Problem 1 (13 points)

Consider the market for taxi rides in Hyderabad. Suppose that anyone who has a driver’s license can supply one trip
from the Hyderabad airport to the Financial District, just down the road from ISB, on any given day. The long run
supply curve of such trips is horizontal at
P = Rs. 500, which is the average cost of such a trip. Suppose daily demand is Q = 1000 – P.

a. How many trips from the airport to the Financial District will be sold each day? (2 points)

b. At what price will each trip be sold? (2 points)

c. What is the consumer surplus at equilibrium? (1.5 points)

d. What is the producer surplus at equilibrium? (1.5 points)

e. Suppose the city of Hyderabad mandates that people supplying such trips must possess a special permit, and
that only 300 such permits will be issued. What is the price of trips sold under this regulation? (1 point)

f. What is the quantity of trips sold under the regulation described in (e)? (1 point)

g. What is the change in social welfare under the new regulations as compared to the unregulated market? (4
points)

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Problem 2 (9 points)

Several years ago, a British journalist did a story on Apple and Steve Jobs. As part of this story, she pointed out that
iTunes prices vary by the customer’s currency. In terms of the British currency (£), the prices are: UK: £0.79; Germany
& France: 99 Euro cents (£0.68); US: 99 US cents (£0.51); and Canada: 99 Canadian cents (£0.41). Evidence suggests
that iTunes’ marginal cost is constant; you may suppose that it is £0.10.

a. What kind of price discrimination is being followed here? (1 point)

b. Estimate the (own-price) demand elasticity for iTunes in Canada, assuming that iTunes prices in each region
are set at the profit-maximizing level. (4 points)

c. Consider an average Canadian iTunes user. Would this user’s total expenditure on iTunes increase, decrease
or say the same if the iTunes price increases? (4 points)

Problem 3 (11 points)

The market for supplying flowers outside the Jagannath temple in Puri is perfectly competitive. All firms (a firm is a
stall) sell flowers in small bamboo baskets. Each existing firm and every potential entrant faces an identical average
cost curve. The minimum level of average cost is Rs. 5 per bamboo basket, and occurs when a firm sells 200 bamboo
baskets of flowers each day. The market demand curve for a basket of flowers is Q = 28005 – P, where P is the market
price in Rupees per basket.

a. What is the long run equilibrium price per basket of flowers? (2 points)

b. How many baskets does each firm sell at this price? (2 points)

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 c. How many firms will be in the market at the long-run equilibrium? (3 points)

d. Suppose the new railway minister starts a new train to Puri, which increases the number of visitors to the
Jagannath temple. As a result, the demand curve shifts to the right, and becomes Q = 34005 – P. How many
new firms will have to enter the market for the long run equilibrium to be established? (4 points)

Problem 4 (17 points)

As part of scoping work for setting up a nation-wide chain of de-addiction and rehabilitation centres, you have been
trying to develop a better understanding of the problem of drug use in the United States. As part of this, you have
become interested in what the impact would be if authorities could be more effective at getting drugs off the streets.
The DEA has estimated the following data:

• Elasticity of Demand for Cocaine: -.55

• Elasticity of Supply: 1.0

• Current Market Price Cocaine: $80 per gram

• Current Cocaine Sales (annual): 950M grams

Suppose we are using a simply supply/demand framework, where the demand curve is given by:

Qd = a + bP

and the supply curve is given by:

Qs = c + dP

a. Use the data above to find the parameters a, b, c, and d (8 points)

a = __________________________________________________________

b = __________________________________________________________

c = __________________________________________________________

d = __________________________________________________________

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 b. Suppose there is a major crackdown on drug dealers, during which the DEA is able to seize 100M
grams of cocaine and take it off the market. What will happen to the equilibrium price and quantity? (5
points)

Equilibrium price = _________________________________________

_________________________________________________________

Equilibrium quantity = __________________________________________________________

c. Suppose your rehab chain finally takes off. As part of a group counselling session at one of the centers,
you meet two former addicts, Jo and Bo. Jo says that she always spent $200 a month on cocaine, no
matter what the price. To this Bo responds that he didn’t care about the price either, and always bought
exactly 2 grams of cocaine. Based on this conversation, what can you conclude about Jo’s and Bo’s
price elasticity of demand for cocaine? (4 points)

Jo’s elasticity __________________________________________________________

Bo’s elasticity __________________________________________________________

Problem 5 (8 points)

Apple has traditionally outsourced the production of iPhones, iPads and other electronic devices to a contract
manufacturer based in China, Foxconn, which employs 800,000 workers in factories located all over China to work
on manufacturing these devices. Faced with increased competition for labor a few years back, Foxconn raised wages
and increased benefits for its workers. In April 2011, Samsung sued Apple for violating various Samsung patents to
produce mobile phones. (Sources: “Foxconn to raise salaries by 20% after suicides”, Financial Times, May 28, 2010;
“Samsung sues Apple on patent-infringement claims as legal dispute deepens”, Bloomberg, April 22, 2011.)

Note: For all questions below, given that Apple’s products are protected through patents, assume they are operating
as a monopoly.

a. Explain how Apple should adjust its production and price if Foxconn raises prices for contract manufacturing.
(2 points)

Quantity __________________________________________________________

Price __________________________________________________________

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 b. Suppose that Apple must pay a royalty to Samsung for patent infringement on each mobile device that it
produces. How should Apple adjust its production and price in response to the royalty? (Note: We know that
Samsung ultimately had to pay Apple for patent infringement, but for purposes of this question, let’s assume
that Apple has to pay Samsung.) (2 points)

Quantity __________________________________________________________

Price __________________________________________________________

c. How would your answer in (b) change if Apple must pay Samsung a lump sum in damages rather than a
royalty per unit produced? (4 points)

Quantity __________________________________________________________

Price __________________________________________________________

Problem 6 (12 points: 2 points each)

Explain how each of the following events would influence the market in the short run. Assume standard demand and
supply curves, i.e., a downward sloping demand curve and an upward sloping supply curve. The market that needs to
be analyzed is indicated in parentheses against each event.
For each event, you have to indicate the direction of movement of the demand curve (outward, inward, or no change;
alternatively, rightward, leftward, or no change), the supply curve (outward, inward, or no change; alternatively,
rightward, leftward, or no change), equilibrium price (up, down, ambiguous, or no change), and equilibrium quantity
(up, down, ambiguous, or no change)

For all the parts below, assume that other than the event being described, nothing else has changed.

a. A major war breaks out due to which several civilians join the army and are deployed at the front (labour
market)

Demand curve ________________________________

Supply curve _________________________

Equilibrium price ________________________

Equilibrium quantity ______________________

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 b. An increase in the price of movie tickets (market for movie theatre popcorn)

Demand curve ________________________________

Supply curve _________________________

Equilibrium price ________________________

Equilibrium quantity ______________________

c. A new technology that makes it cheaper to extract juice from oranges (market for orange juice)

Demand curve ______________________________________

Supply curve _________________________

Equilibrium price ________________________

Equilibrium quantity ______________________

d. An increase in the proportion of twins relative to singletons among newborns (market for baby clothes)

Demand curve ________________________________

Supply curve _________________________

Equilibrium price ________________________

Equilibrium quantity ______________________

e. A prediction by the Indian Meteorological Department that the monsoon is going to be “below normal”
(market for food grains)

Demand curve________________________________

Supply curve _________________________

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 Equilibrium price ________________________

Equilibrium quantity ______________________

f. The latest viral forward on Whatsapp suggesting that consuming desi ghee could prevent COVID-19 (milk
market)

Demand curve ________________________________

Supply curve _________________________

Equilibrium price ________________________

Equilibrium quantity ______________________

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