Question 1.
A. [25 points] Many software companies, after years of providing
unlimited free telephone technical support for their products, began to
charge for these services (typically after an initial start-up period of 90
days). Most companies offer two pricing plans. Suppose, for instance,
Lotus Development offers users of their spreadsheet software the
option of paying either (i) $2.00 per minute for telephone support or (ii)
a $129 flat charge for a year of unlimited toll-free calls. Consider a
customer with a yearly demand for service support of P = 11 – 0.1Q,
where P is the price per minute and Q is the number of minutes of calls
made per year. How many calls would this customer make under plan
(i)? How many calls would he or she make under plan (ii)? Calculate
the consumer surplus for each of the plans (i) and (ii).
B. [25 points] Suppose the government imposes a price ceiling of $50
on a market characterized by the following information:
Qd = 700 - 2P Qs = 100 + 4P
Calculate the magnitude of deadweight loss from the price ceiling. Find
a price floor that will result in the same magnitude of deadweight loss.
[Note: P = price per unit; Qd = hundreds of units demanded; Qs =
hundreds of units supplied]
Question 2. [50 points] On Tuesday, February 16, 2010, the U.S.
Office of Management and Budget announced its decision to extend
review of a controversial rule that would re-classify imports of
Vietnamese pangasius, a bottom-feeding fish native to the Mekong
Delta, as “catfish,” thereby subjecting the fish to a provision of the
2008 U.S. farm bill that transferred inspections of catfish from the Food
and Drug Administration to the Department of Agriculture (USDA).
The impetus for the transfer to the USDA, whose inspection procedures
are more stringent than those of the FDA, came from U.S cat-fishers
themselves. According to the Washington Post (Feb. 16, 2010), “U.S.
catfish producers used a multimillion-dollar lobbying effort to persuade
Congress...to tighten regulation of the single species of fish”. The
policy change seems particularly fishy in light of the fact that just a few
years earlier the U.S. catfish lobby had succeeded in persuading
Congress to include a provision in the 2002 farm bill that prohibited
Vietnamese producers from selling pangasius as catfish, thereby
forcing them to market their fish in the U.S. under unfamiliar names
such as “tra,” “basa,” and “swai.” Although Vietnamese and American
catfish are different species — the former is a member of the family
Pangasiidae and the latter of Ictaluridae — the two fish are close
substitutes. The U.S. catfish market is worth more than half a billion
dollars a year. Before 2000, U.S. catfish growers, located primarily in
the Mississippi Delta, had the market pretty much to themselves. But
by 2002, Vietnamese imports had captured 20% of sales. When
banning use of the catfish label didn’t deter U.S. consumers from
buying the Vietnamese fish, the Catfish Farmers of America (CFA)
filed an antidumping petition with the U.S. International Trade
Commission. Following imposition of antidumping duties of between
34% and 64% in 2003, imports of pangasius dropped from 46 million
pounds in 2002 to 37.5 million pounds in 2005. By 2008, however,
imports of “catfish” (from Vietnam and other countries) had reached
110 million pounds. U.S. production, meanwhile, has continued to
slide, from a peak of 660 million pounds in 2003 to 480 million pounds
in 2009. The following summarizes the current state of the U.S. catfish
market:
U.S. catfish production is 480 million pounds per year,
and U.S. elasticity of supply is 0.5.
Foreign supply of catfish to the U.S. is 150 million
pounds per year.
Foreign producers are willing to supply the U.S. with all
of the catfish demanded at the current U.S. price of 80 cents per
pound. According to the USDA Economic Research Service,
the price elasticity of demand for catfish (including pangasius) in
the U.S. is –2.0. Assume that the term “catfish” refers to both
foreign and domestic species, and that consumers consider them
equivalent. A June 30, 2009, Associated Press article observed,
“The inspections requirement could be the U.S. producers’ silver
bullet, stopping imports in their tracks. Applying to all catfish
sold in the U.S., it would require Vietnam to establish a
complicated inspection system and demonstrate that it is
equivalent to U.S. inspections, a process that could take years.”
Adds the Wall Street Journal (May 20, 2009), “Since Vietnam
would not be able to implement the inspections cheaply or
quickly, it would effectively amount to an import ban.” If these
assessments of the effect of the more stringent USDA inspections
are correct, calculate the effect of this policy on the U.S. price of
catfish.
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