Reference no: EM131195702

Economic Principles Microeconomics Part-

Task 1: Economic Foundations and Market Forces

Table 1-1: Number of labour hours required to produce a motorcycle and a guitar in Ireland and Scotland.

	One Motorcycle	One Guitar
Ireland	10 hours	2.5 hours
Scotland	9 hours	2 hours

Q1. Answer the following questions from Table 1-1 - must show workings

a. Which country has an absolute advantage in the production of motorcycles?

b. Which country has an absolute advantage in the production of guitars?

c. What is Ireland's opportunity cost of producing one motorcycle?

d. What is Scotland's opportunity cost of producing one motorcycle?

e. What is Ireland's opportunity cost of producing one guitar?

f. What is Scotland's opportunity cost of producing one guitar?

g. If each country specialises in the production of the product in which it has a comparative advantage, who should produce motorcycles?

h. If each country specialises in the production of the product in which it has a comparative advantage, who should produce guitars?

Q2. Define the concept of efficiency. Define the concept of equity. Using the tax system as an example to explain how a trade-off exists between economic efficiency and equity.

Q3. Describe the law of demand. What are the two effects that explain the law of demand? Briefly explain each effect.

Q4. Answer the following questions from Table 1-2

Table 1-2: Quantity demanded and supplied for the "The Theatre Company"

Price ($)	Quantity demanded	Quantity supplied
4	1000	600
8	800	600
12	600	600
16	400	600
20	200	600

a. Draw the demand and supply curves for the "The Theatre Company"

b. What are the equilibrium price and quantity of entry tickets?

c. Explain using the graph above what would happen if the price was initially $20? Identify any surplus or shortage on the graph above.

Q5. Consider the market for 4WD cars. For each of the following events listed here, identify which of the determinants of demand or supply are affected. Also, indicate whether demand or supply is increased or decreased.

a. People decide to have more children.

b. The price of fuel rising by 40%.

c. Development of new technology for producing 4WDs.

d. A fall in the price of station wagons.

Q6. What is a production possibility frontier? What do points along the frontier represent? What do points inside and outside the frontier represent? Why does the curve have a bow shape (concave) rather than a straight line?

Q7. Watch the following video clip (Comparative Advantage, Opportunity Cost, and Housework) and answer the following questions.

Link to video -

https://commons.swinburne.edu.au/logon.do?.page=items%2Fa84f5ffd-7f9f-4c2e-933d-c585887a34c4%2F1%2F

a. In more detail than provide in the video explain how the opportunity cost of household chores has changed for men and for women.

b. In more detail than provide in the video explain how the change in the opportunity cost of household chores has led to change in split in the chores between men and women. What is one explanation for men's share of the chores still being less than women's share?

c. If more women are completing higher education qualifications what are the implications for the split in household chores?

Q8. Read the following excerpt and answer the following questions

The Federal Department of Industry and Science has cut its price forecast for iron ore in 2015 by 10 per cent to $US54.40 a tonne, citing a weak outlook for China's steel sector. The commodity - which climbed as high as $US65.61 a tonne on June 11, the peak in its recent rebound from April lows - was bringing $US61.29 on Monday night and many analysts predicted further falls. The department's forecast for 2016 was $US52.10 a tonne. "China's steel production is forecast to contract in 2015 and 2016 as the seaborne supply of iron ore increases," the department said in its latest quarterly update. Iron ore is a key ingredient of steel. Read more: https://www.smh.com.au/business/mining-and-resources/australia- cuts-2015-iron-ore-forecast-by-10-20150630-gi18dp.html#ixzz3tb8IbFdw

Author: Stephen Cauchi; Sydney Morning Herald - June 30, 2015.

a. Using demand and supply analysis explain the impact of the change in commodity price on the market for iron ore mine workers.

b. Using demand and supply analysis explain the impact of the change in commodity price on the market for rental properties in mining towns.

Task 2: Elasticity

Q1. Briefly explain the economic concept of elasticity. List the five key determinants of price elasticity of demand and explain how each determinant indicates whether demand tends to be elastic or inelastic. Explain the concepts of cross-price elasticity of demand and income elasticity of demand. What do positive and negative values indicate for each of these demand elasticities? Use examples to explain your answer.

Q2. Explain the economic concept of price elasticity of supply. What are the 5 key determines of price elasticity of supply. Use examples to explain your answer.

Q3. For each pair of items below, determine which product would have a higher price elasticity of demand (in absolute value) and which one a lower price elasticity of demand.

a. Blood pressure medicine for someone who has high blood pressure and the purchase of Clairol hair colouring product.

b. A new Ford Fusion or a tank of petrol for your current car.

c. A Seiko watch or watches in general.

Q4. A study of the effects of the minimum wage on employment of low-skilled workers estimated the price elasticity of demand for low-skilled workers to be -0.75. Suppose that the government is considering raising the minimum wage from $7.25 per hour to $7.75 per hour. Based on this information, calculate the percentage change in the employment of low-skilled workers. Use the midpoint formula and you must show all workings.

Q5. Answer the following questions from Table 2-1

Table 2-1: Quantity demanded and price for the "the latest John Grisham novel"

Price	Quantity
$35	40
$25	50

Suppose you own a bookstore. You believe that you can sell 40 copies per day of the latest John Grisham novel when the price is $35. You consider lowering the price to $25 and believe this will increase the quantity sold to 50 books per day. Compute the price elasticity of demand using the midpoint formula and these data. What are the implications for revenue based on your calculation of elasticity and why? Show all working.

Q6. Watch the following video clip (BTN takes a look at the factors behind the rise in price of bananas) and answer the following questions.

Link to video -

https://ezproxy.lib.swin.edu.au/login?url=https://search.informit.com.au/documentSummary;dn=TEX20113400487;res=TVNEWS

a. Using supply and demand curves explain how the cyclone would affect the price and quantity of bananas. Make sure you explain in your answer why prices have gone up by such a large amount.

b. The bananas were called luxuries in the video. Do you think that this is strictly true? If bananas were luxuries what would this mean for the supply and demand curves? In turn what would this mean for the price and quantity of bananas following the cyclone compared to the case in 7a?

c. What would be the impact on elasticity of supply if it were possibly to increase the imports of bananas?

7. Read the following excerpt and answer the following questions-

Childcare workers upgrading their qualifications would have tuition fees covered under an apprenticeship scheme to ease the chronic skills shortage in the sector, in a recommendation by a leading industry group, Care For Kids. Providers are still struggling to meet standards introduced in January which require half of all staff to have, or be working towards, a diploma in early childhood education and remaining staff to hold a certificate III qualification. Services with more than 25 children are required to employ a university-qualified early childhood teacher under the National Quality Framework, which aims to lift young children's learning. But the cost of further study is a deterrent to staff earning as little as $19 an hour. Read more: https://www.smh.com.au/national/education/childcare-apprenticeships-proposed-as-way-around-skills-shortage-20140224-33d0e.html#ixzz3tg2WEgFP. Accessed December 9^th 2015.

Author: Rachel Browne; Sydney Morning Herald - February 25, 2014.

a. Would you expect the supply of childcare places to be elastic or inelastic and why?

b. Using the concept of elasticity explain why significantly higher prices might be required to raise the number of childcare places in the short to medium term.

c. How would the use of apprentices help in addressing the childcare shortage? Make sure you use economic concepts in answering this question.

8. In the following graph the demand for hot dog rolls has shifted outwards because the price of hot dogs has fallen from $2.40 to $1.80 per package.

a. Calculate the cross-price elasticity of demand between hot dogs and hot dog rolls.

b. Calculate the price elasticity of supply for hot dog rolls.

Task 3: Efficiency and Market Failure

Q1. The marginal cost for Java Joe's to produce its first cup of coffee is $0.75. Its marginal cost to produce its second cup of coffee is $1.25. Its marginal cost increases by $0.50 for each additional cup of coffee it produces. Suppose the market price for coffee is $2.25. Construct a graph showing the producer surplus for each cup of coffee Java Joe's will sell. How many cups of coffee will Java Joe's sell? What is the value of the producer surplus Java Joe's receives for each cup of coffee it sells?

Q2. The graph below represents the market for lychee nuts. The equilibrium price is $7.00 per bushel, but the market price is $5.00 per bushel. Identify the areas representing consumer surplus, producer surplus, and deadweight loss at the equilibrium price of $7.00 and at the market price of $5.00.

Q3. The following figure above illustrates the markets for two goods, Good X and Good Y. Suppose an identical dollar tax is imposed in each market.

a. Compare the consumer burden and producer burden in each market. Illustrate your answer graphically.

b. If the goal of the government is to raise revenue with minimum impact to quantity consumed, in which market should the tax be imposed? Briefly explain.

c. If the goal of the government is to discourage consumption, in which market should the tax be imposed? Briefly explain.

Q4. How does a public good differ from a quasi-public good? In your answer give an example of each type of good and why you believe it to be either a public or quasi- public good.

Q5. Using a supply-demand diagram, demonstrate how a positive consumption externality, vaccination, leads to market inefficiency. Using a supply-demand diagram, demonstrate how a negative supply consumption externality, pollution, leads to market inefficiency. Make sure you describe the diagram in words as well.

Q6. Read the following excerpt and answer the following questions

TRAFFIC on Sydney's clogged roads and motor ways is now so congested it is costing the majority of businesses in Western Sydney up to $5000 a year. The startling figures were revealed as part of the NRMA Motoring & Services Business Wise survey of almost 730 businesses that run vehicle fleets. Frustrated local businesses who took part in the survey said travel times for each of their work vehicles had jumped, on average, by 59 minutes every day due to roads clogged by commuters forced into their cars because of poor public transport options. In the past year about six out of 10 Western Sydney firms said their fuel bills had risen as a result of congestion .......

Author Jim O'Rourke

Source: The Australian web site April 08, 2014 12:00AM (https://www.theaustralian.com.au/news/fair-go-for-the-west-theres-a-costly-message-in- a-bottleneck-on-our-congested-roads/story-e6frg6n6-1226877298328) accessed 8th April 2014

a. Identify the negative externality discussed in the article?

b. Explain how the negative externality leads to an inefficient price and level of output. Make sure you identify any Dead Weight Loss (DWL)

c. What solution would you recommend to the government to address the externality?

7. What is the difference between scarcity and a shortage? Until recently Melbourne was subject to water restrictions. Using a graph explain how this would impact on the market. Is this an example of scarcity or a shortage? Consider the case where the government raised the price so that exactly the same amount of quantity was bought by customers as allowed for under the water restriction scenario. Use a graph to explain the impact of the market. Is this an example of a scarcity or a shortage and explain any differences (if any) between a price rise and a restriction of consumption.

8. Watch the following video clip (Cigarette: Tax hike) and answer the following questions.

Link to video -

https://ezproxy.lib.swin.edu.au/login?url=https://search.informit.com.au/documentSummary;dn=TSM201408310196;res=TVNEWS

a. What were the two factors that lead to a decrease in the consumption of cigarettes? How does this compare to the adoption of plain packaging? (Hint: how does each of these impact on demand and/or supply and why).

b. With the aid of graphs show how these three different factors work to reduce consumption.

c. Plain packaging was linked to a fall in consumption of 2% over three years. Using graphs in your explanation show why it is difficult to change the quantity of cigarettes in relation to all three factors.

Task 4: Costs of Production

Q1. What is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business.

Q2. In economics, what is the difference between the short run and the long run? Explain using a real world example why the length if the short run varies for different firms.

Q3. A firm has fixed costs of $60 and variable costs as indicated in the table below. For each level of output (total product), calculate total fixed cost, total cost, average fixed cost, average variable cost, average total cost and marginal cost

Total product	Total fixed cost	Total variable cost	Total variable cost	Total cost	Average fixed cost	Average variable cost	Average total cost	Marginal cost
0		0
1		50
2		88
3		120
4		150
5		182

Q4. Draw the typical relationship between short and long run average costs. Using the graph explain how the average cost changes in the short run when output increases. Again using the graph explain how the situation changes when, given the same increase in output, firms are in the long run.

Q5. What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?

Q6. State the law of diminishing marginal returns. Explain why the marginal cost of production must increase if the marginal product of a variable resource is decreasing

Q7. Watch the following video clip (Costs of prisons) and answer the following questions.

Link to video -

https://ezproxy.lib.swin.edu.au/login?url=https://search.informit.com.au/documentSummary;dn=TES20084400689;res=TVNEWS

a. Why do you think the government worries about increasing number of prisoners? Explain your answer.

b. Identify 2 fixed costs and 2 variable costs. What is the advantage of increasing the number of prisoners per prison?

c. Identify 2 explicit costs and 2 implicit costs. Why are the implicit costs so important in this case?

Q8. Read the following excerpt and answer the following questions-

South Australia's nuclear royal commission has exposed the high cost of nuclear power for the state but has delivered fresh ammunition for those arguing it should be kept on the table as a valuable future option for low-emissions electricity supply.

Numerous factors stack up against nuclear power in South Australia, including flat demand for grid-based power, rising use of solar and wind power, and its relatively limited ability to ship power to and from other states, the commission's interim report found. Combined with the high costs of nuclear reactors, that means nuclear is uneconomic for the state for "the foreseeable future", it said.        .............

Mr Scarce (commission chairman) said the way the National Electricity Market works means renewable energy, with its much lower costs than other sources, is "the first energy that goes into the market" in SA, while a nuclear plant, with its significant financing costs, would be further up the cost curve. In such a small market as SA it was "difficult" to make nuclear effective, he said.

Read more:

https://www.smh.com.au/business/energy/nuclear-costs-too-much-for-sa- but-held-open-as-option-20160214-gmu2lq.html#ixzz42SqcCeZ5Author: Rachel Browne; Sydney Morning Herald - February 25, 2014.

Author: Angela Macdonald-Smith; Sydney Morning Herald - February 15, 2016.

a. What costs appear to be the problem with it comes to nuclear energy based on this article (fixed or variable)? Why does this make nuclear plants uneconomic?

b. How does a flat demand for grid-based power (i.e. stable demand for electricity) affect the viability of new nuclear power plants?

c. How does, rising use of solar and wind power affect the viability of new nuclear power plants?

Task 5: Perfect Competition and Business Strategy

Q1. Of the following industries, which are perfectly competitive? For those that are not perfectly competitive, explain why.

a. Restaurants

b. Corn

c. University education

d. Local radio and television

Q2. What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency? What is meant by productive efficiency? How does a perfectly competitive firm achieve productive efficiency? What is the difference between allocative efficiency and productive efficiency in a perfectly competitive market?

Q3. What is an oligopoly? Give two examples of oligopolistic industries in Australia. Why would you classify these examples as oligopolies?

Q4. Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide whether to increase its advertising spending to compete for customers. The following figure shows the payoff matrix for this advertising game.

Godrickporter's (G) Choices
		Increase advertising budget	Leave advertising budget as is
Star Connections' (s) Choices	Increasing advertising budget	G: $16,000 profit S: $8,000 profit	G: $12,000 profit S: $15,000 profit
	Leave advertising budget as is	G: $8,000 profit S: $10,000 profit	G: $6,000 profit S: $12,000 profit

a. Is there a dominant strategy for Godrickporter and, if so, what is it? Explain.

b. Is there a dominant strategy for Star Connections and, if so, what is it? Explain.

c. Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6000 and Star Connections earns a profit of $12 000. Is there an incentive for any one firm to increase its advertising budget? Explain.

d. What is the Nash equilibrium in this game? Explain.

Q5. Assume that two interior design companies, Alistair and Baine, are competing for customers and, if they both advertise, they would each earn $30 million in profits. If neither advertises, they each earn $50 million in profits. If one advertises and the other doesn't, the firm that advertises earns $40 million in profit while the other earns $20 million in profit.

a. Present the information above in the form of a payoff matrix. Let Baine be the row player and Alistair the column player.

b. What is the Nash equilibrium?

Q6. Assume the gold-mining industry is competitive.

a. Illustrate a long-run competitive equilibrium using diagrams for the gold market and for a representative gold mine.

b. Suppose that an increase in jewellery demand induces a surge in the demand for gold. Using your diagrams, show what happens in the short run to the gold market and to each existing gold mine.

c. Over time what would the new long-run equilibrium price be above, below or equal to the short-run equilibrium price in part a) above (explain). Are there any changes in profits in the long run? Hint: over time fixed costs are likely to rise.

Q7. Explain why OPEC is caught in a prisoner's dilemma?

Q8. Read the following excerpt from "Why Uber's surge pricing is naive economics" and answer the following questions-

Economists love Uber's surge pricing. But it is doomed, because customers hate it. Why?

Surge pricing occurs when the supply and demand for Uber vehicles becomes unbalanced, for example, due to inclement weather, a public holiday such as New Years Eve or some other event (public transport failure, terrorist attack, ...). Supply is low (who wants to drive in a snow storm?). However, demand is high (how do I get home when the rail network is down?). So, by raising the price (sometimes very substantially), Uber aims to encourage more drivers to pick up passengers and to ration the available supply to the customers who value the service the most.

The result is a New Year filled with negative Uber articles, both in Australia and overseas. In the Harvard Business Review, Utpal Dholakia suggests that the near universal dislike of surge pricing is due to a lack of transparency and customers' lack of understanding about its benefits. He suggests education and transparency. But Uber is already embracing these strategies, trying to warn customers when surge pricing is likely and to make sure customers understand and agree to the surge price when requesting a car.

So Dholakia misses the key point. It is not ignorance that leads to customer annoyance with surge pricing. Customers understand exactly what surge pricing does. And that is why they do not like it. From the customers' perspective, surge pricing does two things. First, it encourages more drivers and so makes it more likely that the customer can get home (or where ever else they are going) in less time (albeit at a higher - and possibly much higher - monetary price). ....

Second, however, surge pricing creates a transfer. When I jump into the Uber car I don't know if my driver only decided to work because of the surge pricing. He or she might have been out there anyway. And in that case, I just pay more even though the driver would have been there anyway. Of course, the driver also gets more. The money doesn't disappear. It is a transfer. My loss through paying the higher surge price is the driver's gain. So from an economic perspective, this transfer is neutral. But that doesn't make the customer feel any happier.

Read more:

https://theconversation.com/why-ubers-surge-pricing-is-naive-economics-52948

Author: Stephen King; Professor, Department of Economics, Monash University; The Conversation - January 11, 2016.

a. Explain in detail using graphs how market forces will lead to conditions when surge prices can occur? Given these conditions in the market, why is the market inefficient in the absence of the surge price? (Hint: talk about surplus and/or shortages as well as any deadweight loss that may exist in the absence of a price surge).

b. How does surge pricing ensure that the market is allocative efficient? Explain how the consumer and producer surplus changes as a result of the price surge. Why would these changes upset customers?

c. Provide one alternative to surge pricing.

Task 6: Market Power

Q1. How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain.

Q2. How might advertising reduce economic wellbeing? How might advertising increase economic wellbeing?

Q3. 'Being the only seller in the market, the monopolist can choose any price and quantity it desires.' Evaluate this statement: Is it true or false? Explain your answer.

Q4. There are many cattle ranchers in the world, and there are also many McDonald's restaurants in the world. Why, then, does a McDonald's restaurant face a downward- sloping demand curve while a cattle rancher faces a horizontal demand curve? How would this situation change if there were two McDonalds restaurants located very close to each other and only one of these firms raises its price?

Q5. A sceptic says, 'marketing research and brand management are redundant. If a company wants to find out what customers want, it should simply look at what they are already buying'. Do you agree with the comment? Explain.

Q6. Read the following excerpt and answer the following questions:

CSR and Boral have announced the intention to form a joint venture of Australian east coast brick operations, citing reduced brick usage as a major cause for consolidation. The companies have proposed to combine brick operations in New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT. The move is subject to clearance by the Australian Competition and Consumer Commission (ACCC). A joint statement from the companies explains brick demand in Australia has experienced a sustained structural decline, with bricks becoming an increasingly smaller component of the broader cladding market. Despite a general increase in construction activity over this period, total brick production in Australia has fallen by 46 per cent from its peak in 1981, according to Boral and CSR.

Author David Wheeldon

Source: Infolink web site (https://www.infolink.com.au/articles/news/csr-and-boral-join- forces-as-brick-demand-falls-in-line-with-australian-design-trends- n2505885#71JLP4W4bY3OD3Tg.99) accessed 8th April 2014

a. Using the concept of economies of scale to explain the two companies' argument that it is now necessary for CSR and Boral to merge (hint: what is happening to costs and to demand)? A graph is likely to be helpful in explaining this question.

 b. If the joint venture is allowed to proceed, how would you describe the new market? What would be the impact on price, quantity and profit? Explain.

c. If the government allows the merger to go ahead two options are available for regulating the price. What are the two options and which would be the better option? Explain.

Q7. Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society, from the production of a good. Why, then, did Joseph Schumpeter argue that an economy may benefit more from firms that have market power than from firms that are perfectly competitive?

Q8. Watch the following video clip (Rod Sims discusses the likelihood of a takeover of Austar media by Foxtel) and answer the following questions.

Link to video -

https://ezproxy.lib.swin.edu.au/login?url=https://search.informit.com.au/documentSummary;dn=TEV20121107280;res=TVNEWS

a. What is the source of Telstra's significant market power?

b. Under what circumstances would Telstra have monopoly power? (Hint: what are the characteristics of a monopoly?)

c. How would the solution to make TV content available to other online providers reduce the market power? What might be some prevailing issues with this?