Download Answer for Homework 2 Due 4/14 Chapter 5 1.Industry researchers

Answer for Homework 2
Due 4/14
Chapter 5
1.Industry researchers R.S. Platou predicted that, between 2003–04, oil prices would
fall by 5%, production of oil by OPEC and the former Soviet Union would increase,
and deliveries of new tankers would exceed scrappage of older vessels.
a. Using suitable diagrams, explain how each of the following would affect
the market for tanker services: (i) a fall in oil prices; (ii) an increase in
production by OPEC and the former Soviet Union; (iii) new tanker
deliveries; and (iv) scrappage of older vessels.
b. Suppose that the net effect is to increase tanker rates. Illustrate the net
effect on a single diagram. Explain the impact on the quantity of tanker
services used.
c. In actuality, oil prices increased by 25% between 2003 and 2004 and
OPEC and the former Soviet Union production increased by about 10%.
Modify your analyses in (a) for these changes.
Answer:
(a) Fall in oil price would reduce the operating costs of tankers, and hence,
increase the supply of tanker services. Increase in oil production would
increase the demand for tanker services. New tanker deliveries would
increase the supply of tanker services, while scrappage would reduce the
supply.
Price ($ per ton-mile)
Original supply
Higher supply
(new tankers >
scrappage; lower
oil price)
Original
demand
Higher demand
(opec production
rises)
Quantity (billion ton-miles a year)
(b) Please refer to diagram below. Quantity of tanker services used could be
higher.
Original supply
New supply
Price
New demand
increase
Original demand
Quantity (billion ton-miles a year)
(c) In actuality, oil prices increased rather than fell. The net impact on the
supply is ambiguous: it depends on which effect is larger – the increase in oil
prices on the cost of tanker operations or the net increase in the tanker
capacity. The revised figure is as follows:
Price ($ per ton-mile)
Lower supply (higher
oil price)
Original
supply
Higher supply
(new tankers >
scrappage)
Original
demand
higher demand
(APEC)
Quantity (billion ton-miles a year)
2.In 2002, Iraq’s Kirkuk region exported 0.5–0.8 million barrels of crude oil per
day (mpd) by pipeline to the Turkish port of Ceyhan. Following the U.S.-led
coalition attack against Iraq, the pipeline was sabotaged and Kirkuk oil exports
were disrupted. Refineries in western Europe switched to buying oil from the
Urals in Russia, which produce oil that is chemically similar to Kirkuk. Urals oil
is shipped to western Europe by tanker from the Black Sea through the Bosporus
and Dardanelles. However, by early 2004, the surge in European demand and
congestion in the Bosporus and Dardanelles had lifted spot tanker rates to €39,000
per day (Source: “Bosporus Tanker Congestion Threatens Shortage of Oil,”
Financial Times, January 12, 2004).
a. Using suitable demand and supply curves, illustrate the short-run effects of
pipeline disruption on the tanker services market.
b. Using your diagram for (a), illustrate the long-run effects of the pipeline
disruption.
c. When political conditions in Iraq are restored to normal, exports by
pipeline will resume, and the demand for tanker services will fall. With
lower charter rates, the owner of a tanker must decide whether to continue
operating, temporarily lay up, or scrap the vessel. Explain how the owner
should choose among these alternatives.
Answer:
(a) Pipeline disruption increased the demand for tanker services.
Price (€ per ton-mile)
day)
Short-run supply
Long-run supply
€39,000
New demand
Original demand
Quantity (tanker-days)
(b) In the long run, the price would be higher than the original equilibrium, but
lower than €39,000 per day. The quantity of tanker services would be
higher than in the short run equilibrium, and in turn, higher than in the
original equilibrium.
(c)The choice between operating and laying up is a short run decision. If the
short run rate is below the average variable cost, the owner should lay up the tanker.
The choice between operating and scrapping is a long run decision. If the long run
rate is below the average cost, the owner should scrap the tanker.
Chapter 6
3.Consider a company that manages a network of hospitals across several counties in
one state. Household incomes and the cost of living are higher in urban than rural
areas. The company, however, has set the same prices for pharmaceuticals and
services in all of its hospitals. It has also paid the same salaries for doctors, nurses,
and other professional staff throughout the state.
a. Management has noticed that there are long waiting lists for treatment at
its urban hospitals. Can you explain this problem?
b. The company has had great difficulty in recruiting professional staff for its
urban hospitals. Can you explain this problem?
c. What advice would you give to management?
Answer:
(a)
In urban areas, household incomes are higher.
Pharmaceuticals and
medical services are normal products. Accordingly, the demand for
pharmaceuticals and medical services will be higher in urban areas. The
company charges the same prices in urban and rural areas. These prices
will be too low in urban areas, resulting in excess demand (waiting lists).
(b)
(c)
In urban areas, the cost of living is higher. The cost of living is a major
factor in the supply of medical labor. The supply will be lower in urban
areas. Since the company pays the same salaries in urban and rural areas,
it will get a smaller quantity of medical labor in urban areas.
The company should decentralize and allow each hospital to set its own
prices for medicines and services and set its own salaries for professional
staff.
4.Typical real-estate broker: "In California, the seller always pays the broker's
commission, so, buyers get brokerage services free."
MBA: "If the custom were for the buyer to pay the commission, then would
sellers get brokerage services free?"
Real-estate broker, clearly losing patience: "That is a purely hypothetical scenario,
but if that situation were to arise, yes, I guess you're right."
a. Assume that each seller pays a brokers' commission of $18,000. Then,
the supply of houses includes the cost of brokerage. Illustrate the market
equilibrium with a price of $310,000 per house and sale of 200,000 houses
a year.
b. Now suppose that buyers rather than sellers pay the $18,000 commission.
Using your figure, illustrate the following: (i) shift the supply curve down
by $18,000 since sellers do not pay the commission, and (ii) shift the
demand curve down by $18,000 since buyers now pay the commission.
c. Compare the market equilibria of (a) and (b) in terms of (i) the net price
received by sellers, and (ii) the net price paid by buyers. (Net prices are
net of brokerage commission, if any).
Answer:
The net price would not be affected for either buyer or seller.
price ($’000)
(b)(i) supply
curve shifts down
s
310
(b) (ii) demand
curve shifts down
200
0
Quantity (‘000
houses per year)
Chapter 7
5.Qantas operates a fleet of over 100 Boeing jet aircraft. Commercial passenger jets
must be operated by a pilot and co-pilot. Many jets carry cargo in their "bellies",
under the passenger seating areas. Consider each of the following costs. Identify
which are joint costs of passenger and belly cargo services, which are fixed costs of
passenger service, and which are both.
a. Cockpit personnel: All jets, large and small, require a pilot and co-pilot.
Belly cargo service requires no additional officers in the cockpit.
b. Airport landing fees: Some airports charge landing fees by weight of the
aircraft, while others levy a fixed fee, regardless of weight.
c. Fuel: Larger aircraft and those carrying heavier loads will consume
relatively more fuel.
Answer:
(a) Joint cost, and also a fixed cost.
(b) If the landing fee varies with weight, then it is not joint or fixed. If a jet
carries an additional 100 pounds of cargo, the airline must pay additional
fees. Similarly, if the jet carries an additional passenger.
If the landing
fee is fixed, then it is a joint cost and a fixed cost.
(c) Neither a joint cost, nor a fixed cost. If a jet carries an additional 100
pounds of cargo, the airline must spend more on fuel. Similarly, if the jet
carries an additional passenger.
6.Elevators generally break down at random times and for different reasons.
Elevator maintenance contractors must have trained service personnel to provide
routine and emergency service. Shan On Elevator has 200 service personnel to
maintain 1000 elevators.
a. Suppose that Shan On has received a contract to maintain an additional
1,000 elevators. Do you expect that Shan On will need to double its
service personnel? Why or why not?
b. Does the example in (a) illustrate economies of scale or scope?
c. Escalators and elevators use quite different technology and parts. But
many clients operate both escalators and elevators. Are there any
economies of scope for a contractor to maintain both escalators and
elevators?
Answer:
(a) No. Assuming that elevator breakdowns are independent, then the average
rate of breakdowns will obey the law of large numbers. Shan On should be
able to predict the number of breakdowns with relatively less error when it
maintains a larger number of elevators. Hence, it need not increase the
number of service people by the same proportion as the number of elevators
to be maintained.
(b) Economies of scale.
(c) There do not appear to be economies of scope.