Microeconomics (6th Edition)
6th Edition
ISBN: 9780134106243
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 16, Problem 16.1.4PA
Subpart (a):
To determine
Application of arbitrage.
Subpart (b):
To determine
Application of arbitrage.
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Suppose Meow Meow is a local store specializes in selling cat food. She offers discount coupons via Buzz, a free local newspaper. As such, some of her customers use the discount coupons while others do not.
a. Printing and distributing the discount coupons are costly. Why does Meow Meow offer these coupons? Given that the coupons can be collected for free, why doesn’t she simply lower the price and save the costs of issuing the coupons? Briefly explain with reference to the concept of demand elasticity.
b. Suppose Meow Meow has a constant marginal cost of $20 for her cat food. Based on your answer in (a), construct side-by-side diagrams to illustrate the pricing strategy adopted by Meow Meow on the coupon users and nonusers. Label your diagrams clearly.
c. Explain TWO practical limitations facing Meow Meow when conducting the above pricing strategy.
d. Instead of the above pricing strategy, one economist suggests Meow Meow using a two-part tariff. Briefly illustrate how this works.
At the start of 2010, the UK was hit by extremely cold weather including snow and ice. As a result, there was a major increase in demand for salt to put on the roads to make them safer. However, the supply of salt in the UK comes mainly from three salt mines; one in Cheshire, one in Cleveland, and one in County Antrim. The shortage was so great that at one point the government ordered councils to use less grit on the roads and stopped gritting the hard shoulder of the motorways. Problems in the past meant councils had been instructed to hold a few days worth of stock of salt but this was not enough to make the roads safe in what was the coldest period since 1963.
Questions
Sketch a supply curve that represents the supply of salt in the short run. Explain your diagram.
Why do councils keep stocks of salt?
Add to your first diagram a long-run supply curve for salt; explain your diagram.
At the start of 2010, the UK was hit by extremely cold weather including snow and ice. As a result, there was a major increase in demand for salt to put on the roads to make them safer. However, the supply of salt in the UK comes mainly from three salt mines; one in Cheshire, one in Cleveland, and one in County Antrim. The shortage was so great that at one point the government ordered councils to use less grit on the roads and stopped gritting the hard shoulder of the motorways. Problems in the past meant councils had been instructed to hold a few days worth of stock of salt but this was not enough to make the roads safe in what was the coldest period since 1963.
Questions
Add to your first diagram a long-run supply curve for salt; explain your diagram.
Chapter 16 Solutions
Microeconomics (6th Edition)
Ch. 16 - What is the law of one price? What is arbitrage?Ch. 16 - Prob. 16.1.2RQCh. 16 - Prob. 16.1.3PACh. 16 - Prob. 16.1.4PACh. 16 - Prob. 16.1.5PACh. 16 - Prob. 16.1.6PACh. 16 - Prob. 16.2.1RQCh. 16 - Prob. 16.2.2RQCh. 16 - Prob. 16.2.3RQCh. 16 - Prob. 16.2.4RQ
Ch. 16 - Prob. 16.2.5RQCh. 16 - Prob. 16.2.6PACh. 16 - Prob. 16.2.7PACh. 16 - Prob. 16.2.8PACh. 16 - Prob. 16.2.9PACh. 16 - Prob. 16.2.10PACh. 16 - Prob. 16.2.11PACh. 16 - Prob. 16.2.12PACh. 16 - Prob. 16.2.13PACh. 16 - Prob. 16.2.14PACh. 16 - Prob. 16.2.15PACh. 16 - Prob. 16.2.16PACh. 16 - Prob. 16.2.17PACh. 16 - Prob. 16.2.18PACh. 16 - Prob. 16.3.1RQCh. 16 - Prob. 16.3.2RQCh. 16 - Prob. 16.3.3RQCh. 16 - Prob. 16.3.4PACh. 16 - Prob. 16.3.5PACh. 16 - Prob. 16.3.6PACh. 16 - Prob. 16.3.7PACh. 16 - Prob. 16.3.8PACh. 16 - Prob. 16.3.9PACh. 16 - Prob. 16.3.10PACh. 16 - Prob. 16.3.11PACh. 16 - Prob. 16.3.12PA
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