Reference no: EM13142314

1. Suppose that the U.S. corn market is characterized by the following demand and supply equations:

Q_d = 64- 5P

Q_s = 3P

Where Q_d is the quantity of corn (in millions of metric tons) demanded by consumers, Q_s is the quantity of corn supplied by producers, and P is the price of a million metric tons of corn in millions of dollars.

a) Assume there is a perfect market. Find the market equilibrium quantity (Q*) and price (P*).

b) The U.S. Farm Bill sets a price floor for corn. The bill mandates a minimum price of 11 dollars per metric ton of corn (11 million dollars for one million metric tons). At this new price, P_min = 11, what is Q_d and Q_s?

c) How much surplus corn does the U.S. Farm Bill create?

2. Consider the model of industry protection of Grossman and Helpman. There are two industries A and B, each producing good X and Y respectively. All other things being equal, the demand for good X is inelastic while the demand for good Y is elastic (or more simply, the demand for good Y is more elastic than the demand for good X). The country where these two industries are located is considering opening up its border to foreign companies that will bring competition and reduce the domestic prices of goods X and Y. In this context, and using the G-H model, explain which industry will seek protection against international competition and why. (Do not write more than two paragraphs.)

3. Although Iceland is situated at high latitude and surrounded by some of the most abundant fisheries in the world, until relatively recently its economy was based on agriculture - dairy farming in particular. The high latitude means that winters are harsh and cattle have to be brought inside and fed on hay collected during the summer. The winters can also drag on.

In 1281 AD, the Danish crown (which ruled Iceland) created a "good neighbor law" in Iceland: any farmer whose hay supply had run out could buy hay from his neighbor at a fixed (and relatively low) price. The neighbor was obligated to sell his hay at this price. Discuss this situation in terms of the collective action problem that it created.

a) How do you think the system worked?

b) Do you think farmers collected more or less hay once this law was established?

c) Do you think Iceland's prosperity improved because of good neighbors?

4. It is Friday night and your apartment is a mess. Both you and your roommate have been avoiding cleaning it in the hopes that the other would do it. Both of you want to go out tonight. The best possible outcome for you would be if you went out and while you were out enjoying yourself your roommate cleaned the apartment. The second best outcome for you would be if both you and your roommate stayed home and cleaned the apartment together. The third best outcome for you would be if both you and your roommate went out and neither of you cleaned the apartment. The worst outcome for you would be if your roommate went out and you stayed home cleaning the stupid apartment all night while she had a good time with her friends. Your roommate has symmetric preferences (meaning that she would order the four outcomes in the same way but for herself). 

a) Draw a 2x2 game to represent the situation. Label the players, actions and payoffs.

b) Find the Nash Equilibrium of the game. 

c) What type of problem is this?