Economics Assignment

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 thoseof 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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