# Project #85942 - Economics

Many tourists climb Mt. Fuji in Japan, which is one of the world’s highest mountains: over 12,000 feet or 3,700 meters tall. Tourists can purchase water along the route at huts. The higher a tourist climbs up the mountain, the higher is the price of 1 liter of water. So a tourist pays more for 1 liter of water at the 10,000' hut than at the 7,000' hut. Assume water sellers on Mt. Fuji are profit-maximizers. And (eventhough it’s unrealistic) assume perfect competition.

a. (5 points) Water sold at huts is carried up the mountain by workers, not by vehicles. Referring to the costs of production, explainwhy sellers would charge a higher price for 1 liter of water at a higher elevation.

b. (5 points) Most tourists bring their own water, but drink it all before reaching the peak. Referring to the demand for water, explain why sellers would charge a higher price for 1 liter of water at a higher elevation.

c. (10 points) We learn that more water is sold at higherelevations than at lower elevations. Does that informationhelp you determine whether differences in supply or differences in demand are primarily responsible for the price differences? Explain. Supplement your answer with a graph.

Question 2 (10 points; 4 minutes) Royal Dutch Shell is a profit-maximizing company that produces and sells oil. Last week, Shell announced it would immediately stop all offshore oil drilling in the Arctic, even though it had already spent \$7 billion on the project. They stated that oil prices were expected to remain low and future drilling costs were expected to rise. Using economic terminology, explain Shell’s decision to immediately stop Arctic drilling. In your answer, be sure to indicate whether the \$7 billion already spent on the project is relevant to their decision.

In Oregon, farms can grow apples or grapes. Grapes are used to make wine. There are hundreds of small farms growing grapes and producing wine. Assume the Oregon wine industry is perfectly competitive.

a. (8 points) Initially, the Oregon wine industry was in long-run competitive equilibrium. Draw the relevant graphs below for the market and for the typical firm. Use subscripts “1” on your labels.

(12 points) Oregon wine becomes much more popular with consumers. In the short run, what happens to the price of Oregon wine?

To the market quantity? To the quantity produced by the typical firm? To the profit of the typical firm? Show the effects on your graph above, using subscripts “2” on your labels.

Effect on price of Oregon wine Effect on market quantity

Effect on quantity produced by the typical firm Effect on profit of the typical firm

c. (8 points) In the long run, what happens in the Oregon wine industry? Specify the effects on market price, market quantity, typical firm quantity, typical firm profit, and the number of firms. Show the effects on your graph above, using subscripts “3” on your labels.

Effect on the number of firms Effect on market price

Effect on market quantity

Effect on typical firm quantity

Effect on typical firm profit

(6 points) You can see the effect of the increased popularity of Oregon wine as you drive through Oregon: acres and acres of apple trees have been torn out, replaced with acres and acres of grape vineyards. Each time 10 acres of Oregon land is converted fromapple orchards to grape vineyards, does Oregon’s production of apples fall by the same amount? Explain.

e. (6 points) Draw Oregon’s PPF (the two outputs are apples and grapes). Illustrate two things in one graph:

• your answer to part (d), the effect on apple production of converting apple orchards to vineyards

Briefly explain your graph.

(10 points) Taxi rides are sold at a fixed price. The price does not fall or rise in response to changes in demand. The graph at the right illustrates this market. When is the fixed price a price ceiling: when demand is low or when demand is high? When demand is high, will taxi rides go only to the people with the highest ability and willingness to pay? Explain.

b. (10 points) What is Uber’s “surge pricing”? Use the model of supply and demand to illustrate at right the market for Uber rides. In your graph, distinguish between a low-demand time and a high-demand time.

c. (10 points) When demand is high, is Uber price-gouging? In your answer, distinguish between a high-demand time such as Halloween or New Year’s Eve and a high-demand time such as an unexpected closure of all public transit (Bart, bus, etc.).

 Subject Business Due By (Pacific Time) 10/09/2015 08:05 am
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