Lecture 5 to midterm

Question 1

What does Monopoly Rent refer to?

Answer 1

The profits a monopoly makes above MC.

Question 2

What happens when we add more members to a consumer co-op?

Answer 2

The demand curve shifts out
CS gains and loses so depends on the curve what the final outcome is
Price increases (as does Q*)
Q old members buy decreases
Profit changes but more members to make patronage payments to.

Question 3

Are there profits at optimal membership?

Answer 3

no

Question 4

Where do we find optimal membership in a producer co-op?

Answer 4

S = NARP = MVP

Question 5

Is aggregate PS higher or lower with optimal membership?

Answer 5

Aggregate PS is lower, but per-unit PS is at it’s maximum.

Question 6

How is MW captured when a co-op is at it’s optimal membership?

Answer 6

All MW is captured through regular transactions because there is no profit where NARP = MVP or where AC = MC

Question 7

Define fair trade

Answer 7

Trade between companies in developed countries and producers in developing countries in which fair prices are paid to the producers.

Question 8

What are the three main points of fair trade?

Answer 8

1. members must be small-scale producers
2. democracy
3. enabling strong producer organizations

Question 9

Why are so many fair trade producers in co-ops?

Answer 9

The values happen to align well.

Question 10

What are the fees that fair trade purchasers pay used for?

Answer 10

• advertising
• evaluating new producer group applicants
• educating producer groups
• offices and staff

Question 11

What does FLO stand for?

Answer 11

Fairtrade Labelling Organization

Question 12

Who does FLO work with?

Answer 12

Producer co-ops
international traders
roasting companies

Question 13

What is “National Initiative”?

Answer 13

The FLO member who deals with consumers of fair trade.

Question 14

Is the consumer country % of revenues higher or lower with fair trade?

Answer 14

Higher! But the producer still gets a larger $ amount.

Question 15

Does the extra cost of a fair trade product generally get to the producer?

Answer 15

Some but most tends to stay at the retailer lever.

Question 16

Are fair trade and regular coffee substitutes?

Answer 16

Yes - not perfect, but very much substitutes

Question 17

Why does it matter that Fair Trade coffee and regular coffee are substitutes?

Answer 17

Because regular coffee is being used as a loss leader, so that means less Fair Trade coffee gets sold, which limits the number of producers the Fair Trade system can take on.

Question 18

Is it fair to assume that a co-op is a price-taker in other market levels to which it’s members are operating?

Answer 18

NO! This is a general assumption, but in reality if a co-op is the only buyer or seller of a product, it’s probably the only one of the opposite end too.

Question 19

Should a co-op exert market power in the market opposite to where it’s members operate?

Answer 19

NO! this means they’ll actually have to limit interactions with members, and the prices they’ll be able to offer members will be less attractive.

Question 20

Are there positive externalities from co-ops?

Answer 20

Yes! When they work to maximize member welfare, they actually don’t exert market power in the other levels of market they’re involved with, which benefits the other players in those markets.

Question 21

Why would co-op members get more utility from consumer surplus than from patronage payments?

Answer 21

CS contributes to cashflow.
Patronage payments generally go into savings because they can’t be guaranteed (timing, amount, or if they get distributed at all or not for many years)

Question 22

What are the five points of contention within a traditional co-op according to Cook? Are there more points of contention?

Answer 22

1. Free Rider problem
2. Horizon problem
3. Portfolio problem
4. Control problem
5. Influence costs problem
   ** not mentioned by Cook: pricing strategies problem

Question 23

How do we find optimal membership in a consumer co-op?

Answer 23

D = MC = AC