainfall in October, the potential yield of
cotton and rice fields is shrinking, too. The USDA Tuesday cut its one-month-old cotton production forecast
by 3.8% to 12.5 million bales, each of which weighs 480 pounds. Government forecasters shaved their onemonth-old forecast of U.S. rice production by 1%.
By Scott Kilman
Markets and Participants
Retail bread
Wheat milling company
Labor market
Wheat farmer
2
grocery store
wholesale bread
Bakery
Commercial harvesters
wheat
Consumer
bio fuels
Flour
Participants
Markets
Commeercial Harvesters
Seller
Labor Market
Wheat farmers Buyer Extent: I N R L
Wheat
Seller
Wheat milling CompanyExtent: I N R L
Buyer
Flour
Seller
Bakery
Extent: I N R L
Buyer
Wholesale
Bread
Seller
Grocery store Buyer
Extent: I N R L
Retail Bread
Seller
Consumers
Buyer
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no)
competition,etc) Left Right Left Right
Y Nm
perfect
competition
f 1 m f 1 ___________
A B XC D
“
Y Nm
f 1 m f 1 ___________
A B C D
Oligopoly
X
A
B C D
monopolistic
competition
m f 1 m f 1 ___________ X
A
“
B C D
B C D
Y Nm
Y N
f 1 m f 1 ___________
Extent: I N R L
Y Nm
f 1 m f 1 ___________
X
A
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
Seller
Buyer
Seller
Buyer
Article 2.
Y N m f 1 m f 1 ___________A B C D
NOTE: even though there is no mention of the indirect shifts (Xs) they
Must occur. Every market should have one and only one shift.
10 PTS FOR EACH SECTION
NOVEMBER 17, 2009
Retail Sales Rise on Autos
By JEFF BATER
WASHINGTON -- U.S. retail sales surged more than expected in October on
rebounding demand for cars, easing fears of the toll rising unemployment
might take on the economic recovery.
Retail sales increased 1.4%, the government said Monday, much better than
the 0.9% increase projected by Wall Street for the first month of the fourth
quarter.
But the report wasn't exactly a picture of strength. September sales were
revised way down, to a 2.3% decrease from a previously estimated 1.5%
tumble.
And aside from automobiles in October, other sales rose just 0.2%. It was the
third increase in a row, yet smaller than the 0.4% climb predicted by
economists.
3
Consumer spending makes up 70% of GDP, which is the broad measure of
U.S. economic activity. The retail-sales data are an important indicator of
consumer spending. Concerns have mounted that joblessness, a remnant of the
severe recession, will stop people from spending money and thwart the
recovery. The U.S. unemployment rate rose to 10.2% in October, the highest
since April 1983. Incomes have fallen in the past year, and getting credit
remains difficult.
"It seems unlikely that households will be able to spend more freely any time
soon," said Paul Dales, an economist at Capital Economist. "We continue to
think that the failure of households to join the party will be the main reason
why the overall economic recovery disappoints."
Big retailers aren't exactly brimming with cheer as the holidays near. WalMart Stores Inc. last week projected earnings of $1.08 to $1.12 a share in the
fourth quarter. Its U.S. chief, Eduardo Castro-Wright, said in a conference call:
"We recognize that some customers may be more cautious in their holiday
spending."
Monday's lukewarm retail sales report showed U.S. sales of autos and parts
rebounded partly in October, up 7.4% in October after a September crash of
14.3% with the expiration of the government "cash for clunkers" incentive
program to boost car sales.
In October, filling station sales were flat.
Excluding sales of gasoline and cars, other retailers' sales increased 0.3% last
month, the third consecutive gain.
Health and personal-care stores increased 0.5%. Restaurants and bars were up
1.2%. Mail order and Internet retailers rose 1.0%.
But housing-related categories fell sharply, with furniture retailers down 0.8%
and building material and garden supplies dealers dropping 2.4%.
Electronic and appliance-store sales fell 0.6%. Food and beverage stores
increased 0.1% and clothing stores were up by 0.4%. General merchandise
stores rose 0.8%. Sporting goods, hobby, book and music stores fell 1.2%.
Another report said U.S. business inventories in September fell 0.4%, less than
the 0.8% drop expected. Inventories of cars grew because sales fell with the
end of [government's "cash for clunkers" car-rebate program.]
"Inventories still appear to be overbuilt because of weak sales, although not
nearly as badly as they were at the beginning of the year," Insight Economics
analyst Steven Wood said.
The Federal Reserve Bank of New York's Empire Manufacturing Survey
showed its general business conditions index fell by 11 points to 23.51 from
34.57 in October. November is the fourth consecutive month that the general
business conditions index has remained in positive territory.
4
—Karen Talley and Deborah Lynn Blumberg contributed to this article. Write
to Jeff Bater at jeff.bater@dowjones.com
Printed in The Wall Street Journal, page A8
Markets and Participants
Car distributors
Auto workers
Consumers
Wholesale cars
Retail cars
automobile manufacturers
Car dealers
Participants
Markets
Autoworkers
Labor
Seller Market
Automobile manufacturers
Extent: I N R L
Buyer
Manufactured
Seller
Cars
Extent: I N R L
Car Distributors Buyer
Seller
Wholesale cars
Extent: I N R L
Buyer
Car dealers
SellerRetail
Cars
Buyer
Extent: I N R L
Consumers
Service stations
Labor market
manufactured cars
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no)
competition,etc) Left Right Left Right
bilateral
Y Nm
f 1 m f oligopoly
1 ___________
A B CX D
Y Nm
“
f 1 m f 1 ___________
A B CX D
Y Nm
f 1 m f 1 ___________
Oligopoly
“
A B CX D
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Y N m f 1 m f 1 ___________A B C D
8 PTS FOR EACH SECTION (32 IN ALL)
NOTE: the labor market is uinionized and the distributors are franchises
of the auto companies.
What type of government intervention is shown in brackets (and
underlined) in the above excerpt?_______Subsidy
What type of government failure is suggested by the underlined part of
the above excerpt? The government may be causing dynamic market
failure by changing expectations and timing of purchases. Administrative
5
cost of cash for clunkers. Compliance cost-auto companies loss of sales
due to expiration of clunker program. Also externalities, market power.
Article 3.
By SPENCER SWARTZ
LONDON—Energy forecasters increasingly predict slowing growth in global oil demand
in the years ahead, but some OPEC nations are heading in the opposite direction and
ramping up their capacity to pump oil.
Qatar, for example, is set to raise its oil-production capacity early next year from an
existing field known as Al Shaheen. The more than $6 billion expansion project brightens
the revenue prospects of the Mideast state but highlights a bigger problem brewing for its
partners in the Organization of Petroleum Exporting Countries.
After keeping a tight tether on supply in recent years by cautiously investing, the 12nation cartel finds itself battling an untimely convergence of lackluster consumption that
magnifies its own rising supply capacity—which may in turn reignite old battles between
members over market share and ultimately push oil prices lower.
OPEC output capacity is expected to increase around one million barrels a day in 2010 as
projects enter service in Angola, Iraq, Qatar and Saudi Arabia, according to Bill FarrenPrice, energy director at Medley Global Advisors.
"Significant challenges face OPEC next year," Mr. Farren-Price says. "It will struggle to
integrate a wave of new OPEC production capacity that vastly exceeds world demand for
its crude." Many of the projects started development well before the recession.
Projects like Al Shaheen may swell OPEC's nominal spare production capacity, a
measure of its overall capability to bring barrels to consumers, to roughly 7.5 million
barrels a day. That would will leave OPEC capacity up about 15% from 2008 at almost a
10-year high, depending on how much oil the group is actually producing.
Operated by Denmark's AP Moller-Maersk, the offshore Al Shaheen field started
producing crude in the early 1990s and could almost double in capacity to over 500,000
barrels a day, says Qatar oil minister Abdullah Bin Hamad Al-Attiyah. "The expansion is
coming along as expected," he said, dismissing concern about depressed demand.
Mr. Al-Attiyah and other OPEC officials say China, India and other parts of Asia will
remain OPEC's fastest-growing markets. OPEC exports to Asia, not including Japan,
grew by 22% in 2000-08, according to OPEC data. By comparison, shipments to North
America, mainly the U.S., were flat in that period.
6
Prices, meanwhile, have risen about 77% this year to $79 a barrel, thanks in part to a
weak U.S. dollar that is encouraging investors to buy higher-yielding oil futures
contracts, and on big OPEC production cuts this year. Those cuts are likely to be kept in
place at the group's final meeting of the year scheduled for Dec. 22 in Angola, OPEC
officials say.
But problems seem set to mount. In the near term, a persistent glut in crude inventory this
year is expected to tarry into 2010. Meanwhile, the long-term outlook is softening. The
International Energy Agency, a Paris-based energy adviser to industrialized nations, last
week sharply downgraded its world demand forecast to 2015 to 88 million barrels a day,
just three million barrels a day more than today, due to fallout from the recession and
energy efficiency efforts.
Yet, OPEC is cranking up its ability to produce oil-and that [could
extend the
current supply glut.] "With these expected capacity additions, mediocre
economic performance and weak demand, we currently foresee \[OPEC\] spare capacity
to remain above five million barrels a day beyond 2015," said one senior Gulf OPEC
official.
Among the most aggressive has been Angola, which has doubled its production capacityfrom a low base-since 2004, to about 2.1 million barrels a day. Most of the output from
its 100,000-barrel-a-day Tombua-Landana offshore project will start in 2010. Chevron
Corp. is developing the $3.8 billion project.
"We have new projects that will start in coming years. We will want a higher quota at
some point," an Angolan oil ministry official said.
At the same time, Saudi Arabia is completing one of its biggest oil-drilling programs,
boosting the kingdom's total oil output capacity to 12.5 million barrels a day by early
next year, up about a net 1.5 million barrels a day versus a few years ago.
Then there are big capacity increases coming in Iraq and Nigeria, two OPEC producers
riven with security problems in recent years that have sharply cut oil output. Now, they
may be getting their petroleum sectors back on their feet with new projects and the
resurrection of dormant facilities.
BP PLC and other companies that recently signed drilling contracts with the Iraqi
government requiring them to deliver quick results will "rehabilitate" existing oil fields,
which may elevate Iraq's crude output next year by 300,000 barrels a day to a total of 2.8
million barrels a day.
David Kirsch, director of market intelligence at PFC Energy, thinks Iraq's total capacity
could top four million barrels a day by 2015 if political and security problems don't get in
the way. Even on that conservative assumption, such output would make it hard for
OPEC "to manage markets over the medium term," Mr. Kirsch said.
7
In Nigeria, a government amnesty that offered thousands of militants money to stop
destroying oil infrastructure may yet fall apart-but so far has held up the past few months.
That has allowed Nigeria to export more crude and more barrels could hit the market
soon.
Markets and Participants
Retail Gasoline
Al Shaheen
Service Stations
OPEC
Refined Oil
Crude Oil
Oil Refineries
Participants
Markets
Al Shaheen
OPEC
Seller
Buyer
Seller
Oil refineries
Buyer
Seller
Service Stations
Consumers
Buyer
Seller
Buyer
Land
Market
Consumers
International Energy Agency
Land Market
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no)
competition,etc) Left Right Left Right
Bilateral
m f 1 m f 1 Oligopoly
___________
Extent: I N R L
Y N
Extent: I N R L
Y Nm
Crude
Oil
Refined Oil
Extent: I N R L
“
f 1 m f 1 ___________
A B C D
Oligopoly
Y Nm
Retail Gasoline
f 1 m f 1 ___________
Perfect
Competition
AX
B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
AX
B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
A B C D
X
X
Seller
Buyer
Seller
Buyer
Seller
Buyer
Y N m f 1 m f 1 ___________A B C D
What is the market failure suggested by the bold, italicized bracketed part of the
quotation? Failure to ration, market power
What type of government intervention would be the least restrictive way to deal with
such a market failure. Antitrust. (government rationing. Taxes/subsidies. regulation.)
What type of government failure would likely occur from such intervention?
Dynamic, government reinforced market power, administrative cost, compliance cost.
8 PTS FOR EACH SECTION (32 IN ALL)
8
Weigh
the market failures and against the government failures
qualitatively.
Should the government intervene to correct this type of market failure?
Article 4.
In Senate, coal fuels climate deals
By LISA LERER | 11/17/09 5:19 AM EST
Forget the debate over green jobs, wind farms and solar power. In the Senate, all deals
on climate change run through coal country.
Black gold has maintained a tight hold over the climate bill — despite a damaging
lobbying scandal this summer, growing public health concerns and a destructive toxic
coal ash spill that smothered 300 acres in eastern Tennessee last December.
“They don’t have a deal until they get the coal-state senators, and they are a long way
from doing it,” said Sen. John Rockefeller (D-W.Va.). “They’re going to need us to pass
a bill.”
And coal-state senators haven’t been shy about their needs. On Thursday, a group of
14 coal-state members, in a letter to Senate Majority Leader Harry Reid (D-Nev.), urged
Senate Democrats to offer more protection in the climate bill for coal-dependent utilities.
“You’ve got to have the coal states,” said Peter Gray, chairman of the environmental
law practice at McKenna Long & Aldridge. “If Democrats want a climate change bill,
they are going to have to accept concessions to the coal industry.”
Even the Senate’s most liberal Democrats recognize the stronghold coal has in the
Senate.
“There are folks who would say, ‘Well, let’s just shut down coal-powered plants.’
That is not going to happen,” said Oregon Sen. Jeff Merkley, a liberal Democrat who
supports stronger environmental and accountability standards for coal plants. “You are
not going to have 60 votes in the Senate to shut down coal.”
Thirty-four states rely on coal as a driver of economic activity. Department of
Energy studies from 2007 found that coal provides about half of all American power and
employed more than 80,000 people in mines. Each one of those positions creates another
3½ jobs on railways, barges and elsewhere in the economy, according to the National
Mining Association.
9
Coal’s economic reach has translated into significant lobbying power in Washington.
Coal provides more jobs than nearly any other energy source because of the low degree
of automation in the mining process. Most of those jobs — either in the mines or on the
railways that send coal shipments across the country — are unionized.
As a result, support for coal can mean critical election-year backing from unions.
“Union support can give lawmakers in tight races decisive leads by delivering large
voting blocs,” Kevin Book, managing director of ClearView Energy Partners, wrote in a
recent research note. “Coal-friendly policies have the potential to unlock political support
from organized laborers all the way from the mine shaft to the smokestack.”
And while the unions deliver votes back home, the coal corporations deliver cash in
Washington.
[ Last year, the mining industry spent nearly $31 million on lobbying
and gave $6.3 million in political contributions.] In the Senate, top recipients
included Reid, Commerce Committee Chairman Rockefeller and Minority Leader Mitch
McConnell (R-Ky.). The industry’s influence doesn’t seem to be harmed after one of the
most prominent coal organizations came under congressional investigation for hiring a
subcontractor that sent forged letters purporting to be from community groups opposing
the House climate bill just days before the legislation came to the floor.
And while Sen. Barbara Boxer (D-Calif.) received a lot of attention for forcing her
climate change bill through the Environment and Public Works Committee, this
legislation still has to run through a gantlet of coal-state committee chairmen, including
Rockefeller, Finance Committee Chairman Max Baucus (D-Mont.) and Agriculture
Committee Chairwoman Blanche Lincoln (D-Ark.).
In fact, Boxer has already had to make some concessions to the industry in her bill,
agreeing to distribute funding for coal technologies sooner. Coal-state senators are also
pushing hard to weaken short-term emissions targets, to mandate greater economic
incentives to develop cleaner coal technologies and for funding to ease the transition to a
cap-and-trade system.
The coal industry also has a major issue with the proposed 20 percent reduction in
greenhouse gas emissions by 2020.
Baucus and other coal-state senators would like to see a 14 percent to 17 percent
emissions target to give the industry more time to develop new technologies like carbon
capture and sequestration — a still-experimental technology that would catch greenhouse
gas emissions before they enter the air and bury them in holes in the ground or under the
ocean.
But while the coal industry and its backers keep chipping away at the Boxer bill, a
weaker emissions target could be a deal breaker for liberal Democrats.
10
“I’ll do everything I can to oppose that,” Sen. Bernie Sanders (I-Vt.) said of the lowered
targets.
And earlier this month, Sen. Sheldon Whitehouse (D-R.I.) took a direct shot at the
industry, proposing short-term emissions cuts of 28.5 percent. Rhode Island is one of a
handful of states that use very little coal power.
“I think there’s a danger that coal interests will demand such a large share of the
proceeds of the bill that it creates a backlash,” said Whitehouse. “So I think they’ve got to
be aware of their own prudential limitations.”
Taken from http://www.politico.com/news/stories/1109/29596_Page2.html on 11/17/09
at 4:43 PM
Markets and Participants
Consumers
Miners
Utilities
11
Coal
Coal Companies
Labor Market
Electricity
Kevin Book
Participants
Miners
Markets
Seller
Buyer
Coal companies
Seller
Utilities
Buyer
Seller
Consumers
Buyer
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no)
competition,etc) Left Right Left Right
Labor Market
Y Nm
Extent: I N R L
Coal
Oligopsony
f 1 m f 1 ___________
A BX
C D
Bilateral
Oligopoly A B C D
Y Nm
f 1 m f 1 ___________
Extent: I N R L
Y Nm
f 1 m f 1 ___________
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Electricity
Monopoly AX B C D
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Y N m f 1 m f 1 ___________A B C D
What is the market failure suggested by the bold, italicized bracketed part of the
quotation? Lobbying can only be done when a firm has enough profit- through
market power- to pay for the lobbying.
Inequities, Externalities.
What type of government intervention would be the least restrictive way to deal with
such a market failure? Market power is best handled with antitrust
What type of government failure would likely occur from such intervention?
Administrative cost, compliance cost (shutting down the coal companies, creating
shortages of electricity), and efficiency costs all work here.
Weigh
the market failures against the government failures
qualitatively. 6 PTS FOR EACH SECTION (24 IN ALL)
Should the government intervene to correct this type of market failure?
Article 5.
12
20 August 27, 2009, 1:41 PM ET
Clean Cities: DOE Boosts Nat-Gas Vehicles With $300 Million
These really aren’t happy days for biofuels.
More where that came from (AP)
As The Wall Street Journal reported today, the entire sector—from corn ethanol to nextgeneration biofuels—has been poleaxed by everything from the credit crunch to its own
inability to turn promises into reality. Now the Department of Energy seems to be adding
insult to injury.
Yesterday, the DOE unveiled the “Clean Cities Grants,” a $300 million slice of the
stimulus package meant to spur development of [cleaner, alternative transport
systems for cities across the country. ]
The big winner? Natural gas. The big losers? Biofuel and biodiesel. The program dished
out roughly two dozen grants meant to build 542 refueling locations across the country
and put more than 9,000 alternative-fuel vehicles on the road.
Only a fraction of those refueling stations will be for ethanol or biodiesel; the majority
are for compressed natural gas, liquid natural gas, or propane. One project, for instance,
will help finance a 700-mile LNG corridor from California to Utah “along one of the
nation’s most heavily traveled truck routes.” T. Boone Pickens must be smiling today.
“Maybe it’s not a forever solution, but the only thing that’s ready to go today is natural
gas,” says David Woodburn, senior research analyst at ThinkEquity in Chicago, who
covers alternative fuels. The fact that the money comes from the stimulus package, he
says, explains in part natural gas’ field day: As attractive as electric batteries and nextgeneration biofuels may be, they are still tomorrow’s solutions (if even then).
A year after Mr. Pickens unveiled his eponymous plan to use natural gas for transport and
lessen dependence on foreign oil, the stars seem to be aligning. That’s partly because
natural gas appeals to so many different constituencies: The energy-security crowd,
environmentalists, natural-gas companies desperately looking for new markets to unload
a domestic glut, and so on.
Congress has legislation that would boost federal tax credits for the purchase of naturalgas fueled vehicles. Influential politicians and think tanks are increasingly warming up to
natural gas as a low-carbon alternative to fossil fuels.
Still, the “Clean Cities” program really is just the tiniest start: The DOE estimates it will
save 38 million gallons of gasoline a year. That’s 0.027% of U.S. annual consumption.
13
http://blogs.wsj.com/environmentalcapital/2009/08/27/clean-cities-doe-boosts-nat-gasvehicles-with-300-million/tab/print/
Markets and Participants
Biofuel distributors
Consumers
Contract farm labor market
Bio-Fuel refiners
Participants
Farmers
Labor contractors
wholesale biofuel
retail biofuel
Markets
Farm workers
Seller
Buyer
Labor contractors
Seller
Buyer
Farmers
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no)
competition,etc) Left Right Left Right
Farm Labor market
Extent: I N R L
grains for biofuel
service stations
Farm workers
farm labor market
oligopsony
Y Nm
f 1 m f 1 ___________
oligopoly
A BX
C D
Contract farm labor
Y
Extent: I N R L
Market
Nm
f 1 m f 1 ___________
A BX
C D
Extent: for
I N biofuels
R L
Grains
Y
Nm
f 1 m f 1 oligopsony
___________
A BX
C D
Seller
Buyer
Bio-Fuel refiners
Seller
Buyer
Bio-fuel distributors
Wholesale biofuel
Bilateral
oligopoly
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A BX
C D
Retail
Extent: Biofuels
I N R L
Y Nm
f 1 m f 1 oligopoly
___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
Consumers
Seller
Buyer
Seller
Buyer
Seller
Buyer
Y N m f 1 m f 1 ___________A B C D
NOTE: this is where you need to read very
carefully. Notice the statement “The big winner? Natural gas.
The big losers? Biofuel and biodiesel.” that comes right after the
underlined passage. The government is subsidizing
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the SUBSTITUTES for biofuel which will first
show up at the retail level and work its way down
to the biofuel companies. The impact on biofuels is
a big externality (public bad) of the government
action.
What is the market failure suggested by the bold, italicized bracketed part of the
quotation? If the government action is designed to to make “alternative transport
systems cleaner” then implicitly the market failure is the polluting, “unclean”
transport systems. This would be a public bad or externality.
What type of government intervention would be the least restrictive way to deal with
such a market failure? Subsidy is what is mentioned in the article and probably is the
least restrictive way to deal with the problem.
What type of government failure would likely occur from such intervention?
Government causes compliance costs and inefficiencies (eg. Externalities, public bads)
here. The article mentions T.Boone Pickens who will be one of the beneficiaries of the
government largesse; implicitly the government is bestowing market power on him
and producers of natural gas and natural gas vehicles.
Should the government intervene to correct this type of market failure?
Weigh the market failures against the government
failures qualitatively. 10 PTS FOR EACH SECTION (40 IN ALL)
PART II. (60 points)
A. Fill in the following table and graph the demand, marginal revenue, average total
cost, average variable cost, and marginal cost curves in the graph below. Make sure
you calculate the price elasticity of demand in the last column of the table.
15
Quan
Tity
(Q)
Total
Revenue
($)
Total
Costs
($)
Fixed
Costs
($)
Variable
Costs
($)
0
20
40
50
60
70
0
160
280
300
300
280
20
80
120
170
240
385
20
20
20
20
20
20
0
60
100
150
220
365
Price
($/Q)
Marginal
Revenue
($/Q)
8
7
6
5
4
8
6
2
0
-2
Average
Total
Cost
($/Q)
Average
Variable
Cost
($/Q)
4
3
3
2.5
3.4
3
4 3.666667
5.5 5.214286
Marginal
Cost
($/Q)
3
2
5
7
14.5
Profit
($)
-20
80
160
130
60
-105
AveRage
proFit
($/Q)
Elasticity
4
4
-5
2.6 -1.44
1
-1
-1.5 -0.69
(2 PTS EACH COLUMN) 20 PTS. IN ALL
B. Graph
?
!
C. With an arrow ( )point to the output on the X-axis where profit will be maximized
where MR=0MC
D. Circle the output at which revenue will be maximized.where MR=0
E. Put an exclamation point (!) where the greatest efficiency of production can be
achieved. Minimum of ATC
F. [Bracket] the shutdown point (corresponding to the shutdown price on the Y-axis
and output at the shutdown price) Minimum of AVC
G. Place a question mark (?) where output would have to be to minimize total cost.
H. Place a rectangle around the OUTPUT at which average profit would be maximized.
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(4 PTS. EACH FOR THE 6 ABOVE QUESTIONS: 24 POINTS)
I. (2 PTS. EACH-TOTAL 6 PTS) At what output level would a firm with the above
cost and revenue curves end up producing, based on their long run incentives?
__40 (min of ATC) units in a competitive market.
__60 (max market share (i.e. revenue))_ units for an oligopoly.
__40 (max profit) units for a monopoly.
J. (4 PTS) Which of the following types of markets is the above diagram most likely to
represent in the short run?
(a) A competitive market.
(b) A monopolistically competitive market
*(c) A monopoly or oligopoly.(because DOWNWARD SLOPING demand curve far
above ATC)
(d)
A bilateral monopoly or bilateral oligopoly (CAN’T TELL BECAUSE THIS IS
THE PRODUCT MARKET, NOT A FAQCTOR MARKET).
K. (4 PTS) Which of the following is NOT true of producing at an output of 70 units in
the above table?
*A)
Demand is elastic.(ABSOLUTE VALUE OF ELASTICITY IS LESS
THAN 1.0)
B) Marginal revenue is negative.
C) Total revenue declines relative to revenue at a production rate of 60 units.
D) Total revenue is positive.
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