A. Assuming that the company faces two distinct markets, calculate the profit-maximizing price/output combination in each market and economic profits.
B. Describe the short- and long-run implications of meeting OSHA standards if doing so raises marginal cost by $1,000 per machine.
C. Calculate the point price elasticity at the initial (part A) profit-maximizing activity level in each market. Are the differential effects on sales in each market that were seen in part B typical or atypical?
P13.7 Incidence of Regulation Costs. The Smokey Mountain Coal Company sells coal to electric utilities in the southeast. Unfortunately, Smokey's coal has a high particulate content, and, therefore, the company is adversely affected by state and local regulations governing smoke and dust emissions at its customers' electricity-generating plants. Smokey's total and marginal cost relations are
TC = $1,000,000 + $5Q + $0.0001Q2 MC = ATC/AQ = $5 + $0.0002Q
where Q is tons of coal produced per month and TC includes a risk-adjusted normal rate of return on investment.
A. Calculate Smokey's profit at the profit-maximizing activity level if prices in the industry are stable at $25 per ton and therefore P = MR = $25.
B. Calculate Smokey's optimal price, output, and profit levels if a new state regulation results in a $5-per-ton cost increase that can be fully passed on to customers.
C. Determine the effect on output and profit if Smokey must fully absorb the $5-per-ton cost increase.
P13.8 Cost of Import Tariffs. Topo Gigo Imports, Ltd., located in San Francisco, California, is an importer and distributor of a leading Japanese-made desktop dry copier. The U.S. Commerce Department recently told the company that it will be subject to a new 5.75% tariff on the import cost of copiers. Topo Gigo is concerned that the tariff will slow its sales, given the highly competitive nature of the copier market. Relevant market demand and marginal revenue relations are as follows:
P = $13,800 - $0.23Q MR = ATR/AQ = $13,800 - $0.46Q
Topo Gigo's marginal cost per copier equals the import cost of $8,000 per unit, plus 15% to cover transportation, insurance, and related selling expenses. In addition to these costs, Topo Gigo's fixed costs, including a normal rate of return, come to $15 million per year.
A. Calculate Topo Gigo's optimal price/output combination and economic profits before imposition of the tariff.
B. Calculate Topo Gigo's optimal price/output combination and economic profits after imposition of the tariff.
C. Compare your answers to parts A and B. Who pays the economic burden of the import tariff?
P13.9 Utility Regulation. The Woebegone Water Company, a small water utility serving rural customers in Minnesota, is currently engaged in a rate case with the regulatory commission under whose jurisdiction it operates. At issue is the monthly rate that the company will charge for unmetered sewer and water service. The demand curve for monthly service is P = $40 - $0.01Q. This implies annual demand and marginal revenue curves of
where P is service price in dollars and Q is the number of customers served. Total and marginal costs per year (before investment return) are described by the following function:
TC = $70,000 + $80Q + $0.005Q2 MC = ATC/AQ = $80 + $0.01Q
The company has assets of $2 million and the utility commission has authorized an 11.5% return on investment.
A. Calculate Woebegone's profit-maximizing price (monthly and annually), output, and rate-of-return levels.
B. Woebegone has requested a monthly price of $22. Calculate Woebegone's output and total return on investment if the request were to be granted. Why are these values different from those calculated in part A?
C. What monthly price should the commission grant to limit Woebegone to an 11.5% rate of return?
P13.10 Costs of Regulation. The Klamath Paper Company produces corrugated boxes for industrial packaging at a plant located in Klamath Falls, Oregon. For each ton of packaging materials produced, 100 gallons of waste-water pollutant is dumped into the Klamath River. Klamath's revenue and manufacturing cost relations for corrugated boxes are
Both price and total manufacturing cost (which includes capital costs) are in dollars, and Q is in tons of output. The Oregon Department of Natural Resources (DNR) is considering various pol lution tax schemes designed to provide funding for clean-up operations as well as reduce Klamath's waste-water pollution. The DNR has determined that discharges into the river must be cut to meet new federal water-quality guidelines. Alternatively, the Klamath Water District water-treatment facility could be expanded to deal with water-treatment needs at a public cost of $2.5 million per year—costs that must be met through pollution charges, other taxes, or both.
A. Calculate Klamath's optimal output, price, discharge, and profit levels based on the assumption of no pollution taxes nor disposal costs.
B. Calculate these same levels if a $2-per-gallon waste-water disposal charge is imposed on the company.
C. If Klamath is required to recycle all waste water, Klamath calculates total recycling costs (in dollars) as
where W is gallons of recycled waste water. This implies a marginal recycling cost per ton of production of
Calculate optimal output, price, discharge, and profit levels in this situation.
D. Describe the advantages and disadvantages of the disposal charge and recycling alternatives.
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