Economics homework problems

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This passage discusses various economic concepts and situations. It includes a diagram of the market for chocolate candy bars and asks the reader to identify the new equilibrium after an increase in cocoa prices or rapid economic growth. The passage also explains why the price of roses increases more than greeting cards on Valentine’s Day, and the long-run effect of increasing housing benefits for new faculty at a university. It discusses why intangible resources may provide sustainable competitive advantage and why the national dental association may be behind efforts to ban salons from providing teeth whitening services. Finally, it explains why Mattel sets a lower contribution margin on its Barbie dolls than its accessories and how a family business can accommodate chain supermarkets without losing profits from specialty stores.

Table of Content

Candy Bars Market

In the accompanying diagram (which represents the market for chocolate candy bars), the initial equilibrium is at the intersection of S1 and D1. Circle the new equilibrium if there is an increase in cocoa prices. In the same diagram, the initial equilibrium is at the intersection of S1 and D1. Circle the new equilibrium if there is rapid economic growth.

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Valentine’s Day

On Valentine’s Day, the price of roses increases by more than the price of greeting cards. Why? (Hint: Consider what makes roses and cards different and how that difference might affect supply’s responsiveness to price.) During Valentine’s day the demand for roses shifts and price becomes more inelastic. This allows the sellers to charge a higher price to high value customers. In the card industry you are dealing with low value customers that if the price increased would find a substitute for the card.

Faculty Housing Benefits

At a university faculty meeting in 2000, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. What will likely be the long-run effect of this proposal? (Hint: Think indifference principle.) If the asset is a mobile one then in the long run it will make the same profit going to housing benefits as it would have in another investment.

Intangible Resources

Why might intangible resources like human capital and intellectual assets be a more likely source of sustainable competitive advantage than tangible resources? These create ambiguous resources that are difficult to duplicate. Competitors will have a hard time re-creating the particular resources that deliver the advantage.

Salons and Teeth Whitening

Salon owners have recently started offering teeth whitening services to clients in addition to their more standard services. In a number of states, regulators have ordered the salon owners to stop, claiming that this service constitutes the practice of illegal dentistry. What group would you expect to be behind the state’s efforts to ban salons from providing teeth whitening services? Why? Probably the national dental association. By making the state enforce that it is illegal dentistry this allows them to reduce competition in the industry to slow the erosion of profitability.

Barbie Dolls and Accessories

Why does Mattel set a much lower contribution margin on its Barbie dolls than on the accessories for the dolls? They do this as indirect price discrimination. The low value and high value customers identify themselves by the number of accessories they buy.

Selling Salsa

Your family business produces a secret recipe salsa and distributes it through both smaller specialty stores and chain supermarkets. The chains have been demanding sizable discounts but you do not want to drop your prices to the specialty stores. How can you legally accommodate the chains without losing profits from the specialty stores? You lower your price to the supermarkets because you are cutting price to your customers to meet the lower price of competitors already selling in the supermarkets.

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