Leyton and Dustin run a service station in a country town, the service station sells petrol and a number of other goods, which are displayed near the cash register and outside the office. Leyton and Dustin are partners in the business, though they have an old written agreement that states that neither will order goods or services over the value of $3,000 unless the contract contains signatures from both partners.

Leyton has been approached by a supplier of magazines who offers the business the delivery of 100 copies of a particular publication each month. Leyton convinced that the magazine is popular and will make some money, signs a contract with a promise to pay $5,000 in instalments for the delivery of the magazines.

The magazines arrive and Dustin is very upset, first because the magazine is quite unsuitable for display in the business and may result in a loss of customers if they see this publication, but he is also upset that Leyton has made an agreement without consulting him. There is an argument between the partners and Leyton takes sick leave and stays at home to recover from the stress of the argument. In the meantime, Dustin communicates with the supplier of the magazines and declares that the agreement to supply the publication is invalid due to a breach of the partnership agreement, and that the magazines will be returned and no payments will be forthcoming from the business.

Explain, with reference to partnership law:

1. Whether Dustin can cancel the contract with supplier of the magazines?         

[Answer here]

2. Whether Dustin can be liable for the actions of Leyton?                  

[Answer here]

In the town, the weather pattern has three categories each day: Windy, Rainy or Sunny. The weather pattern each day follows a Markov chain model. If it is windy on a day, the following day will be sunny for sure; if it is rainy, the following day will be rainy with probability 0.25 otherwise sunny; and if it is sunny, the following day will be windy with probability 0.25, Rainy with probability 0.25 and sunny otherwise. A worker is paid $175, $125 and $75 on days work depending on if it is Windy, Rainy or Sunny, respectively.

a. Write the transition matrix for this weather pattern
b. How much does the worker get paid on an average day?

The cartel

Consider a town in which only two residents, Hubert and Kate, own wells that produce water safe for drinking. Hubert and Kate can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water.

Suppose Hubert and Kate form a cartel and behave as a monopolist. The profit-maximizing price is

per gallon, and the total output is

gallons. As part of their cartel agreement, Hubert and Kate agree to split production equally. Therefore, Hubert's profit is

, and Kate's profit is

.

Suppose that Hubert and Kate have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Hubert says to himself, "Kate and I aren't the best of friends anyway. If I increase my production by 40 gallons, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Hubert implements his new plan, the price of water   to

per gallon. Given Kate and Hubert's production levels, Hubert's profit becomes

and Kate's profit becomes

.

Because Hubert has deviated from the cartel agreement and increased his output of water by 40 gallons, Kate decides that she will also increase her production by 40 gallons.

After Kate increases her production, Hubert's profit becomes

, Kate's profit becomes

, and total profit (the sum of the profits of Hubert and Kate) is now

.

Note that Hubert and Kate started by behaving cooperatively. However, once Hubert decided to cheat, Kate decided to cheat as well. In other words, Kate's output decisions are based on Hubert's actions.

This behavior is an example of?

Montpelier, a small town in Ohio, earns $75 million and spends $46.5 million. If their income falls to $67 million, they will spend $41 million. Full employment is achieved when income is $79 million.

1. Calculate the average propensity to consume when Montpelier earns $75 million
2. Calculate the average propensity to save when Montpelier earns $75 million
3. Calculate the marginal propensity to consume when income falls from $75 million to $67 million
4. Calculate the spending multiplier for Montpelier
5. Is Montpelier in a recessionary or inflationary period?
6. If the government wants to change their spending level to get Montpelier to reach full employment, how much will they have to adjust their spending when Montpelier is earning $67 million

Consider a small town, with two restaurants: a tapas bar and a bistro. Both restaurants have a set menu and the cost of serving each customer is $8 for both restaurants. Tapas bar chooses its price for the menu denoted by Pt, and bistro chooses its price for the menu denoted by Pb. Both restaurants are trying to maximize their profits. Tapas bar faces the demand curve Qt = 44 − 2Pt + Pb and bistro faces the demand curve Qb = 44 − 2Pb + Pt.

a) Write down the profit function of the tapas bar.

b) Write down the profit function of the bistro.

c) Find the best reply function of the tapas bar.

d) Find the best reply function of the bistro.

e) Find the Nash equilibrium using the best reply functions you derived in part c and d.

f) Draw the best reply functions you found in part c and d in the same graph. Show the Nash 2 equilibrium on your graph.

g) Does the Nash equilibrium you found generate the highest possible total profits (that is the sum of profits of the tapas bar and the profits of the bistro) for the two firms? If so, argue why this is the case. If not, argue why this is not the case and find the point that generates the highest possible total profits for the two firms.

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. Assume George has no fixed costs, and his cost of producing each portrait is $35.

a. Complete the following table.

Instructions: If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Enter your responses as whole numbers.

How much should George charge if he must charge a single price to all customers? $__

At this price, how many portraits will George produce each day? __ portraits

What will be his economic profit? $__ per day

b. How much consumer surplus is generated each day at this price? $__

c. What is the socially efficient number of portraits? __ portraits

d. George is very experienced in the business and knows the reservation price of each of his customers. If he is allowed to charge any price he likes to any consumer, how many portraits will he produce each day? __ portraits.

What will his economic profit be? $__ per day

e. In this case, how much consumer surplus is generated each day? $__

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. Assume George has no fixed costs, and his cost of producing each portrait is $25.

a. Suppose George is permitted to charge two prices. He knows that customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them. At what level should George set the list price of a portrait? At what level should he set the discount price? How many photo portraits will he sell at each price?

List price of a portrait: $__   

Number of portraits to be sold at the list price: __portraits

Discount price of a portrait: $__   

Number of portraits to be sold at the discounted price: __portraits

b. In this case, what is George’s economic profit and how much consumer surplus is generated each day?

Economic profit: $__   

Consumer surplus: $__

3. Breakdown of a cartel agreement Consider a town in which only two residents, Clancy and Eileen, own wells that produce water safe for drinking. Clancy and Eileen can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water. Price Quantity Demanded Total Revenue (Dollars per gallon) (Gallons of water) (Dollars) 3.60 0 0 3.30 30 $99.00 3.00 60 $180.00 2.70 90 $243.00 2.40 120 $288.00 2.10 150 $315.00 1.80 180 $324.00 1.50 210 $315.00 1.20 240 $288.00 0.90 270 $243.00 0.60 300 $180.00 0.30 330 $99.00 0 360 0 Suppose Clancy and Eileen form a cartel and behave as a monopolist. The profit-maximizing price isper gallon, and the total output isgallons. As part of their cartel agreement, Clancy and Eileen agree to split production equally. Therefore, Clancy's profit is, and Eileen's profit is. Suppose that Clancy and Eileen have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Clancy says to himself, "Eileen and I aren't the best of friends anyway. If I increase my production to 30 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Clancy implements his new plan, the price of water toper gallon. Given Eileen and Clancy's production levels, Clancy's profit becomes and Eileen's profit becomes. Because Clancy has deviated from the cartel agreement and increased his output of water to 30 gallons more than the cartel amount, Eileen decides that she will also increase her production to 30 gallons more than the cartel amount. After Eileen increases her production, Clancy's profit becomes, Eileen's profit becomes, and total profit (the sum of the profits of Clancy and Eileen) is now. True or False: Based on the fact that both Clancy and Eileen increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity. True False Note that Clancy and Eileen started by behaving cooperatively. However, once Clancy decided to cheat, Eileen decided to cheat as well. In other words, Eileen's output decisions are based on Clancy's actions. This behavior is an example of .

Breakdown of a cartel agreement

Consider a town in which only two residents, Sam and Teresa, own wells that produce water safe for drinking. Sam and Teresa can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water.

Suppose Sam and Teresa form a cartel and behave as a monopolist. The profit-maximizing price is

per gallon, and the total output is

gallons. As part of their cartel agreement, Sam and Teresa agree to split production equally. Therefore, Sam's profit is

, and Teresa's profit is

.

Suppose that Sam and Teresa have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Sam says to himself, "Teresa and I aren't the best of friends anyway. If I increase my production to 40 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Sam implements his new plan, the price of water   to

per gallon. Given Teresa and Sam's production levels, Sam's profit becomes

and Teresa's profit becomes

.

Because Sam has deviated from the cartel agreement and increased his output of water to 40 gallons more than the cartel amount, Teresa decides that she will also increase her production to 40 gallons more than the cartel amount.

After Teresa increases her production, Sam's profit becomes

, Teresa's profit becomes

, and total profit (the sum of the profits of Sam and Teresa) is now

.