Many tourists climb Mt. Fuji in Japan, which is one of the world’s highest mountains

| November 24, 2016

1.) Many tourists climb Mt. Fuji in Japan, which is one of the world’s highest mountains: over 12,000 feet or 3,700 meters tall. Tourists canpurchase water along the route at huts. The higher a tourist climbs up the mountain, the higher is the price of 1 liter of water. So a touristpays more for 1 liter of water at the 10,000′ hut than at the 7,000′ hut. Assume water sellers on Mt. Fuji are profit-maximizers. And (eventhough it’s unrealistic) assume perfect competition.

a. (5 points) Water sold at huts is carried up the mountain by workers, not by vehicles. Referring to the costs of production, explainwhy sellers would charge a higher price for 1 liter of water at a higher elevation.

b. (5 points) Most tourists bring their own water, but drink it all before reaching the peak. Referring to the demand for water, explainwhy sellers would charge a higher price for 1 liter of water at a higher elevation.

c. (10 points) We learn that more water is sold at higher elevations than at lower elevations. Does that informationhelp you determine whether differences in supply ordifferences in demand are primarily responsible for the pricedifferences? Explain. Supplement your answer with a graph.

2.) In Oregon, farms can grow apples or grapes. Grapes are used to make wine. There are hundreds of small farms growing grapes andproducing wine. Assume the Oregon wine industry is perfectly competitive.

a. (8 points) Initially, the Oregon wine industry was in long-run competitive equilibrium. Draw the relevant graphs below for themarket and for the typical firm. Use subscripts “1” on your labels

b. (12 points) Oregon wine becomes much more popular with consumers. In the short run, what happens to the price of Oregon wine?To the market quantity? To the quantity produced by the typical firm? To the profit of the typical firm? Show the effects on yourgraph above, using subscripts “2” on your labels.

Effect on price of Oregon wine Effect on market quantity

Effect on quantity produced by the typical firm Effect on profit of the typical firm

c. (8 points) In the long run, what happens in the Oregon wine industry? Specify the effects on market price, market quantity, typicalfirm quantity, typical firm profit, and the number of firms. Show the effects on your graph above, using subscripts “3” on your labels.

Effect on the number of firms Effect on market price

Effect on market quantity Effect on typical firm quantity Effect on typical firm profit

d.) (6 points) You can see the effect of the increased popularity of Oregon wine as you drive through Oregon: acres and acres of appletrees have been torn out, replaced with acres and acres of grape vineyards. Each time 10 acres of Oregon land is converted fromapple orchards to grape vineyards, does Oregon’s production of apples fall by the same amount? Explain.

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