Yesterday 1,000,000 kgs of fish were landed at Melbourne and nearby ports. The market cleared (demand equalled supply) at a price of $0.40 per kg. The demand curve for fish is given by the following equation.

p = 400,000/Q	Where:	p is price in $
		Q is quantity in kg

Last night the existence a strange, life-threatening intestinal epidemic was confirmed. Fish is believed to provide some immunity. Consequently, the demand for fish has skyrocketed and the 1,000,000 kgs that are expected to be landed by the fishing fleet this morning are sure to be sold at much higher prices. It is estimated that the quantity demanded has increased by a factor of 6.25 at all prices, so that the new demand curve is

p = 2,500,000/Q

The fishing fleet is currently comprised of 125 trawlers that can be considered identical to one another. Prior to the demand shift, and for today as well, each trawler has brought in 8,000 kgs of fish using a crew of 5 deckhands. Trawlers are rented on a monthly basis in a market that is perfectly competitive. The rental is now $200 a day, which pays for fuel, maintenance, and all other costs including the trawler owner's required return. The rental agreements may be cancelled by either party on one month's notice. Captains are the entrepreneurs. There are plenty of deckhands nearby who are ready, able and willing to be captains if they can make $1000 a day or more, but they won't operate for a penny less.

The going wage for skilled deckhands is $400 a day. There are a large number of deckhands, who are currently working at other jobs, who would be glad to work at that price if given one week's notice. Trawler owners make a reasonable profit at $200 a day per boat, given the risk level and capital required. Owners will increase their fleets if they can get more than $200 per day over a sustained period, and reduce them if they get less. It takes a year to get a trawler built. There are no trawlers on order now.

The fish cannot be stored or frozen. Each day's catch must be sold that day. The daily catch is not a matter of luck; it depends strictly on the number of deckhands on board, not counting the captain, as follows:

Table 1
Number of Deckhands on Board	Daily catch Per Trawler kgs.		Cont.	Cont.
1	1,000		10	10,000
2	3,500		11	10,190
3	5,500		12	10,370
4	7,000		13	10,540
5	8,000		14	10,700
6	8,600		15	10,850
7	9,100		16	10,990
8	9,500		17	11,120
9	9,800		18	11,240

Yesterday's income statement for one of the Captains would be

Revenue		$3,200	(8,000 kgs @ $0.40/kgs)
Expenses		$2,200
Labor	$2,000		(5 deckhands @ $400/deckhand)
Rent of Trawler	$200
Total Income		$1000

Class Questions

1. With 1 million kilograms landed, and the new demand schedule of p = 2,500,000/Q, what price will clear today's market?

2. Calculate the entries for the following table, to develop:

a. A production/cost schedule for a single trawler (columns 1-6) and;

b. A short-run supply schedule for the market and the market clearing price (columns 7 and 8).

Start by putting the data from table 1 into columns 1 and 2 – you then have two columns complete for 18 rows. Then work across.

1	2	3	4	5	6	7	8
Quantity	Variable Input	Variable Cost	Total Cost	Marginal Cost	Average Total Cost	Industry Output	Price that would clear market of industry output
(kgs. of fish)	(Deckhands)	($)	($)	($/kg.)	($/kg)	(kgs)	($/kg)
1,000	1
3,500	2
	.
	.
11,240	18

3. What price and quantity do you expect to see approached in this market during the next few weeks as captains adjust their hiring of deckhands in recognition of the changed demand situation?

4. Do you expect that either captains or trawler owners will give notice to cancel the current trawler rental contracts?

5. If trawler rental contracts are cancelled and new contract terms set:

a. What price and quantity do you expect to see in the market for fish in a few months from now?

b. What will a Captain's financial statement look like then?

6. After a few years at the new, higher demand level:

a. What price and quantity do you expect in this market?

b. What will a Captain's financial statement look like? A trawler owner's statement?

c. How many trawlers will operate?

d. Is this outcome efficient? Does it maximize total welfare?

If diseconomies of scale in trawler production raised trawler rent to $800/day, what effect would that have on the industry?