Market Analysis in Microeconomics

You need to be an expert in Microeconomics to do this homework. If you do not have extensive experience in economics and CANNOT finish the homework by Sunday afternoon, do not bother replying. This assignment cannot be turned in late.

You must be able to follow the directions as stated by the instructor. Everything is provided. If you have any further questions, please ask.

Thank you.

MarketSituations VERSION 5.

Final Market Analysis: Directions

Important Rules In Doing Your Analysis:

Graphs may be drawn by hand as long as they are clearly drawn in black ink.

DO NOT discuss with any other person or go to sources other than your notes – do not search online or copy things from your textbook.

Limit your analysis to the hypothetical information given. Do use outside facts about the industry or event.

Be careful to use correct economic terms and not to use normative, value based statements.

The Analysis:

For each of the market situations, first determine whether it is a case in which the market is working or a case of market failure.

If the situation is NOT a case of market failure:

a) To the extent possible from the information given, describe the structure of the market (use each characteristic of structure, not just concentration)

b) Explain how the price mechanism serves as a signal, incentive and, if applicable, a rationing device.

c) Explain how and why the market leads to an outcome that is allocatively and productively efficient in the short run and/or the long run. Be specific.

d) Draw – or use one of the accompanying graphs and explain how it shows what has occurred in the market.

If the situation IS a case of market failure:

a) Describe the source of market failure, explaining clearly and completely how and why:

o It creates incorrect market signals/incentives;

o In the absence of intervention, it will lead to an outcome that is inefficient in allocation and/or production.

o For TWO of the market failure cases, provide a graph to show why the outcome is not optimal.

b) Propose and describe an appropriate, specific government policy measure to correct the market outcome as close to optimal as possible.

c) Explain whether the policy relies on market forces or primarily abandons the market mechanism and discuss why you have chosen such a policy (costs, effectiveness, etc.)

Use to complete your Final Market Analysis. Remember to put VERSION 5 in the top line of your Analysis.

A. Protein supplement market. These supplements have a growing number of users; primarily people trying to build muscle mass. Physicians are concerned that, while these products use to use high quality egg and soy proteins, many of these supplements use cheaper processed proteins that lead to increased levels of diabetes and heart failure. An industry analyst stated that the market was simply responding to consumers, saying that they were looking for competitively priced products. A spokesman for a gym that sells the products stated that one of the problems is that , because the labels do not distinguish between the different types of proteins, their customers are uncertain what to buy.

B. Frozen low fat pizza. As you know, schools are attempting to help students to improve their diets. A local district has been ordering frozen pizza, a popular lunch time food that is more nutritious, with less low fat pizza. However, the district has discovered that they can only order the low fat pizza from 2 businesses. Furthermore, it sells at nearly double the price of regular pizza even though it only costs about 5% more to produce and has sold at this much higher price for a long time. When the district tried to find other suppliers, the vendors informed them that they had agreed only to carry the two brands.

C. Snack Cakes market. As you may have heard, Hostess, the producer of Twinkies and other snack cakes, has, after several years of losses, decided to close its business. The same has happened to several other producers of snack cakes, while the market for nut, chips and meat snacks have grown. A former exec from Hostess said that the problem was that there was so much negative publicity on diabetes and gluten health problems that people had become ridiculously afraid to eat cake.

D. Cruises. Marine biologists have become concerned about a new balance and navigation system for cruise ships. The sound waves used seem to alter the environment for certain types of tuna and prevent tuna from effectively reproducing. Last year, it was estimated that the worldwide catch was reduced by 80 tons. The tuna industry is protesting loudly, but the cruise shipping lines argue that the new system has lead to better and cheaper trips for cruisers.

E. Drug-resistant forms of bacteria and viruses have started to spread in United States. Since there are no cures, the only way to prevent an epidemic is to detect it and isolate those who are sick. A prototype of a detector has been developed by NASA, which would cost about $100,000. It can roam the streets and detect the dangerous organisms at 1-2 miles away. Industry specialists have stated that this is a miracle machine – a great low cost way of eliminating a problem with high social, personal and monetary costs. However, so far there are only 2 such detectors at use – one in New York and one in Philadelphia.