Reference no: EM131094833

Economics 713: Assignment 4-

Q1. The salaries of professional baseball players have risen sharply since the reserve clause was abolished in 1976, changing a monopsony into something more like a competitive labor market, in which players may become free agents, and sell their services to the highest bidder.

This winter, a number of players are eligible to become free agents, but the players' union has been complaining that the baseball owners are colluding and acting like a single monopsony employer. The owners, on the other hand, warn that if player salaries are not held down, the increase will have to be passed on to the fans, in the form of higher ticket prices.

Each baseball team is a local monopoly, and it seems safe to assume that most baseball owners are motivated by profit, rather than by a love of baseball.

Analyze the connection between player salaries and ticket prices. In particular, is it true that salary increases will be passed on as higher ticket prices, or will they be paid out of monopoly profits?

Q2. Below is a map showing the location of five firms and five homes. Each firm dumps 12 gallons of crap in the river each week, and this flows down to the sea. The homeowners like to swim in the river, and each homeowner would pay $1 per week to reduce the amount of crap in his section of the river by 1 gallon. Each firm could stop polluting at a cost of $25 per week. Each homeowner could put in a private swimming pool at a cost of $40 per week, and then would not care about the river.

a. If the firms are not liable for pollution, what transactions would you expect to see (would the firms install pollution controls? Would anyone build a swimming pool? Who would pay?)

b. If you were the mayor of this town, what would you do?

Q3. An exchange economy has two consumers, Frances and Francis, and two goods, fish and fowl. Each consumer must eat five fish and five fowl to survive, and, beyond this, utility is a loglinear function of extra fish and fowl consumed (the two utility functions can be different). Frances is endowed with fifty fish and fifty fowl, and Francis is endowed with fifteen fish and fifteen fowl. Find a general equilibrium for this economy.