Economics 102 Assignment #1 (15 Points) Name

Economics 102 Assignment #1 (15 Points) Name__________________

5. According to Adam Smith, "He...neither intends to promote the publick (sic) interest, nor knows how much he is promoting it...He intends only his own gain, and he is in this, as in many other cases, led … to promote an end which was no part of his intention." In other words, in pursuing one’s self interest, one acts to promote the good of society.

In the movie Wall Street, Gordon Gekko (Michael Douglas) says the following: “Greed … is

good. Greed is right. Greed works. Greed comes through and catches the essence of the evolutionary spirit. Greed in all its forms -- greed for life, for love, for knowledge, for money --- has marked the upward surge of mankind and greed will …. save that malfunctioning corporation called the USA.”

6. Private industrial timber companies own 15% of all timberland in the United States (9% in the West). At some point, the trees are cut, transported to a mill, processed into either paper or lumber products, and then sold. Assume that the trees are already planted. Two costs will be incurred before the trees are to be cut. First, in ten years, there must be a commercial thinning. This means that workers will be hired and machines purchased to reduce the amount of undergrowth so that nutrients can be concentrated in the trees. Second, in ten years and again in twenty years, the trees will be chemically fertilized through aerial spraying. The trees will grow very quickly for 50 to 60 years. After this, they grow slowly. The slow growth produces a wood that is free of knots and sap and therefore sells for a much higher price in the market.

Use the principles of rational decision-making from Chapter 2 to explain how a timber company would go about making the decision as to the best time for it to cut the trees. (You do not have to make the decision. Just explain how one would go about making this decision.)
Continued on Page 2

Part 3: (5 points)

1. In the chapter it was argued that the demand for airline travel was relatively elastic. Explain why this would be so using the three factors discussed in this section.

2. In 2007, Governor Schwartzeneggar lowered the fees at community colleges from $26 to $20 per unit. Is the demand for community college courses relatively elastic or relatively inelastic? Use the three factors to explain why. Based on your answer, what would happen to the revenues of the community colleges?

3. In each case, state whether you believe the demand for the product is relatively elastic or relatively inelastic? Then, provide reasons for your conclusion.

a. A company buying advertising during the Super Bowl

b. Services of a dentist to bleach teeth to make them very white

c. Use of cigarettes when the state of California raised the cigarette tax by $1.10

d. Buying gasoline when the price rose from $2.50 to $3.30

6. In Chapter 4, you were given the following demand curve for homes:

$340,000 0

1 $320,000 1000

2 $300,000 2000

3 $280,000 3000

4 $260,000 4000

5 $240,000 5000

6 $220,000 6000

7 $200,000 7000

8 $180,000 8000

9 $160,000 9000

10 $140,000 10000

In what price range is the demand for homes relatively inelastic?_______________

Economics 102 Assignment #2 (20 Points) Name______________________

2. The cross elasticity of demand between automobiles and gasoline is -3.

2. In each of the following cases, state whether there is a movement along the demand curve for American automobiles, the demand curve for American automobiles will shift to the right, or the demand curve for American automobiles will shift to the left:
1. The price of gasoline rises to $4 ____________________
2. The prices of American automobiles rise ____________________
3. The prices of Japanese automobiles rise ____________________
4. Interest rates paid to borrow money to buy automobiles

fall to zero ____________________

of higher quality ____________________

buy American automobiles ____________________

automobiles will rise next year ____________________

state of the music business. It concerns a young rock band who decided

to stop selling their CDs at concerts. Selling CDs has, for many years,

been a good way for an act to reclaim the margin that would otherwise

have been snaffled by a retailer. But it made no sense to this band once

they discovered that by selling CDs for $10 they were cannibalising

sales of their $20 T-shirts.

There are two points to note here. First, that a simple garment with a

logo stamped across it, probably manufactured for pennies in a

third-world sweatshop, now costs twice as much as an album of digitally

pristine, highly wrought music recorded in a state of the art western

studio. Second, most bands, however successful, now make their money

from live work and the merchandising opportunities that go with it,

rather than from recordings.

The record companies know this, which is why when EMI re-signed Robbie Williams in 2002, the £80m deal guaranteed the label a share in the profits generated by Williams's tours (a British pound is worth $2). Such spinoffs are often now make or break issues in contractual negotiations. Gerd Leonhard, a music business consultant, predicts that by 2010, recorded music sales will make up only 30 per cent of a successful label's revenues. The rest will be generated by artists' extra-musical brand extensions. Like those $20 T-shirts.

The artists are getting wise to this new value chain. One of the hottest new names to emerge recently, the rave metal band Enter Shikari, have refused to sign any of the deals they have been offered, instead releasing their debut album Take to the Skies on their own label, Ambush

Reality, in March. In the past, these tiny, so-called "indie," labels have usually been funded by majors anxious to covertly purchase credibility for their products with a young audience. The celebrated label Creation, home to Oasis and other Britpop stars in the 1990s, was owned entirely by Sony. Had it not been, the marketing spend which turned Oasis into a huge international draw would not have been available.

But this is not the case with Ambush Reality. The marketing of Take to the Skies was undertaken largely by the band themselves, who have played nearly 700 gigs since forming in St Albans in 2003. Word of mouth, coupled with the inevitable presence on MySpace, has done the rest. In November 2006, they became only the second unsigned band (after the Darkness) to sell out the 2,000-capacity Astoria in London. Five months later, Take to the Skies entered the British album chart at number four. In May, Enter Shikari started out on their first American tour.

They have set an inspirational example, not least by their single-minded prioritising of their performances. Groups used to tour, often at a loss, to stimulate sales of their latest album. Now it's the other way around. Hence the widely reported decision earlier this year by the Crimea, a band previously signed to Warner Bros, to release their new album as a free download. The band explained this not as an anarcho-hippie gesture in support of the principle that music ought to

be free, but as a sensible promotional tactic. Their hope is that by disseminating their music online, they will expand their fan base and increase their returns from touring. Having seen the small size of the checks they got from Warner, they know where not to look for their future income.

This view is shared by a far more famous former Warner artist: Prince. Anyone attending his shows at the London O2 arena in August will receive a free copy of his latest CD, Planet Earth, as did anyone who bought the Mail on Sunday on 15th July. Prince's new label, Sony/BMG, which did not know about the deal, has withdrawn the album from British shelves. "Record sales as we know them are in long-term decline," says music business analyst Keith Jopling. "Whereas the wider music market—live, merchandising, streaming video and music social networking—is in rude health. After seven years of gradual change, we are about to see a major shift. Record companies are, at last, in a hurry to transform themselves into proper consumer marketing companies."

The catastrophic slide in the value of recorded music, and particularly in the price consumers are prepared to pay for it, has been felt hard on the high street. HMV announced in June that its profits had halved over the past year. Soon afterwards, the discount CD chain Fopp went out of

business.

The industry that for years appeared to possess a licence to print money is reeling. The "big four" labels—Sony/BMG, Warner Music, EMI and Universal—have in recent years embarked on cost-cutting operations leading to major culls of staff: EMI's recorded music division has shrunk by almost half since 2001, from 9,388 employees worldwide to 4,818 today. Meanwhile, a senior industry executive reports that of this year's breakthrough British acts, just one, Mika, will make money for his record company. This decline in fortunes has been noticed in the financial markets: EMI is being bought up by private equity group Terra Firma, for £3.2bn.

Almost as soon as the offer was accepted, Terra Firma were reported to be in discussions with Warner to offload EMI's recorded music division. The side of EMI that interested Terra Firma was its song publishing arm, the world's largest and a profitable performer. It is regarded as a

safer bet because the exploitation of song copyrights is not subject to the same feasts and famines as the hitmaking process. As well as receiving around 14 per cent of the profit on any CD sale,

the publisher has its fingers in other pies, such as licensing fees for films, ads or any of the other myriad outlets which now employ music. Once upon a time, EMI's publishing arm accounted for about a third of the market value of the whole group. Now it's the only part that's worth anything

to the people who venture their capital. It is no coincidence that Terra Firma's offer valued EMI at about a third, in real terms, of what it nearly fetched ten years ago when a sale to its competitor Universal was mooted.

That decline roughly mirrors what has happened over the same period to the retail price of

new—as opposed to catalogue reissue—CDs. When EMI's subsidiary Virgin put out the Spice Girls debut album in 1996, it sold for around £13 in Britain, from which the company cleared more than £5 in profit. New CDs now seldom cost more than £9, from which the label can expect to make £2, if it is lucky.

Although Britons still buy more CDs per head than anyone else—2.7 in 2006—the market for recorded music is in rapid decline. In the first quarter of 2007, the market for the top-selling 200 CDs in Britain shrank by 20 per cent compared to the same period in 2006. In the US, CD sales in 2007 are down by 15 per cent, in France 25 per cent, in Canada 35 per cent. The German market, once the largest in Europe, is now no bigger than that of the Netherlands.

The market for digital downloads was worth around $981m in the US last year, around a tenth of the value of the CD market. Yet the labels' great hope is that the slump in demand for physical formats will be offset by growth in the download market. This looks wildly optimistic. The latest figures from the US reveal that while paid-for downloads are increasingly popular—up 74 per cent in 2006 on the previous year—the surge in demand is slowing. And while the total value of music sales across all formats remained more or less static in 2004 and 2005, it declined by more than 6 per cent in 2006. The trade body of the American record industry, the RIAA, optimistically predicts that by 2011, the global online music market will be worth $6.6bn; three times what it

currently amounts to. This situation will, as the RIAA delicately puts it, "leave the industry better positioned to offset physical sales."

Yet however it finds itself in 2011, the underlying truth is that recorded music, on or offline, has moved from being a high-margin, "high-end" product to a low-margin, low-prestige commodity. The album, for 35 years the basic, pricey unit of the industry—such a handy way of

getting fans to shell out for ten songs when they might have wanted only three or four— increasingly seems, for young consumers, a clunky, old-fashioned and uneconomical way of building a music library on a portable MP3 player.

Far better to download songs; at the iTunes music store, tracks retail for 99 cents in America and 79p here. In Britain, at the end of the 1990s, CD singles sold for £4. Of that, the artist received about 50p, while the record company took as much as £1. Under the new web-style

arrangement, the artist is lucky to get 10p, and the company might gross 30p.

This destruction of the value of individual recordings explains why, even if we were to carry on buying recorded music in the quantity we did at the end of the last century, the prospects for suppliers would still be bleak. However high the record companies worldwide pile their audio

products in future, the only way they will be able to sell them is cheap. In Britain, the 10 per cent of singles still sold on CD now retail for just £1.49.

Record company insiders are aghast at the demise of what was, for the last two decades of the 20th century, their golden goose. And some of them know that they were partly responsible for killing it. Arriving on the market in 1982, just after record sales began to revive following a three-year downturn, the compact disc ushered in the biggest boom in profits the record companies had known since 7" singles gave way to 12" LPs in the late 1960s. The CD persuaded many music fans to replace their vinyl collection with digital copies of music they had already paid for. And the rise of the CD permitted record companies to double the price of their basic product without incurring a huge uplift in costs. Even allowing for the royalty paid to the joint inventors of

the CD—Philips and Sony—the discs were soon being manufactured for little more than it cost to crank out vinyl records on ancient presses. Initial anxieties that consumers might be resistant to the more expensive format proved unfounded. Research revealed that music fans were more worried about the cost of acquiring a CD player than by the price of the discs. Paying £12 (£30 in today's money) for an album that, nearly everybody agreed, sounded better and was easier to manipulate than a vinyl LP, didn't feel steep in the mid-1980s. In 1994, the CD supplanted the cassette as the most popular platform for recorded music in western markets.

Yet in some ways the CD contained the seeds of its own destruction. One of the few industry moguls to raise his voice against the digital format in its early days was the late Maurice Oberstein, an American who was latterly head of the Polygram UK (later Universal) label. "Do you realize we are giving away our master tapes here?" he asked at an industry event. At the time, everybody was too busy counting the cash to listen. But as the advent of recordable CDs kickstarted a black economy in counterfeits in the 1990s, Oberstein was proved right.

Anybody who owned a CD could indeed use it as record companies had traditionally used master tapes: to clone thousands more, and quickly, using kit available on any high street. And at home, CD burning hardware on computers made it simple to produce copies in seconds. Developing markets in South America and southeast Asia collapsed under the weight of cheap copies. More damaging was the loss of the German market. Within the space of five years, the 82m Germans turned into a nation of CD copiers, paying pfennigs for albums that once cost 40DM.

Still, the market in the rest of the west, while not exactly booming, did hold up. The next development to shake up the music industry was the emergence in the late 1990s of illegal "file-sharing" websites, such as Napster. Online piracy, often identified by the media as the wrecker of

the CD business, did seem a big threat at the time, although it was difficult to find hard data to support the claim that it damaged sales. Rather like the "Home Taping is Killing Music" campaign mounted by record companies in the 1980s, the arrival of illegal file-sharing coincided with an increase in legitimate sales of recorded music in the three largest markets: America, Japan and Britain. This supported the file-sharers' defense that their activities were no more harmful to music sales than the arrival of free radio airplay in the 1930s.

Instead, it has been the iTunes era of the 21st century—the creation of a growing legitimate online trade in cheap music—that has coincided with the drop-off in CD sales. The burgeoning popularity of portable MP3 players, notably Apple's iPod, seems to be turning the compact disc into the 21st-century equivalent of shellac—the precursor to vinyl.

Yet the music industry itself must take some of the blame for the decline of the CD. For the past 15 years, free covermounts on magazines and newspapers, licensed or even paid for by record companies, have diluted the perceived value of recorded music in general and CDs in particular. The practice of dumping free music CDs on the newsstands peaked in 2004, when 454 were licensed in Britain. It may seem odd that at the same time the industry was trying, and failing, to maintain a £10 price point for its premium CD products. But for years, record companies clung to the view that covermounts were a promotional benefit to them and their artists. Just as they allowed MTV to build its business by supplying it with free videos, they did newspaper and magazine publishers a huge favor on what turned out to be a hunch. They maintained this position even after their trade body, the BPI, showed that the only beneficiaries of such giveaways were the publications carrying them. In the mid-1990s, Mark Ellen, editor of Q,

Britain's leading rock title, described a CD giveaway as "like pinning a £10 note to the cover." When the Sunday Times gave away a free CD of old Oasis songs in 2000, it registered its highest circulation ever. In the following weeks, the BPI noted, retail sales of Oasis albums actually declined. But now even newspapers and magazines seem to have lost their appetite for covermounts. Last year, Q discontinued them on the grounds that the cost of manufacturing the discs was no longer justified by a spike in circulation. No clearer sign exists that, at least for

musically savvy Q readers, you can't give CDs away.

Labels now tend only to use covermounts to showcase the music of new or developing acts. But old habits die hard. In April, EMI licensed Mike Oldfield's album Tubular Bells to the Mail on Sunday. The company charged Northcliffe Newspapers £200,000 for the right to dispense 2.3m CD covermounts of Britain's 11th bestselling album ever. The deal valued Oldfield's classic—the LP that launched Virgin as a successful record label in 1973—at a little over 8p a copy. This led the head of Woolworths, one of the largest of the dwindling band of CD retailers in

Britain, to ask: "And how many copies of Tubular Bells do you think we will sell this week?"

It is difficult to prove that the rising popularity and price of live music has been directly affected by the superfluity and cheapness of the recorded stuff. But it seems more than a coincidence that just as fans are spending less on the tunes they listen to at home, they will pay unprecedented sums to hear them in concert. Ticket prices, especially for A-list artists, have soared.

Back in the 1980s, a seat at a concert by a superstar cost about the same as one CD album. By contrast, last summer you could have bought Madonna's entire catalogue for less than half of what it cost to see her perform at Wembley Arena. The best seats in Madge's house went for £160. With the Rolling Stones at Twickenham last August, a decent view would have set you back £150, or £350 for a seat on the side of the stage. To put this in historical perspective, when the Stones played Wembley in 1990, they took some stick for charging £25, top whack. Now that demand for live music is on the up, nobody bothers to complain about what it costs any more. Euphoria at the news earlier this year that the Police had reformed obliterated all concerns that it would cost £90 to see them play at Twickenham in September.

This is not a local phenomenon. The $690 (£345) it cost to watch Elton John at Las Vegas in May set a new record for an American rock show. In Hong Kong last year, Robbie Williams charged £180. Even the less prosperous citizens of Chile were asked to pay £80 to watch Coldplay in Santiago's Espacio Riesco, a considerable sum in a city where the average monthly salary is around £250. Ticket inflation with smaller bands is less intense. But even a relative unknown like the American singer-songwriter Laura Veirs charged £15 for her London show at Bush Hall this July. More telling is the ubiquitous presence of touts outside low-key venues where no secondary market for tickets existed ten years ago.

Attendance at arena rock shows grew by 11 per cent in Britain last year, and looks set to rise again in 2007. The bigger the concerts, the more we seem to like them. Hence the explosion in the festival trade. In 2007, there are 450 such large-scale gatherings scheduled, ranging from

the recent Glastonbury festival to the one-day Underage festival in Hackney on 10th August, which claims to be the first to be aimed exclusively at 14 to 18 year olds. A rediscovery, or a renewed appreciation, of the communal source of music-making—and listening— must lie near the root of this upending of the music business. As personal stereos and MP3 players have grown in popularity, so has an appreciation that music isn't just something that goes on between your ears. The guitarist of the American hardcore band Anthrax expressed this rather neatly: "Our album is the menu," he explained. "The concert is the meal."

In his book e-Topia, William Mitchell relates the increasing value of shared experience to the isolating nature of electronic or online virtual worlds. Being in the same place at the same time as a live performance, music fans appear to have decided, is the rarest and most precious presence of all.
Now Answer the Following Questions:
1. Use the demand and supply graph (showing relevant shifts) and also the concept of the price elasticity of demand to illustrate why the band in the first paragraph would choose to stop selling CDs at its concerts.

Price

____________________________________

0. 
   Quantity of T-Shirts
   

2. In the reading, the marketing decisions of Shakiri (to market their own CDs), Crimea (to give away their CD as a free download), and Prince (to give a free copy of his latest CD) were explained. Use the graph below to explain the reason for this policy, showing the relevant shifts. Label both axes.

____________________________________Quantity of ______

3. Use the demand-supply graph (and make the appropriate shifts) to explain why “recorded music, on or offline, has moved from being a high-margin, high-end product to a low-margin, low-prestige commodity”.

Price of Recorded Music

0. 
   Quantity of Recorded Music
   

4. Use the demand-supply graph (and make the appropriate shifts) to explain the results of the cost-cutting measures taken by Sony/BMG, Warner, EMI, and Universal.

0. 
   Quantity of Recorded Music
   

5. Show on the demand-supply graph (and make the appropriate shifts) the result of the change in the demand for live concerts.

Price of Concerts

0 Quantity of Concerts

Price

____________________________

Quantity of Electricity

2. A recent article estimated the following for restaurant meals:

The price elasticity of demand = 0.188

The price elasticity of supply – 6.47

The equilibrium price averaged $10.47 per meal (in 1992 prices)

The equilibrium quantity was 8.14 billion meals per year.

Price

Quantity of Meals

do they bear? Using the analysis of the chapter, why do you think this is so?

2. Because of the program explained in question 1, what happens to the amount of cotton grown in the United States? Since some of this is exported, what happens to the world price of cotton? What effect would this have for poor African cotton producers?

Economics 102 Name_________________

P₁

Demand
0 Quantity of the Stock

Economics 102 Assignment #3 (10 Points) Name_______________________
Part 1: 5 Points
The following are the shares of sales of tobacco for the main tobacco companies:
1980 1995
American Tobacco 11% *
Liggett and Myers 2% 2%
Lorillard 10% 8%
R.J. Reynolds 33% 26%
Philip Morris Co. 31% 46%
Brown and Williamson 14% 18%
* Brown and Williamson acquired American Tobacco. The 1995 share for American is included in the Brown and Williamson share.
Calculate the concentration ratio and the Herfindahl Index (HHI) for 1980.

Calculate the concentration ratio and the Herfindahl Index (HHI) for 1995.

Based on your answers to questions 1 and 2, plus a perusal of the data above, draw a conclusion as to what happened to the competitiveness of the tobacco industry between 1980 and 1995.

Use the Merger Guidelines explained in the class to analyze the merger of Brown and Williamson with American Tobacco. Based on our interpretation of the Guidelines, should the merger have been allowed? Why or why not? She calculations.

Because ______________________________________________________

2. 
   Government imposes tariffs (taxes) in steel products
   

mothers with small children. _____________________(function)

National Park _____________________ (function)

the amount of protein, calories, cholesterol, etc . _____________________(function)

to them available without charge ____________________(function)

hurricanes, earthquakes, and other natural disasters __________________(function)

business in my home __________________(function)

(1) The total amount of money appropriated by Congress is divided among the parks according to the number of visitors in each park.

(2) Congress specified that charges to users of the park be low. The average park charges users about $0.60 per visitor day. It has been estimated that the market value is actually $14 per visitor day. The Park Service is only allowed to keep a small part of the fees collected by the parks.

(3) There are about 500 businesses that have concessions in the national parks. They run hotels, stores, restaurants, tour guides, etc. At present, they pay about 2.5% of their sales receipts to the Park Service for the right to operate in the parks. Payments of 10% to 15% are commonly charged in other activities. The Park Service is not allowed to keep any of the concession receipts.

2. San Diego County has 17 coastal wetlands. Some you may be familiar with include the Batiquitos Lagoon, the San Elijo Lagoon, and Mission Bay. These coastal wetlands provide flood protection, habitat for wildlife (especially migratory birds and marine life), protection of the shoreline, protection against water erosion, recreation activities, and many other benefits. Many of these wetlands have been degraded. In order to manage them properly, it is necessary to evaluate the both marginal benefits and the marginal opportunity costs.

This is a reasonable description of an orange grove. Let us examine the costs. Let us assume that we hire six full-time workers (or the equivalent). Each is paid $12,000 per year ($1,000 per month), making the labor cost equal $72,000. The company has buildings. It has machinery, such as the tractor, the trucks, saws, shovels, and so forth. Our measure of cost here is the part of the building and machines used up during the year (called depreciation). Let us assume that the cost of all of this capital for the year is $16,000. Let us assume that the owner paid $400,000 for the grove and the capital; this money could have been earning 5% interest. We shall assume here that owner does not work in this business.

Economics 102 Assignment #5 (20 Points) Name________________________

0 0

2 40,000

4 130,000

5 160,000

6 180,000

7 192,000

8 198,000

9 200,000

10 200,000

11 190,000
In the table below, calculate the average physical product and the marginal physical product