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Suppose the ABC chemical company discovers a drug that cures the common cold. ABC has plants in Europe and in the United States and can produce the drug in either continent at a marginal cost of 10. There are no fixed costs. Where P = price, Q = quantity and subscripts E and U refer to Europe and the US respectively, the firm faces the following demand curves in the two continents: Europe: QE=70-PE US: QU=110-PU 1. Assuming that the firm is a profit maximiser and that it can engage in third degree price discrimination, what price will it charge in each continent? Explain the intuition of the result.
2. What profits does it earn?
3. Now assume that the governments of the two continents agree to forbid price discrimination on the basis that it harms consumers. ABC must now charge a single price, the same in Europe and the US. What price will it choose? What profits will it earn? (Hint: because there is a single price, you need to consider the demand curve for the total market, Europe plus the US).
4. Who gains and who loses when price discrimination is forbidden?
Minimum wage laws are common in many countries. The debate over minimum wage includes claims about the impact of this action on employment levels and wage levels. What impact does
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Assume that the following data describe the condition of the banking system: Total Reserves $200 billion Transactions Deposited $700 billion
define business cycle
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Given the data in the table below, provide an estimate of the arc price elasticity of demand for green and chai tea. Chai tea Price $/lb. 10.4, 10.5 Chai tea Quantity mil lbs. 75
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Discuss the three major economic indicators and how they are indicative of our current economic climate.
2. Given the following information: Consumers are very optimistic about the future. The price of oil has just doubled. The money supply is growing at a 6% rate. The government has
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