ECN 2210

Homework 3

Make a copy and keep to use in class

1. Suppose all automobile manufacturers have collusively agreed to sell their cars at a
uniform price. If a firm wanted to break this agreement and not be detected, what
would be one way to do this?

One way to do this would be to lower price or use secret rebates because the demand
curve facing each firm is more elastic than the market demand curve. They also may want
to come back with a differentiated product so they could sell it at any price they would
want to.

2. Why does the U.S. government maintain a monopoly in the delivery of first-class
mail? Does the Postal Service nevertheless face other forms of competition?

First-class mail is paid for by U.S. tax dollars and that is how it maintains being a
monopoly. The entry barriers are high and this keeps the price low. The Postal Service
faces forms of competition from packaging companies such as, UPS and FedEx.

3. A new government study reveals that daily consumption of peanut butter increases
life expectancy by 10 years. What will this do to the input markets for peanuts and
peanut butter factory workers? Assuming bologna is a substitute for peanut butter,
what will happen in the market for bologna factory workers?

The people in the market for peanuts and the peanut butter factory workers will be
making a profit and more people will be entering into the industry. Bologna demand will
be increasing and firms will most likely be exiting the industry. This means that the
bologna workers will be getting laid off and using their valuable skills elsewhere.

4. Cattle manure is an input often used in making fertilizer. Suppose a technique is

discovered that can transform cattle manure into quality gasoline. What would
happen in the fertilizer industry?

Cattle manure prices would increase because the demand for cattle manure would
increase. This would cause the fertilizer industry to now be a minimal importance in the
cow manure industry because cow manure is now a main component used in making
gasoline.

5. Why is a college graduate more likely to get a job in management than is someone
with only a high school diploma, even when the job has nothing to do with a specific
type of education?

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 A college graduate is more likely in job management than someone with a high school
education because a college graduate has more education and more experience in other
areas than a person with just a high school education would have.

6. There is an Italian soccer player who makes more than $10 million a year. Why?

An Italian soccer player would make more than 10 million a year because he is in high
demand. He is the people’s favorite and he is most likely to be the best soccer star out
there. He has become more than a soccer player and more like a celebrity.

7. Ethyl does not like redheads and refuses to hire any at her business. Paul was the
perfect candidate on paper, but the personal interview revealed that he was a
redhead. Are there any costs to Ethyl for not hiring Paul?

There are costs to Ethyl for not hiring Paul. He was the perfect candidate and had
everything that Ethyl was looking for in a worker. Just because he had red hair does not
mean anything about Paul’s personality. Ethyl was just being racist.

8. Joanne states: “The best way to increase the wages of workers is to increase worker
productivity.” Is Joanne correct? Why or why?

Joanne is correct. When the workers are more productive you will get more output than
you normally would. They will also want to work harder for a larger salary. When you
increase output your profit will be more and that is how you can afford to pay them a
larger wage.

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