Micro economics- please find the information in the file attached
[Type here] Please write detailed answers. 1. Think about how demand and supply change in the following scenarios and describe the effect on equilibrium prices and quantities. a. Going to the hairdresser is perceived as a health risk. What happens in the market for haircuts? b. Due to new safety protocols, workers in meat processing plants are able to pack half as many chicken drumsticks per hour. What happens in the market for drumsticks? c. A study finds that UVC light kills 99.7% of viruses within 30 seconds. What is the effect on the market for UVC light diodes? 2. AbbVie Pharmaceuticals (headquartered in Lake Forest, IL) has commenced a $80 million R&D project to develop a new drug to treat a rare disease. So far, it has spent $25 million of the $80 million, and preliminary results are positive. If the remaining $45 million is invested, the drug will certainly be completed and is expected to generate profit[footnoteRef:1] of $100 million (in present value) for AbbVie. Meanwhile, a research biologist at Northwestern has independently developed a treatment for the same disease. The scientist has offered to sell her invention to AbbVie for $33 million. Her drug would be just as effective as AbbVie’s drug, and would also generate profit of $100 million in present value. [1: Profit here means revenue from selling the drug net of the cost of production, but without taking R&D (or acquisition) costs into account.] a. Should AbbVie buy the drug for $33 million? b. What is the most AbbVie should be willing to pay for the Northwestern researcher’s drug? c. How would your answer change if the Northwestern biologist had developed her drug two years ago, before AbbVie started its own R&D project? d. Suppose that Merck has also expressed interest in the biologist’s invention. If Merck buys the drug, there is a 50% chance that it will beat AbbVie’s drug to market. If that happens, suppose the second drug to market will earn nothing. Now how much should AbbVie be willing to pay for the drug? How much should Merck be willing to pay? (Hint: If Merck buys the drug, it will earn an expected value of 50% of the profits. If Abbvie buys the drug, then it will surely earn the $100 million in profit, but if it doesn’t make the purchase then its chance of winning the R&D race is 50%). 3. Upon graduation from Kellogg, you’re hired by Boston Consulting Group. Your division is developing a practice specializing in smaller-volume agricultural products not currently covered in BCG’s portfolio of expertise. You’ve been asked to develop your understanding of the cinnamon industry. After a bit of research, you’ve learned that most of the cinnamon Western cooks use isn’t actually cinnamon, but cassia. True cinnamon is grown in Sri Lanka and Myanmar; sold in large curls or powdered, it is light brown in color, with a complex but mild flavor. Cassia is darker brown, sold in small curls or powdered, not as aromatic as cinnamon but has a stronger, hotter flavor. This question concerns cassia. Cassia is the bark of a tree native to parts of Indonesia, China and Vietnam. While there are some differences among the flavors of cassia from those three nations, we shall treat all cassia as indistinguishable and homogeneous. Likewise, there are differences in quality across growers, but we shall abstract away from these and treat all of the cassia produced in Indonesia, China, and Vietnam as homogeneous. The table below shows the average size of a cassia plantation in tons per year, as well as the number of plantations and various costs of production. Cassia production table. All costs given in dollars per ton of cassia.[footnoteRef:2] [2: Actual plantation outputs and costs vary more than is shown here.] Location Labor Cost Transportation Cost Overhead Cost Capacity (tons/year) Number of Plantations Indonesia $700 $650 $100 100 900 China $880 $600 $150 80 1000 Vietnam $800 $800 $100 100 420 a. Draw the marginal cost curve and the average total cost curve of an Indonesian cassia plantation. Assume that the overhead cost is not recoverable if the plantation temporarily ceases producing. b. Draw the marginal cost curve and the average total cost curve of a Chinese and a Vietnamese plantation. c. Suppose the current market price of cassia is $1300 per ton. Would you advise your client, an Indonesian cassia plantation owner, to operate or temporarily suspend operations? What is the minimum price for cassia at which you would advise your client to operate? d. Draw the current short-run industry supply curve for cassia. e. Suppose the world demand function for cassia can be approximated by the function , where is the quantity of cassia in tons and is the price per ton. Estimate the short run equilibrium price of cassia. f. Suppose an international incident results in sanctions being imposed on the Chinese government, and Chinese cassia growers are no longer able to sell their cassia on the international market. What is your forecast for the price of cassia when these sanctions are imposed? Assume that the world demand for cassia is the function from part e, and that Chinese consumers are a negligible fraction of the world demand for cassia. g. When the sanctions are imposed, what is your forecast for the price of cassia in China?