Economics 306
Bobby McCormick
Final celebration of Learning
April 30, 1998
ANSWER EIGHT of the following questions.
Remember to be analytical, precise, and complete.
Show your work on computational questions.
Please write neatly only on one side of the paper.
You may answer the questions you desire in any order, but please do not put more than one question per page (you may use more than one page to answer any one question.) You may use your notes and materials. 1. The demand for sports utility vehicles is growing. They are increasingly a large part of theautomobile market. At the same time, there is a Ralph Nader like concern that these vehiclesconsume a lot of gas and because they are large and safe, affect the injuries of others wheninvolved in accidents with smaller vehicles. Assuming that the government imposes additional andcostly safety restrictions on sports utility vehicles at the same time that demand is growing: a. Predict what will happen to the price of sport utility vehicles.
b. Analyze what will happen to the number of sport utility vehicles bought and sold in theU.S. market.
2. Suppose the price elasticity of demand for cotton is -1 and the supply elasticity is +2. Thecurrent price is $1 per pound and current world production is 300 million bales annually. Supposethat demand increases by 25%, and supply simultaneously declines by 10%. What will happen tothe world price, production, and consumption? 3. Under what circumstances can the price elasticity of demand can be used to defend a case ofa horizontal price conspiracy between a number of firms accused of colluding to set price abovethe competitive level? 4. What is the difference between normative and positive analysis? Why is this distinctionimportant? 5. As you may know there is a small crisis brewing in terms of summer school course offeringshere at Clemson. In an attempt to bring some business principles to bear on the course offerings,the administration has decreed that all summer school courses must breakeven. That is, thetuition revenues must be sufficient to reimburse all costs of delivery. Moreover, the administrationhas said that overhead costs such as building maintenance, the overall costs of the library, andother such fixed costs must be used in the formula for determining cost recovery. Does thisapproach make economic sense? 6. Economic statistics suggest that the short-run demand for electricity is far more inelastic thanthe long-run elasticity of demand. The best estimates of the short-run elasticity are about -0.25while the best estimates of the long-run elasticity are about -1.0.
a. Why is the short-run elasticity more unresponsive than the long-run elasticity?b. If the price of power falls by 25 percent, as many analysts suggest it will undercompetition, and if the current residential consumer spends about $80 per month forpower, what will happen to average monthly expenditures on electricity in the short andthen the long run? 7. Assume that natural gas and electricity are substitutes in consumption. Recently the prices ofnatural gas have been deregulated, and as a consequence, they have fallen. At the same time,the price of electricity, which is regulated, has not been allowed to change. Describe the impact ofelectricity deregulation, which would allow the price of electricity to adjust to the fall in the price ofnatural gas, on the elasticity of demand for natural gas.
8. UPS ships packages around the world. They use trucks, trains, and airplanes to transport thisstuff. For the most part, the planes are used during the week to transport overnight packagedeliveries. There is considerable reduced demand for this service over the weekends. Describewhat UPS might do to deal with this reduced demand, and hence slack use of its airplanes, on theweekends.
9. We had two outside workshops, one on communications and one on the utility industry.
Choose one of these workshops. Describe the salient features of the workshop and what youlearned. Describe how the lessons might make you a better manager.
10. Over the past year airline fares have increased by 8% on average. For 1997 passengers flew58 billion passenger miles. If the airlines supply elasticity is 1.0, how much has the demand for airtravel increased this year? Assume the price elasticity of demand is -1.25.
11. What is a constant cost industry? What makes an industry a constant cost industry? Give anexample of a constant cost industry and explain why your example is a constant cost case.
12. As you probably have heard Pfizer is marketing a new drug to improve sexual potency in men,Viagra. Read the attached story from Wall Street Journal about the market for this drug. Demandfor this drug is overwhelming and growing. As a result Pfizer stock is up $30 since April andappears to be headed for record income. First, are these earnings really profit? Explain what thetheory of competition predicts will happen in a case like this. Does the theory square with yourunderstanding of the facts? Use facts from the story to bolster your argument. What is thedifference between competition for profits and competition for economic rents? 13. What are the lessons you learned from Art Spiro’s lecture and discussion on leveragedbuyouts? Group of 'Sexual Performance' Products
Are Trying to Ride the Viagra Craze
Staff Re porte r of THE WALL STREET JOU RN AL

April 30, 1998, online edition
As the nation grows giddy Inc.'s Viagra, a legion of wannabe "sexual
performance" products are jockeying for a place on the impotence pill's coattails.
Herbal companies with products such as NuMan and Stamina, subliminal audiotape
companies and alternative pharmacies are among those trying to use the Viagra craze to
boost their own businesses. While critics have branded many of the Viagra hangers-on
frivolous, useless or even dangerous, some legitimate medical products could benefit from
Viagra's growing popularity as well. "Viagra has opened a lot of doors for me," says an
ebullient Peipei Wu Wishnow, who bumped up the launch of Interceuticals Inc. and its herbal
sexual performance potion, NuMan, to coincide with Viagra's release. "We wanted to get a
ride out of the Viagra hot trend," she says.

Artie Schiff's subliminal audiotape business, HypnoVision Inc. in Halesite, N.Y., is also taking
advantage of the Viagra hype. For years, HypnoVision has sold a tape, primarily through the
Web, with subliminal messages that are purported to help put men in the mood for sex. But
when news of Viagra hit, it added some new messages: "My body works perfectly during sex
because my Viagra is working" and "God Bless the Pfizer drug." Mr. Schiff says he has
received more than 200 orders for the new Viagra-enhanced tape.
Getting too close to Viagra can have disadvantages. Pfizer has sued two concerns hawking
products named Viagro and Vaegra, charging copyright violations. Last week, Pfizer was
granted a seizure and temporary restraining order against David A. Brady and his American
Urological Clinic in Doraville, Ga., which was peddling the Vaegra pill over the Internet. The
drug company was granted a similar order against the hawkers of Viagro. The defendants
couldn't be reached for comment.

But others aren't deterred. Bodyonics Ltd., a Hicksville, N.Y.-based nutritional-supplement
company, is sending a letter to 10,000 doctors around the country to alert them to its new
Longevity line of herbs targeted at baby boomers.The company is also making special note of
Viagra's minor side effects, such as indigestion and vision blurring, which Pfizer uncovered
in clinical trials. "We offer a natural alternative without side effects that has been used
traditionally for many years," says Andrew Fischman, a Bodyonics marketing director. The
company is touting ErogenUs as a "unisex performance support" pill.
The hoopla around Viagra is also prompting Natural Balance Inc. to move up the launch of a
new version of its popular Cobra pills in mass market outlets such as Wal-Mart. Cobra pills,
as well as some other herbal sexual-enhancement products, have traditionally contained
yohimbe, a substance extracted from the bark of an African tree.

The ingredient has been shown to raise blood pressure and cause irregular heart beats, and
the American Botanical Council, which promotes herbal supplements, now recommends that
people avoid it. But Natural Balance defends Cobra. "Clearly when you look at the side effects
of Viagra, yohimbe is very safe," says spokeswoman Stacey Paterson. "But because of the
concern we are coming up with the yohimbe-free product."Anthony Harnett, owner of
Harnetts, an alternative pharmacy in Cambridge, Mass., is ordering a big shipment of NuMan
to meet the demand he expects from customers who don't want to take pharmaceuticals. "My
customers wouldn't take a commercial over-the-counter drug," Mr. Harnett says. "But they're
all interested in sexual health."
James Zhou is spending these Viagra-heady days promoting his HerbaSway Laboratories
LLC's Stamina supplement on his weekly radio talk show, "Secret of Health and Longevity,"

in New York City. "We are telling people that from 5,000 years of experience using herbs in
China, we can enhance your sexual energy," says Mr. Zhou, HerbaSway's vice president of
research and development.

But HerbaSway and other herbal companies have to do a tricky dance. Federal regulations
bar them from making explicit claims that their products treat a medical condition such as
impotence. The law allows companies to make only "structure/function" claims -- basically
claims that a product affects a certain system in the body. "We're not allowed to say Viagra,"
says HerbaSway's Mr. Zhou. "We have to say enhancing your sexual energy."

Since it was introduced less than three weeks ago, Viagra has become one of the
most-prescribed new drugs ever. As of last Friday, doctors were writing 46,000 prescriptions
a day, nearly double the week before. Meanwhile, Pfizer's stock has risen $30 since early
April.Meanwhile, a host of other pharmaceutical companies are hoping to cash in, too.
oodlands, Texas, is collabo Corp. to produce
Vasomax, a new oral formulation of an injectable blood-pressure medication that, according
to early clinical trials, helps patients get erections about 40% of the time. Zonagen says it
plans to apply to the Food and Drug Administration for marketing approval within in a month
or so. The company also expects to release details of larger studies at a scientific meeting
next month.

TAP Holdings Inc., a joint ve and Takeda Chemical
Industries Ltd. of Japan is developing a drug that may be as effective as Viagra. The drug,
apomorphine, acts on the brain to stimulate the neurotransmitter dopamine, which is
involved in sexual response. Other forms of the drug have been used in high doses to induce
vomiting, but TAP officials say that the much lower doses used for impotence won't produce
this effect.

Finally Corp., a biotech company in Bothell, Wash., has a drug that acts in the same
chemical pathway as Viagra, although its clinical trials on humans are at a very early stage.
--Robert Langreth contributed to this article.


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