Economics

1. A New Hampshire resort offers year-round activities: in winter, skiing and other cold-weather activities; and in summer, golf, tennis, and

hiking. The resort’s operating costs are essentially the same in winter and summer. Management charges higher nightly rates in the winter, when

its average occupancy rate is 75 percent, than in the summer, when its occupancy rate is 85 percent. Can this policy be consistent with profit-

maximization? Explain.

2. A trendy French restaurant is one of the first businesses to open in a small corner of a commercial building still under construction. The

restaurant has received rave reviews and has lines of diners waiting for tables most nights.
1 In the short run (next few months), what measures should the restaurant take to maximize its profits? Explain.
2 In the long run (next six months and beyond), how can it maximize its profits? (Assume that the impressive state of demand is

permanent).
3. In recent years, Chrysler Corporation initiated three-shift or nearly continuous (21-hours-per-day) production at a number of its plants.

Explain why Chrysler’s decision might have been prompted by movements in its wage costs or capital costs, or both. Why would Chrysler have

instituted this production change for its most popular (and profitable) vehicles, its minivans and Jeep Cherokee? What risks might such a plan

pose?

4. Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number

of large firms. (At the same time, one internet business such as grocery home deliveries have continually suffered steep losses regardless of

scale. Explain why.) Could lower transaction costs in e-commerce ever make it easier for small suppliers to compete? As noted in Chapter 3,

network externalities are often an important aspect of demand for information goods and services. (The benefits to customers of using software,

participating in electronic markets, or using instant messaging increase with the number of other users.) How might network externalities affect

firm operating strategies (pricing, output, and advertising) and firm size?

5. Over the last 30 year in the US, the real price of a college education (i.e. after adjusting for inflation) has increased by almost 70

percent. Over the same period, an increasing number of high school graduates have sought a college education. (Nationwide college enrollments

almost doubled over this period.) While faculty salaries have barely kept pace with inflation, administrative staffing (and expenditures) and

capital costs have increased significantly. In addition, government support to universities (particularly research funding) has been cut.

a. College enrollments increased at the same time that average tuition rose dramatically. Does this contradict the law of downward-sloping

demand? Explain briefly.

b. Use supply and demand curves (or shifts therein) to explain the dramatic rise in the price of a college education.

6. In 2002, the Atlanta Journal and the Atlanta Constitution, once fierce competitors, merged to become the Atlanta Journal-Constitution, the

only remaining daily newspaper in the city.

a. Before the merger, each of the separate newspapers was losing about $10 million per year. What forecast would you make for the merged firm’s

profits? Explain.
b. Before the merger, each newspaper cut advertising rates substantially. What explanation might there be for such a strategy? After the merger,

what do you think happened to the Atlanta Journal-Constitution’s advertising rates?
c. What do you think the increased availability of online news sources has had on advertising rates?

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