General Instructions

Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fire pits for patios. They are one of about two dozen firms around the world that manufacture and sell clay fire pits for retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. There is virtually no product differentiation. A clay fire pit is a clay fire pit.

Assume that the world market demand and supply curves for clay fire pots intersects at $300 per unit.

The spreadsheet below gives some of Redstone’s production cost data. A template for the spreadsheet is provided in the Course Materials.

Add columns to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC). Then, add columns to show, respectively, total revenue (TR), marginal revenue (MR), total profit, average profit, and profit margin.

Place your completed spreadsheet in the Drop Box,and use it to answer questions 1-7. Your spreadsheet and calculations are worth 15 points and count as 500 words toward your word count requirement.

Your spreadsheet must include formulas showing how you arrived at the calculations. As an alternative, you may also submit a document showing your step-by-step calculations for each of the cells. You will not receive credit if you do not show your work using one of these two methods.

For Questions 2, 4, and 5, be sure to employ both of the General Rules for Implementing the Output Decision in your explanations.

A detailed explanation should be given for each question.

Explain the Phillips Curve and potential differences between the short-run version and the long-run version. How were the economic performance and policies of the country affected by the Phillips Curve in the 1970s, and what eventually happened to break this pattern?

Chapter 17 Betty to the Rescue

• “The highest form of treason: to do the right thing for the wrong reason.”

  —T.S. Eliot

Sometimes angels work behind the scenes in secret ways. Betty Mavis was an unsuspected angel for Supervisor Mark Armen of Glacier Hills Township. Glacier Hills was just north of the city of Westminister. Armen had been a political science professor at Ansell College in Westminister, but he was a resident of Glacier Hills, and when the opportunity present itself, he decided a tour of duty in public service was in order. He still had to get elected. Several students helped in his campaign and all were supportive. Particularly helpful was graduate student Paul Turwill. Tur-will took the lead in getting together volunteers to knock on every door in Glacier Hills. He also talked residents into having signs on their lawn. In the true sense of the word, he was a go-getter. After long summer nights of campaigning, Armen and Turwill and those students who were over 21 would gather at the Knolls Tavern to discuss their activities. Betty Mavis often came along, usually with a textbook in hand, and always with a smile.

Armen told Turwill that he would help him get a job with the township if he were to be elected and a job opening was available. The election was a success, and as it happened, the previous, outgoing supervisor had a secretary who indicated she wished to resign when her boss left office. That created an opening for a secretary. Armen approached the township clerk, another elected official who served as personnel director. Armen was told that he could choose anyone he wished to be his secretary. He brought up the possibilities of having Turwill serve instead as his assistant, but with the understanding that Turwill and Armen would take care of all of the secretarial tasks of the supervisor’s office. The clerk had no problem with that arrangement, and at the first meeting led by new Supervisor Mark Armen, the issue was placed in front of the full board, and it was discussed briefly. There was no opposition when it was established that Turwill could type and he had had some clerical work experience. Turwill was hired. He was able to continue with his master’s degree program as all his remaining classes were in the evening. He agreed not to take any class on Monday night, as that was when the township board meetings were.

Political leaders often praise the patronage system. If an official is given the power to make an appointment untied to arms-length merit considerations and open competition, it is considered a plus. This is what Mark Armen had been teaching right out of the textbooks in his political personnel classes. He had his classes read George Washington Plunkitt,¹ which explained that the only way you can motivate staff is if you get to select them unhindered by rules and examinations. Patronage was the key to loyalty. When Armen the professor yielded to Armen the political leader, it didn’t seem to work out that way at all. Turwill was a big mistake. He immediately took on a lazy air. He did not show respect to other members of the staff, mostly older women who, while a bit stern in demeanor, had efficiently taken care of township business over the previous 3 decades. Stern was the nature of most workers in the community of German immigrants—many of whom were recent immigrants. Turwill was a bit sloppy in his work. Armen had to have letters retyped, and after a while just took on the task of typing his letters by himself.

Armen was outgoing and liked to joke around with citizens and students alike. He was into jogging, and would tour the township streets in his running outfit two or three mornings a week. He actually used the running to look at sites for rezoning or other issues that had come up in meetings. It was a good way to keep in touch with the citizens. He would wave and smile at constituents and even stop to chat if the occasion called for it. Some of the solid citizens took offense at this style of activity. They were especially critical when they would phone the township and ask for the supervisor only to get Turwill to answer in a sarcastic way that the supervisor was out jogging.

Armen was very concerned when some of Turwill’s college friends would stop by and have closed-door meetings with him. Armen also had an impression that Turwill and his friends would go behind the township hall and participate in recreational drug activity. Armen was well aware that many of the students on campus did drugs, and he had seen Turwill smoking on occasion. The township hall was not the place, and working hours were not the time.

A patronage appointee cannot be easily fired. This is especially the case if he or she earned the job through hard political work. This is the case when someone won an appointment through the recommendation of a close friend. A patronage appointee who knows this may use this. The patronage appointee may take on a feeling that he already paid his dues for the job and he doesn’t have to work as hard as others for their pay. Such was the case with Turwill. Armen pondered solutions, and he knew that any direct action would have costs in friendships on campus, and in respect from his township colleagues who had gone along with his judgment when Turwill was hired. The solution to the problem of Turwill was not easy. Armen’s first thought was to move him to some work outside of the township hall. Armen did let Turwill know that he could not defend him if anyone else saw him smoking marijuana about the premises, and Turwill seemed to understand the warning.

Armen thought about putting Turwill with the township work crews, but that was mostly manual labor, and Armen was not going to make Turwill a supervisor of work crews—where the workers were more skilled than he was. Fortunately the township received a neighborhood development grant for a poor area near the river—Riverdale. The grant entailed hiring crews to clean up the streets, paint houses, and conduct recreational programs. Armen put Turwill in charge of organizing teams to go to the Riverdale area and to work with them. While Turwill thought the work was a bit demeaning, he thought it was less boring that being at township hall all day. He seemed to be doing a satisfactory job in Riverdale. Armen only worried about the fall—in 2 months the Riverdale project would be over—then he would have the Tur-will project on his hands again.

Ah! The day of miracles. One day in August, Turwill came into Armen’s office with a big smile and announced that there was an opening for an assistant public works director in the city of Westminister, and the pay was 40% higher than his current salary. He asked if he should apply.

Armen put on his professor’s hat for a moment and said, “Paul, you know you are welcome here. I owe you this; I know I wouldn’t be here without your work. But the job you have here has to be considered temporary—I am here on a 2-year term; you know my job here is temporary too. You do not have a career job here; there is no career ladder. Westminister is a big city, a post like assistant public works director can have a career ladder. And I can’t raise your salary. Believe me, I know I owe you, and I know you can work hard, and I’ll let the people in Westminister know you are a good student and you can work hard. My professorial advice is simply ‘go for it.’”

Armen made a few inquiries about the position in Westminister, and he found that they wanted a person with a master’s degree and experience, and that they were conducting a national search. His brief moments of thinking that the “Paul problem” was being solved ended. On the other hand, maybe his talk with Turwill could encourage him to look for other jobs, too. But hopes dashed can be hopes revived. Two days later Turwill told the supervisor that he had made the list of ten finalists for the job at Westminister. Armen was indeed a bit dumbfounded.

The next week Turwill was invited for a personal interview. He reported back to Armen with another smile on his face. He had been the first candidate interviewed, because they were talking to people in the local area first. He related that the interview had gone extremely well. In the course of discussions about work experience Turwill had told the Westminister director of public works that he had worked on sidewalk construction crews during summers of his college years. The director asked where, and Turwill replied in Geddes, where he grew up. Geddes was a town of 10,000, forty miles to the west of Glacier Hills.

“You grew up in Geddes?” the director had exclaimed. “So did I. Turwill, your name is? Is that right?”

“Yes, Paul Turwill.”

The director asked, “Do you know Tom Turwill?”

“Of course,” Turwill replied. “That’s my father.”

“I can’t believe it. Your father, wow! You must be that little kid he brought to the class picnics,” the director said. “Your father was my best buddy all though school. The stories I won’t tell you, wow!”

And so went the interview. The director said he would call Turwill in a few days.

The next day the director called Mark Armen. Armen gave Turwill a toned-down good recommendation, but the director sensed something. He asked, “You’re not trying to get rid of him are you?”

Without giving a direct answer, Supervisor Armen repeated the essence of his conversation with Turwill. “I am also Paul’s professor at the college, and I have to reflect on what the job here means and what your job would mean for his career. You are offering a professional public administration post with career opportunities. His job here is simply more limited. He is certainly welcome to stay here, but you are presenting a real professional opportunity and he is capable of taking advantage of it and doing a good job.”

Armen worried that his line of bull might not be effective, but he let it rest, and the director thanked him for his views on Turwill. Turwill got the job.

Armen dropped into the Knolls a few weeks later and Betty Mavis strolled in, books in hand. He asked her how the term was going. She said, “This internship and one more class and I’ve got my degree.”

“Hey, great, tell me about your internship,” Armen said.

Mavis said, “You should know about my internship, you helped set it up last fall.”

Armen sort of remembered and said, “Something to do with personnel, at the county.”

“Right on personnel, but it is the personnel department with the city of Westminister, and let me tell you, I saved your friend Paul’s butt, too.”

Armen inquired as to how she had done that.

Mavis related that the applicants for the assistant public works director were on her desk, and a screening committee had selected ten for interviews. Turwill’s application was in the pile of rejected applications. Mavis said she simply took out the bottom application from the pile of ten and placed Turwill’s into the second spot. Evidently, the director just grabbed the pile of ten and sorted out the locals, and Tur-will was the first one to get an interview call. Mavis heard he had gotten the job, but she hadn’t told anyone how he got the interview. Turwill told her that she had really saved him. She said she thought so because Turwill was always complaining about his township job.

Armen had not thought about Mavis’s graduation, and Mavis had not brought up the subject. But Armen knew she was a waitress at a nice restaurant, the Great Lakes Steakhouse. Armen went into the tavern the week after graduation, and Mavis was there again. This time she was direct.

“Hey, Professor, when you going to take care of me? When do I get a job?”

Armen said, “O.K. Right now, this is your job interview.”

They went though her courses, the jobs she had held, and her skill levels.

Armen said, “Look, I never filled Paul Turwill’s job, and I told the clerk I really didn’t need an assistant, but I know we have a backlog of clerical work, and we could use some organization. You come in tomorrow, and we’ll discuss your job with the clerk.”

The next day Mavis was hired. Armen returned to teaching when his 2-year term ended. Mavis’s new job was a clerical job, but over the next 25 years she grew her position into a professional position. The word in township hall was that she made the place work. Indeed she was even recognized by the Greater Westminister Women’s Club as “Professional Woman of the Year.”

Rethinking patronage—sometimes it can work out O.K.

Questions

• 1. Patronage involves basic ethical questions. Was it proper for Armen to hire Turwill in the first place? There was certainly more qualified office staff available.
• 2. What could Armen have done to let Turwill know that his position with the township involved serious work?
• 3. Shouldn’t Armen have had some clues about how Turwill might act in the township office situations? Wouldn’t he have been familiar with his character? Did he do a disservice to Turwill by not carefully determining (and telling him) his specific job duties, and specific expectations for on-the-job work?

Specifically answer this prompt: Have you ever experienced a time where you (as either a buyer or a seller) had more (or less) information about the quality of the product or the available prices of close substitutes to the product? Explain your situation.

One common example is: used car sales. Buyers sometimes have a lot less information than sellers about the quality of the used car.

A story from your experience about the lack of "full information" in a market you have participated in.

With reference to Sweezy’s model of the kinked demand curve, explain the reasons why we might expect price to be unresponsive to small variations in cost in the case of oligopoly. What are the main limitations of the kinked demand curve model?  

b. Quote real world examples of oligopolistic firms that have benefited from a first-mover advantage.

Companies are expected to act ethically and ensure their employees are also acting ethically. However, as we know the level of ethics expected and those practiced are not always the same. Take a moment to share your thoughts on the following questions about ethics.

• Do you believe that ethics can be taught? Why or why not?
• If you were the CEO of a company how would you ensure employees operated at a high ethical standard?

1. What is order paper and what is bearer paper?

2. What are the main types of negotiable instruments?

3. What is the law merchant?

4. Who owns a corporation?

5. Who are the promoters of a corporation?

6. What does it mean to pierce the corporate veil?

1. (15 pts) (a) A country produces computers. If the pretrade domestic price for computers is $ 1500, and the world price for computers is $ 1200, will this country export or import computers?

(b) Say the US dollar appreciates against other currencies. What will happen to US exports?

(c) Say US interest rates decrease over Japanese interest rates. Will the US dollar appreciate or depreciate against the Japanese yen?

(d) Say the US economic growth rate increases over the Canadian economic growth rate. Will the US dollar appreciate or depreciate against the Canadian dollar?

(e) Country A has a Gini coefficient of 0.500, while country B has a Gini coefficient of 0.400. Which country has the more unequal income distribution?

What you think a historian's job is, what skills a historian needs to do that job, and how those skills might be applicable to your career and/or major goals.

Which of the following is not a significant difference between a monopolist and a competitive firm:

The monopolist produces where MR=MC while the perfect competitor does not.

A monopoly is a price-maker, whereas a competitive firm is a price-taker

A monopolist is protected by barriers to entry, whereas a competitive firm is not

The monopoly’s MR curve lies below the demand curve, whereas the competitive firm’s MR curve is horizontal at the market price

HOW STARBUCKS USES PRICING

STRATEGY FOR PROFIT

MAXIMIZATION

Value Based Pricing Can Boost Margins

For the most part, Starbucks is a master of employing value based pricing to maximize profits, and they use research and customer analysis to formulate targeted price increases that capture the greatest amount consumers are willing to pay without driving them off. Profit maximization is the process by which a company determines the price and product output level that generates the most profit. While that may seem obvious to anyone involved in running a business, it’s rare to see companies using a value based pricing approach to effectively uncover the maximum amount a customer base is willing to spend on their products. As such, let’s take a look at how Starbucks introduces price hikes and see how you can use their approach to generate higher profits.

An Overview of the Starbucks Pricing

Strategy:

The Right Customers and the Right Market

While cutting prices is widely accepted as the best way to keep customers during tough times, the practice is rarely based on a deeper analysis or testing of an actual customer base. In Starbucks’ case, price increases throughout the company’s history have already deterred the most price sensitive customers, leaving a loyal, higher-income consumer base that perceives these coffee beverages as an affordable luxury. In order to compensate for the customers lost to cheaper alternatives like Dunkin Donuts, Starbucks raises prices to maximize profits from these price insensitive customers who now depend on their strong gourmet coffee.

Rather than trying to compete with cheaper chains like Dunkin, Starbucks uses price hikes to separate itself from the pack and reinforce the premium image of their brand and products. Since their loyal following isn’t especially price sensitive, Starbucks coffee maintains a fairly inelastic demand curve, and a small price increase can have a huge positive impact on their margins without decreasing demand for beverages. In addition, only certain regions are targeted for each price increase, and prices vary across the U.S. depending on the current markets in those areas (the most recent hike affects the Northeast and Sunbelt regions, but Florida and California prices remain the same).

Product Versioning & Price Communication

They also apply price increases to specific drinks and sizes rather than the whole lot. By raising the price of the tall size brewed coffee exclusively, Starbucks is able to capture consumer surplus from the customers who find more value in upgrading to Grande after witnessing the price of a small drip with tax climb over the $2 mark. By versioning the product in this way, the company can enjoy a slightly higher margin from these customers who were persuaded by the price hike to purchase larger sizes.

Starbucks also expertly communicates their price increases to manipulate consumer perception. The price hike might be based on an analysis of the customer’s willingness to pay, but they associate the increase with what appears to be a fair reason. Using increased commodity costs to justify the price as well as statements that aim to make the hike look insignificant (less than a third of beverages will be affected, for example) help foster an attitude of acceptance.

on Wednesday April 8, Starbucks announced that it expects its fiscal second-quarter earnings to be cut nearly in half as the coronavirus pandemic causes sales to plunge in its two largest markets.

Assume two neighbors who live next to a pond. Both neighbors get together to determine how each of them value a large deck overseeing the pond. After some economic analysis, they arrive at the following demand estimates: Qa = 160 − 20Pa , Qb = 60 − 5Pb where Q is the size of the deck to be built and P is the price of inputs and labor.

a) Based on these estimates, determine the market demand (assuming these are the only two households living next to the pond) for this public good, the deck overlooking the pond. Draw three graphs on the top of each other -first graph for A’s demand, a second graph for B’s demand, and the third graph for the market demand.

b) Explain the shape of the demand curve. Determine the willingness to pay when the size of the pond is 60 square feet.

c) If the market supply for pond decks were P= 6 + 0.15Q, what would be the optimal provision of this public good, that is what would the size of the pond?

d) Which neighbor is more likely to build the pond? Explain your answer.

New Cities
A regional economy has 11 million workers and an urban utility curve u(n)=15+12n-n^2, where n is the number if workers in millions. Initially, all 11 million workers are in a single city.

a) Suppose the regional government establishes a new city with 1 million workers, leaving 10 million workers in the old City. Predict the new equilibrium distribution of population between the two cities. Illustrate.
b) Suppose the regional government provides a subsidy to the residents of the new city. The subsidy (in utils) is s=12-2n, that is, 10 utils in a city with 1 million workers, 8 utils for 2 million workers, and so on. Predict the new equilibrium distribution of population between the two cities. Illustrate.