ECON 1101

Week 2 - Question 4

In a two economy, William can produce 6 watches (if he works only on watches) or 18 boxes per
day (if he works only on boxes), while Kate can produce 8 watches (if she works only on
watches) or 12 boxes per day (if she works only on boxes).Which of the following combinations of
watches and boxes can be produced by William and Kate if they work together, share their
produce and use all the available time in a day?

a) 8 watches and 10 boxes

b) 10 watches and 12 boxes

c) 16 watches and 0 boxes

d) 14 watches and 6 boxes

Answer:

a) is an inefficient production point

c) and d) are clearly unattainable

b) is correct (note that the cost of one watch for William is 3 boxes)

Week 3 - Question 1

Assume that there are only two countries in the world and
they produce two goods, cars and cotton. The opportunity
cost of a car in Country A is 50 units of cotton and the
opportunity cost of a car in country B is 300 units of cotton.
In this example:

a) Country A has a comparative advantage in cotton

b) Country B has a comparative advantage in cotton

c) Country A has an absolute advantage in cotton

d) Country B has an absolute advantage in cotton

Week 3 - Question 2

The diorama blow represents the production possibilities

curves for Mario and Lauren. Make the following assumptions
about two diagrams:

Both agents can buy as many units of meant and

cheese they want from the international market. The
international market price of each good will be between
the two agents opportunity costs of producing that
good

There are no trade barriers

Each agent wants to trade

Which product should each agent specialise in to maximise

its gains to trade?

a) Mario should produce meat and Lauren should produce

meat

b) Lauren should produce cheese Mario should produce

meat

c) Lauren should produce meat and Mario should produce

cheese

Week 3 - Question 3

The production possibilities curve for

Australian is shown in the diagram below:

Suppose Australia is currently consuming a

combination of goods represented by point
P. If trade can occur freely between
Australia and the rest of the world, then
Australia must be:

a) Exporting the amount on the graph

denoted by segment DE of wool and
importing OB Meat

b) Importing AB meat and exporting OD

wool

c) Exporting DE wool and importing AB

meat

d) Producing OD wool and OA meat

Week 3 - Question 7

This table shows the output an identical set of workers can

produce per month in China and India

For there to be gains to trade, what is the range of prices for

a tonne of rice that allows both countries to gain from trade?

Answer: We note that in China, the opportunity cost of 1 tonne

of rice is 4 tonnes of wheat. In india, the opportunity cost of 1
tonne of rice is 2 tonnes of wheat. Thus, for there to be any
gains to trade for both countries, the price must be greater
than 2 tonnes of wheat but less than 4 tonnes of wheat.

Week 3 - Question 9

Use the information below to answer the question below.

a) Who has a comparative advantage in making pots? Who has an

absolute advantage in making pots?

b) Suppose that April, Bert and Colin were the only worker on an island
and they all worker for 6 hours each. Also assume that April and Colin
produce only the goods for which they have a competitive advantage,
whereas Bert splits his time such that he spends 3 hours in weaving
rugs and 3 hours in weaving rugs and 3 hours in making pots. What is
the productive capacity of the economy in terms of rugs and pots?

Week 3 - Question 9 Answer

a) We first need work out the costive making 1 pot. In Aprils case, the
opportunity cost of making 1 pot is 1/2 a rug. For Bert, it is 2 rugs and
for Colin it is 3 rugs. Thus April has a competitive advantage in
making pots.

In terms of absolute advantage, we need to look at the absolute cost of

making 1 pot. For this question the less time needed to make the pot
lower the cost, thus April has an absolute advantage in making pots.

b) April will specialise in pots. She can make 6 pots in an hour and thus
make 36 pots in 6 hours. Colin will specialise in rugs, he can make 3
rugs in an hour and thus make 18 rugs in 6 hours. Bert can make 4
rugs in an hour and in 3 hours he makes 12 rugs; he can also make 2
pots in an hour, thus he can make 6 pots in 3 hours. Summing it all up,
the total productive capacity of the economy is 42 pots and 30 rugs.

Hand-in Assignment 1 Question 1a

Assume 2 countries, Newland and Oldland. Each country produces 2 goods, nuts and
coffee, using only labour. The table below shows the number of labour hours needed in
each country to produce one unit of the good (nuts of coffee):

Which of the following statements is correct?

a) The opportunity cost of producing one more unti of nuts in Newland is 2 units of
coffee

b) The opportunity cost of producing one more unit of nuts in Newland is 2/3 unit of coffee

c) The opportunity cost of producing one more unit of coffee in Oldland is 1.5 units of nuts

d) The opportunity cost of producing one more unit of coffee in Oldland is 1/3 unit of nuts

Hand-in Assignment 1 Question 1b

When a country has a production possibility curve which is

bow shaped (concave to the origin):

a) It has a comparative advantage in producing the good on

the horizontal axis

b) The marginal cost of producing each good decreases as

you move down and along the production possibility curve

c) The opportunity cost of producing one good increases

as more is produced of that good

d) The resources are equally efficient at producing both goods

Hand-in Assignment 1 Question 3

Oliver and Nellie produces two products, cloth and wine. The rates of production is
summarised in the table below:

a) Re-express this table in terms of input labour requirements i.e. how much time does it
take to produce one meter of Cloth and one litre of Wine.

b) From the above table, find out which person has an absolute advantage in producing
cloth and which person has a comparative advantage in producing cloth. Remember
show how you derive the results to reinforce your answer (Hint: For comparative
advantage it may be useful to express things in terms of opportunity costs).

c) Using the principle of comparative advantage, if Nellie decides to specialise in

producing a product, which product should she specialise in to ensure that there are
gains from specialisation?

Week 4 - Question 1

A profit maximising firm, operating in a perfectly competitive market,

will make a negative profit and continue to produce in the short-run, but
not in the long-run, if and only if the following conditions are satisfied:

a) the price is lower than the minimum average total cost and
higher than the minimum average variable cost

b) the price is lower than the minimum average variable cost and
higher than the minimum average fixed cost

c) the price is lower than the minimum average variable cost and
higher than the minimum marginal cost

d) the price is lower than the minimum marginal cost and higher than
the minimum average total cost.

Week 4 - Question 2

The short-run supply curve for a profit maximising firm

operating in a perfectly competitive market is the:

a) the portion of the firms average variable cost curve that

lies above the marginal cost curve

b) the portion of the firms marginal cost curve that lies

above the average variable cost curve

c) the portion of the firms marginal cost curve that lies

above the average total cost curve

d) the firms marginal cost curve

Week 4 - Question 3

When a firm produces a quantity such that the average

variable cost is minimised:

a) the marginal cost equals the average variable cost

b) the marginal cost is decreasing

c) the average variable cost is less than the marginal

cost

d) the average total cost is less than the average

variable cost

Week 4 - Question 6

At the local ice-cream shop ice creams sell for $5 each. Consider the following
information:

Calculate the point at which the marginal costs begin to increase (i.e. the
increasing marginal cost sets in at the employment of the _ worker per day).

Answer: The first worker produces 25 units, the second worker produces 50
additional units, the third work produces 75 additional units, the fourth worker
produces 50, the fifth worker produces 5 additional units. The employment of
the 4th worker is when increasing marginal costs set in. To see this, calculate
the marginal costs and youll see that at the 4th employee the MC start to rise.

Week 4 - Question 7

The figures in the table below indicate the costs to a fast food enterprise producing
gourmet Pizza. Note that is the firm operates in a perfectly competitive industry. Use
the information to answer the following questions.

a) Complete the Marginal Cost column.

b) With the additional of what unit of labour do the marginal costs begin to increase?

c) Assuming all gourmet pizzas sell for $20 and the firm wants to maximise profits,
calculate number of employees the firm should employ and the profit the firm will earn

Week 4 - Question 7 Answer

a)

b) The addition of the fourth unit of labour will result in an increase in marginal
costs

c) If pizzas sell for $20, nothing that the profit maximising rule occurs when P=MC,
the business should employ 5 units of labour since the employment of the 6h unit
will increase marginal costs to $40, thus reducing profits. At 5 units of labour we
know that 70 units of pizza will be produced. The revenue will be $1400; the cost
will be $1100. Thus profits will be $300

Week 5 - Question 1

When the price of an inferior good rises, ceteris paribus, which of

the following statements is true?

a) The income and substitution effects both act to increase the

quantity demanded

b) The income and substitution effects both act to decrease the

quantity demanded

c) The income effects acts to decrease the quantity demanded,

while the substitution effect acts to increase the quantity demanded

d) The income effect acts as to increase the quantity

demanded, while the substitution effect acts to decrease the
quantity demanded

Week 5 - Question 3

What is the concept of utility in economics?

a) Something useful

b) The state of being useful, profitable, or beneficial

c) Infrastructure such as gas, electricity and water

d) It is a way of expressing the satisfaction that

an agent services from consuming a good,
typically measured in utils per unit of time

Week 5 - Question 5

a) What does decreasing marginal utility mean?

b) Assume that you derive utility from the consumption of two goods, CDs and hamburgers. The
utility you receive from each from each good at various levels of combustion is shown below:

Complete the following table for hamburgers and CDs:

Week 5 - Question 5

c) using the data in b), assume that:

you have $40 to spend, and the price of CDs is $10, while the
price of hamburgers is $5

in expanding the consumption of CDs, whenever the marginal

benefit is equal to the marginal cost, the buyers will decided to
purchase the CDs

Using these assumptions, calculate the optimal amount of CDs and

hamburgers that maximises utility. (Note: CDs and hamburgers can
only be purchase the CD.

d) What does the information in the table tell you about the 9th and
10th hamburger?

Week 5 - Question 5 Answer

a) Decreasing marginal utility - DMU? Think about the wording:

it means that the marginal utility we receive is getting less and
less. But what is marginal utility? It is the additional utility we
receive when we consume one extra good. So what does DMU
mean in simple terms? It means that as we consume more of a
good, our utility increases but at a diminishing rate.

b)

Week 5 - Question 5 Answer

c) The first thing to note is the CDs are double the price of hamburgers. So, lets start by
analysing whether the buyer should purchase one CD or two hamburgers, i.e., the first $10
should be spent on what. If he/she purchases one CD, the buyer will obtain 48 units, if he/she
purchases 2 hamburgers, the buyer will obtain 48 units. So the first purchase should be a CD
since the marginal utility of the two options will be equal.

Now lets look at the decision in terms of the buyer budget, i.e., how should the buyer spend the
remaining $30. Should the buyer purchase one extra CD or 2 extra hamburgers? If he/she
purchases a CD, the buyer will receive 11 utils. If the buyer purchases 2 extra hamburgers the
buyer will receive 48 utils. Thus the buyer should purchase 2 hamburgers.

Moving on, were left with $20 and if we undertake the same analysis for the next $10, we find
that the optimal decision is again to purchase 2 extra hamburgers, since the additional utility is
36 utils, which is greater than 11 utils.

Were now left with $10 and hamburger is still the better decision since the marginal utility is 26
which is grater than 11. Thus the optimal bundle is 6 hamburgers and 1 CD.

d) Basically, it tells you that the buyer is receiving negative utility which means that the buyer is
actually worse off if he/she consumers any more hamburgers.

Week 5 - Question 6

What is the absolute value of price elasticity of

demand at point B?

Answer: This is simply an application of the

elasticity formula: slope = -3, P = 27, Q = 3. Thus,
we have price elasticity of demand = (-1/3) * 9. In
absolute value, this means a proc elasticity of 3

Week 6 - Question 1

Assume that a perfectly competitive market has reached its

equilibrium. Which of the following statements describes
efficiency in that market?

a) Consumers are maximising benefits while producers are

maximising revenue

b) The price of the good is equal to the lowest point on the

short-run average variable cost curve

c) The price of the good is equal to the wages o the workers

use to produce it

d) The total economic surplus is maximised

Week 6 - Question 2

When both the supply and the demand curve shift

to the right:

a) The equilibrium price remains unchanged

b) The equilibrium price always rises

c) The equilibrium price might rise or fall or

remain unchanged

d) The equilibrium prices always fall

Week 6 - Question 3

Assuming that we are in a perfectly competitive market,

the supply and demand curves measure the:

a) Total benefit divided by the level of the activity

b) The cost of producing the product

c) Marginal cost of producing the product and the

reservation prices (willingness to pay) for consuming
the product

d) The total benefit resulting from an extra unit of the

activity

Week 6 - Question 4

What does equilibrium mean?

a) The point where there is no excess supply or

dead

b) The point where consumer surplus is always

maximised

c) The point where produce surplus is always

maximised

d) None of the above

Week 6 - Question 8

Assume the demand curve for a product is approximated by the equation:

Qd = 30 - 5P (Qd is measured in millions of units), and supply is given by:
Qs = P (Qs is measured in millions of units)

Suppose the price for this product falls from $4 to $3

a) Calculate the estimated gain in the total consumer surplus. In your

calculation assume that consumers can buy as many units of the
good they want at the indicted prices.

b) Calculate the loss in total producer surplus. In your calculation

assume that producers can sell as many units of the good they want
at the indicated prices.

c) Calculate the net gain/loss in total surplus. Is this total surplus going to
be realised in the market?

Week 6 - Question 8 Answer

a) At a price of $4 the quantity demanded is 10 million. The area above the price line and below
the demand curve is also equal to $10 millions, (10*2)/2, and it represents the consumer
surplus. (Verify this using a diagram; the area of the triangle formed by the price line and the
demand curve is indeed equal to 10).

At the new price of $3, the quantity demanded is 15 millions, which suggests that consumer
surplus is $22.5 million, (15*3)/2.

Thus, the gain in consumer surplus is $12.5 million.

b) At a price of $4, produce surplus is $8 million; (4*4)/2.

At a price of $3, producer surplus is $4.5 million, (3*3)/3.

Thus, the loss in producer surplus is $3.5 million.

c) From the above, the gain in total surplus is $9 million. This total surplus will never be realised.
In fact, there is an excess demand that producers are not willing to satisfy at price $4 and $3.
Use a diagram to verify that the only equilibrium price where quantity supplied equals quantity
demanded is $5.

Week 6 - Question 9

Consider the following information to answer the following question.

The demand curve is: Qd = 200 - 5P

The supply curve is: Qs = 5P

Using this information:

a) Graph the supply and demand curve below:

b) What is the equilibrium price and quantity in this market?

c) Calculate the total consumer surplus.

d) Calculate the total producer surplus.

e) Calculate the total surplus

Week 6 - Question 9 Answer

b) We search for the price such that the quantity demanded equals
the quantity supplied. a quick look at the graph suggests that this
price is 20.

c) For the total consumer surplus we have:

d) For the total producer surplus we have:

CS = 1/2 * (40-20) *100 = $1000

PS = 1/2 * (20-0) * 100 = $1000

e) The total surplus is therefore:

CS + PS = $2000

Week 7 - Question 1

Assuming that the market is perfectly competitive, which

of the following is not true of an equilibrium price?

a) It is always a fair and equitable price

b) It measures the value of the last unit sold to consumers

c) It measures the marginal cost to product the last unit of

the good

d) It is an efficient price i.e. maximises economic surplus

Week 7 - Question 2

Consider a perfectly competitive market. In the

long run the equilibrium price equals _____.

a) The minimum Average Variable Cost

b) The minimum Average Total Cost

c) The minimum Marginal Cost

d) The Fixed Cost

Week 7 - Question 3

Consider a perfectly competitive market. In the

long run the supply curve is ____.

a) Perfectly Inelastic (i.e., an vertical line)

b) Perfectly Elastic (i.e., a horizontal line)

c) Upward sloping

d) None of the Above

Week 7 - Question 7

Consider a perfectly competitive market. Suppose that the supply curve is perfectly elastic (i.e., the supply
curve is an horizontal line) at a price of $10. Demand is given by the following equation: P = 100 - Q

Use this information to answer the following questions:

a) Calculate the consumer and producer surplus at the competitive equilibrium.

b) Suppose that there is an increase in demand where at every price there is 10 extra units demanded. Write
down the demand curve and re-calculate consumer and producer surplus.

c) Provide an intuition for the results.

Answer:

a) Consumer surplus is $4050 and producer surplus is $9

b) The demand curve becomes: Q = 100 - P +10. This can be rearranged as Q = 100 - P or P = 110 - Q.
Consumer surplus is $5000 and producer surplus is zero.

c) Intuitively, when the supply curve is perfectly elastic (i.e., the supply curve is an horizontal line) if there is a
change in price, the quantity supplied goes immediately to zero. Thus, the change in demand only affects
quantity. Since there is no change in price and the supply curve is perfectly elastic, then there is no change in
producer surplus.

Week 7 - Question 8

The demand for a product is given b the equation: Qd = 120 - 8P, while the supply is given by the
equation: Qs = 6P - 20 (P is measured in $)

a) Calculate the absolute value of the price elasticity of supply at the market equilibrium price and
the total producer surplus at this price

b) Calculate the absolute value of the price elasticity of demand at the market equilibrium price and
the total consumer surplus at this price.

c) Calculate total surplus at the market equilibrium price

Answer:

a) At the market equilibrium, the price will be $10 and the quantity is 40. Using the price elasticity
formula, we have (1/slope)*(P/Q)=6*(10/40), which suggests a price elasticity of supply of 1.5. The
producer surplus is (40*(10-20/6))/2=400/3

b) At the market equilibrium, the price will be $10 and the quantity is 40. Using the price elasticity
formula, we have (1/slope)*(P/Q)=8*(10/40), which suggests a price elasticity of supply of 2. The
producer surplus is (40*(15-10))/2=100

c) Total economic surplus will be 700/3.

Hand-in Assignment 2 Question 1b

At the point where the two curves intersect which of the following is true?

a) D1 is more inelastic than D2

b) D2 is more inelastic than D1

c) The elasticity of demand for both curves is equal to 1

d) Elasticity of demand for D1 equals 1 while the elasticity of demand for D2 is greater than 1

Hand-in Assignment 2 Question 4

Consider a perfectly competitive market. If the demand curve for a commodity is

given by the equation: Qd = 150 - 3P, and the supply curve is given by: Qs = 5P 10. Calculate the absolute value of the price elasticity of demand at the competitive
equilibrium.

Answer:

150 - 3P = 5P - 10

P = 20

Qd = 150 - 3*20 = 90

Qs = 5*20 - 10 = 90

Slope = 50 / 150 = 1/3

Elastic A = (1/1/3) * (20/90)= 2/3

Hand-in Assignment 2 Question 5

Assume that demand and supply curves for a particular chemical product are
given by the following equations: Demand: Qd = 150 - 15P; Supply: Qs = 5P - 30

Price is measured in $ per ton; quantity is measured in tons. Calculate the

equilibrium quantity and price for this market.

Answer:

150 - 15P = 5P - 30

P=9

Qd = 150 - 15*9 = 15

Qs = 5 * 9 - 30 = 15

The equilibrium quantity for this market is 15 tons, and the price of that is $9

Week 8 - Question 1

If a per-unit tax is imposed on producers in a perfectly

competitive market, the only curves that will shift upwards
are

a) the average variable cost and marginal cost curve

b) the average fixed cost and average total cost curve

c) the average fixed cost and average variable cost curve

d) the average variable cost, average total cost and

marginal cost curve

Week 8 - Question 2

Holding all else constant, in a perfectly competitive market, the

imposition of a legally enforced price floor above the market
equilibrium price will

a) create more excess supply the lower the price elasticity of

supply

b) create more excess supply the greater the price elasticity of

supply

c) create more excess demand the lower the price elasticity of

demand

d) create more excess demand the higher the price elasticity of

supply

Week 8 - Question 5

Consider the following supply and demand curves:

Supply: P=Qs

Demand: P=10-Qd

a) Find the equilibrium price and quantity of this market. Then work out the
consumer surplus, producer surplus and total economic surplus at he market
equilibrium.

b) Suppose that the government has decided to provide a subsidy of $2 per unit to
suppliers. Write down the new supply curve for the suppliers. Then, work out the
new equilibrium quantity.

c) Given the new quantity produced and sold, calculate consumer surplus, producer
surplus and the cost of the subsidy. Then work out total economic surplus.

d) Calculate the deadweight loss of the subsidy.

Week 8 - Question 5 Answer

a) The equilibrium price is $5 and the equilibrium quantity is 5 units. The

consumer surplus is $12.5 and producer surplus is $12.5. Thus we have total
economic surplus of $25.

b) The new supply curve is P = Qs -2

Now to work out the new equilibrium, we have Q-2=10-Q =>Q=6

c) Consumer surplus is (10-4)*6/2 => 18

Producer surplus is 6*6/2 => 18

The cost of the subsidy is 6*2 => 12

Thus total economic surplus is $24

d) The deadweight loss is $1

Week 8 - Question 6

Assuming that a home country imposes a tariff on an

imported product and the world price plus tariff is below the
no-trade price (i.e., the closed economy price), which of the
following statements is true for the home country?

a) The imposition of the tariff will benefit the home

producers

b) The imposition of the tariff will benefit the home consumers

c) Overall, the home economy will gain

d) There is no effect

Week 8 - Question 7

Assuming that a home country imposes a binding quota

on an imported product, which of the following statements
is true for the home country?

a) There is no reduction in consumer surplus

b) There is no reduction in producer surplus

c) The overall effect is similar to that of a tariff, except

there are no government revenues associated with the
quota

d) There is no effect

Week 8 - Question 9

The weekly demand for wool in Australia is given by: P = 800 - Qd, while the weekly of wool is
given by: P=Qs, where the P is Price, Qd is the quantity demanded and Qs is quantity
supplied. The world price of wool is set to $300 per bale.

a) Suppose that the country is not open to trade. What is the net gain/loss in total economic
surplus compared to the free trade case?

Answer:

If there was no trade, price would be $400 and consumers surplus would be
(400*400/2)=80000. In the free trade case, consumer surplus is (500*500/2)=125000, which
suggests a loss of $45000 in the no-trade case.

For producers, at the no-trade equilibrium, the surplus is (400*400/2)=80000; at the free trade
equilibrium, the surplus is $45000, which suggests a gain of $35000 in the no-trade case.

Thus, the net economic loss is $10000, in the no-trade case compared to free trade.

Week 8 - Question 9

b) Suppose there is a tariff of $50 per bale imposed by the Australian government on the import of wool. Use this information
to answer the following questions:

i. What is the gain in producer surplus in Australia?

ii. What is the loss in consumer surplus in Australia?

iii. What is the amount of tariff revenue accrued to the government?

iv. What is the overall loss in economic surplus following the introduction of the tariff?

Answer:

i) The price before the tariff would have been $300m which suggests producer surplus of $(300*300/2)=$45000. Post-tariff
price goes up to $350, which suggests that the producer surplus is now (350*350/2)=$61250. Taking the difference this
suggests that producer surplus increased by $16250

ii) The price before the tariff would have been $300, which suggests a consumer surplus of (500*500/2) = $125,000. Post-tariff
price goes up to $350, which suggests that the consumer surplus is now (450*450/2) = $101,250. Taking the difference, this
suggests that consumer surplus decreases by $23,750.

iii) The government tariff is $50 per imported unit; at a price of $350, consumers demand 450 units and domestic suppliers
are willing to provide 350 units, which means 100 units needs to be imported. Thus, government revenue is $50*100=$5,000.

iv) We know that producers gain $16,250, consumers lose $23,750 and the government gains $5,000. Add these bits up and
we have a net loss of $2,500.

Week 9 - Question 1

What is the Average Cost Pricing policy?

a) A policy intended to ensure that the market price remains high

enough.

b) A policy through which the government forces a firm to charge

$0 for each unit of the good sold in the market.

c) A policy where through which the government forces a firm to

select a price and a quantity such that the marginal revenue equals
the marginal cost.

d) A policy through which the government forces the

monopolist to set the price and quantity at the intersection of
the Average Total Cost curve and the demand curve.

Week 9 - Question 2

A cinema charges a lower admission price for nonworking patrons over the age of 60 (seniors) than for
other adults seeking entry to see a movie. This is an
example of:

a) no price discrimination

b) first degree price discrimination

c) second degree price discrimination

d) third degree price discrimination

Week 9 - Question 3

Which of the following statements about a monopolist is true?

a) If the monopolist engages in first degree price

discrimination, it will set a price and quantity such that the
total surplus is maximised.

b) The monopolist will always choose a price and quantity such

that the total surplus is maximised.

c) A monopolist will always produce an output level such that

the Average Total Cost is minimised.

d) A monopolist will always make a positive economic profit,

both in the short and the long run.

Week 9 - Question 4

What is the purpose of the competition law?

a) To influence firms productive decisions in markets

that are perfectly competitive.

b) To induce firms to set a price and a quantity such

that the Average Total Cost is minimised.

c) To foster market competition by regulating the

anti-competitive conduct of firms.

d) To maximise the producers surplus.

Week 9 - Question 7

The following table gives the demand schedule of a monopolist.

a) Complete the table above.

b) Assuming that the marginal cost of production is constant and equal to $4, what is the profit maximizing level of output
in the short run (i.e., you can ignore the fixed cost)?

Answer

a)

b) The profit maximising quantity will be 2 units.

Week 9 - Question 8

Consider a monopolist facing a demand curve given by: P =20-Q, where P is price and Q
is quantity.

Assume that the monopolists marginal cost is constant and equal to $10 per unit and
there are no other costs. If the monopolist engages in first degree price discrimination,
what is the deadweight loss? Explain your answer.

Answer

Given that we deal with first degree price discrimination, the deadweight loss is 0, since
the monopolist knows the willingness to pay of each consumer and is able to extract their
entire surplus. In this case, the Marginal Revenue Curve for the monopolist would be equal
to the Demand Curve. The monopolist sets the price and quantity where the Demand
Curve intersects the Marginal Cost curve => in this case P=$10 and Q=10 units.

It is easy to see that this is the quantity that maximizes total surplus (because at this
quantity the Marginal Benefit for society ---captured by the Demand Curve--- equals the
Marginal Cost for society); however, the monopolist obtains the entire surplus, while
consumers obtain zero surplus. So the distribution of surplus is hardly fair!

Week 10 - Question 1

Which of the following is true for a cartel?

a) It is likely to increase competition and decrease

profits for its cartel members.

b) It is always legal in Australia.

c) It is likely to reduce competition and increase

profits for its cartel members.

d) It always increases consumer surplus.

Week 10 - Question 2

When a player has a dominant strategy, it means that

a) this strategy is preferred by the player

irrespective of the strategy selected by the other
player

b) both players make different choices

c) both players make the same choice

d) the payoff to a strategy depends on the choice

made by the other player

Week 10 - Question 3

Which of the following statements is true for the firms operating in

an imperfectly competitive market in which these firms have some
market power?

a) To maximise profit the price they charge is equal to their

minimum average total cost.

b) To maximise profit the price they charge is equal to their

marginal cost.

c) To maximise profits each firm needs to consider the

actions of the other firms.

d) To maximise profit the price they charge is as high as it can be.

Week 10 - Question 4

Define the following terms:

Strategy profile, and

Nash equilibrium.

Answer: See textbook (section 8.4).

Week 10 - Question 7

Assume two rival car rental companies (Ace Rentals and Bobs Rentals) are considering whether to discount their rates as a
method of increasing market share. The following pay-off matrix gives the expected monthly profits (in $000) of each
company (Ace, Bobs) under alternative strategies. The payoffs and strategies for Bobs are in italics:

Find the Nash equilibrium of this game. Explain your answer.

Answer

First note that the dominant strategy for both Bobs and Ace is to Discount. Here is why:

If Bobs chooses Discount, Ace would prefer to choose Discount (obtaining 12 instead of 8). If Bobs chooses Do Not
Discount, Ace would still prefer to choose Discount (obtaining 24 instead of 16). Thus Discount is a dominant strategy for Ace.

If Ace chooses Discount, Bobs will prefer to choose Discount (obtaining 10 instead of 6). If Ace chooses Do Not Discount,
Bobs would prefer chooses Discount (obtaining 20 instead of 14).

It is easy to note that a strategy profile composed by dominant strategies --- in this case (Discount, Discount) --- must also be
a Nash equilibrium. To verify this one needs to check that the only strategy profile where no player has an incentive to deviate
unilaterally is (Discount, Discount).

Week 11 - Question 1

Which of the following is a necessary condition for

Coase Theorem to lead to an efficient outcome?

a) There are a large number of people involved.

b) No transaction costs.

c) Property Rights are not defined.

d) There are economies of scale present in the

production process.

Week 11 - Question 2

If production of a commodity generates a negative externality,

which of the following is true:

a) social supply curve is to the left and above the private

supply curve

b) social supply curve is to the right and below the private

supply curve

c) the commodity will be overpriced and undersupplied in a

competitive market

d) the commodity will be overpriced and oversupplied in a

competitive market

Week 11 - Question 3

Consider a situation where the production of a good

leads to large positive externalities. Now consider the
market equilibrium without any government
intervention. From a social perspective,

a) too much of the good is produced.

b) too little of the good is produced.

c) the efficient amount is produced.

d) none of the above.

Week 11 - Question 4

Which of the following activities is likely to result in

a negative consumption externality?

a) Development of new production technologies

b) Driving

c) Excessive risk taking in the banking sector

d) Over fishing

Week 11 - Question 5

Which of the following activities is likely to result in

a positive production externality?

a) Smoking

b) On-the-job training

c) Alcohol abuse

d) Over fishing

Week 11 - Question 10

Suppose that in the Sydney suburbs the demand for flowering plants is given by: P
= 60 Qd, where Qd represents quantity demanded (in thousands) and P is the
price of a plant. The supply for flowering plants is given by: P = 0.2Qs, where Qs
represents quantity supplied (in thousands).

a) What will be the market price and the quantity supplied of flowering plants?

b) Suppose that there is an external marginal benefit equal to $6 for each extra
flowering plant that is consumed. What is the socially optimal number of plants?

c) How does the socially optimal quantity from point (b) compare to the private
optimal quantity (i.e., the quantity that would be realized in a market with no
government intervention) from point (a)? Should the government impose a tax or
give a subsidy to ensure that the socially optimal outcome is achieved? Explain
your answer.

Week 11 - Question 10 Answer

a) To work out the equilibrium quantity & price, we simply set Demand =
Supply. Thus we have: 0.2Q = 60 - Q => Q* = 50 =>P* = 10

b) To work out the socially optimal equilibrium quantity & price, we simply set
Social Demand = Supply. Remember that the vertical distance between the
Social Demand Curve and the Private Demand Curve is equal to the external
marginal benefit ($6). Thus, the Social Demand Curve is given by P=(60 QD)
+6. By setting Social Demand = Supply we obtain:

0.2Q = (60 Q) + 6 => Q = 55, P = 11

c) Comparing the private optimum with the social optimum we see that too few
units are produced in the market (50 instead of 55). As a result, the
government should provide a subsidy such that the private demand curve is
more closely aligned to the social demand curve. If the subsidy is set to be
equal to the external marginal benefit, the outcome is going to be socially
efficient.

Week 12 - Question 1

Which of the following goods is non-excludable?

a) A local council swimming pool

b) A hotdog

c) A local bus service

d) A lighthouse

Week 12 - Question 2

What are the characteristics of a pure public good?

a) Non-excludability only

b) Non-rivalry only

c) Non-rivalry and non-excludability

d) Rivalry and excludability

Week 12 - Question 3

What is an impure public good?

a) A good that is non-excludable and nonrivalrous but only up to a point

b) A public good that is provided by the private

sector

c) A public good that is provided by the government

d) A good that is excludable and rivalrous

Week 12 - Question 4

The aggregate demand curve for a public good is constructed

by:

a) Summing each consumers desired quantity of the good at

various prices

b) Surveying consumers on how much of the particular good

they would desire at various prices

c) Summing all consumers marginal benefits at each

quantity

d) Finding the averages of the total individual consumers

demand curves

Week 12 - Question 6

What is the free riding problem? Does the freeriding problem result in overprovision or under
provision relative to the social optimal? Explain.

Answer: See Textbook,Section 10.3

Week 12 - Question 7

Fred and Ted each have the following individual demand curve for
urban parkland: P=10Q (Fred) and P=10.1Q (Ted)

a) Assuming that parkland is a public good, find the aggregate

demand curve for urban parkland.

b) Suppose that the marginal cost of maintaining the parkland is

$5 per unit of parkland. Calculate the quantity demanded
individually by Fred and Ted.

c) What is the socially optimal quantity of the public good that

maximises total surplus? Compare this to the quantity that you
obtained in point b) above. What does this suggest about public
goods? Explain

Week 12 - Question 7 Answer

a) To derive the aggregate demand for a public good, you need to sum the individual demand curves
vertically, and so Aggregate Demand: P=(10-Q)+(1-0.1Q)=11-1.1Q

b) To find the individual quantity demanded were substitute P=5 into the individual demand curves. Lets start
with Fred. We obtain 5=1-0.1Q. Rearrange to obtain Q=(1-5)/0.1=-40. Ted thinks that the price is so high that
he would prefer to consumer a negative quantity of the good! Clearly in this context a negative quantity would
be meaningless, so the optimal quantity for Ted is zero (to see this point just note that the marginal cost, $5, is
always above Teds demand curve, which in turn implies that Teds willingness to pay for any unit of the good
is less than $5). Hence, Fred will demand 0 units and the aggregate total quantity is 5 units.

c) The socially optimal quantity is the quantity at which the Marginal Cost (MC) equals the Social Marginal
Benefit (MB(social)), which is the sum of the individual Marginal Benefits (MB(Fred)+MB(Ted)). (This is the
Samuelson Condition.) Recall that the demand curve captures the marginal benefit (or reservation price).
Hence we can write MB(Fred)=P=10-Q; MB(Ted)=P=1-0.1Q and MB(social)=P=11-1.1Q.

In our example the marginal cost is the cost of maintaining the park, so MC=$5.

Set MC=MB(social) to obtain 5=11-1.1Q. Rearrange to obtain Q=(11-5)/1.1=5.45.

As a result, the optimal amount of public good is 5.45 units. This is higher than 5 units (see the previous
point), which is the quantity that the market would provided. This suggests that the market is under-providing
the public good. This is due to the face that Ted engages in free-riding and ultimately benefits from the good
without having to pay for it.

Hand-in Assignment 3 Question 1a

Holding all else constant, the deadweight loss created

by a per unit tax imposed on the producers of a good
will:

a) increase as the demand for the good becomes less

price elastic

b) have no effect on total surplus

c) decrease as the supply becomes more price elastic

d) increase as the supply becomes more price elastic

Hand-in Assignment 3 Question 1b

Which of the following best describes a tarred:

a) A tax on imports

b) A cap on imports

c) A tax on domestic production

d) All of the above

Hand-in Assignment 3 Question 2a

Consider a perfectly competitive market. The deadweight

loss is the loss in economic surplus due to

a) an increase in the cost of production of a given good.

b) the market being prevented from reaching its

equilibrium price and quantity

c) the government forcing the market to operate at a price

and quantity where marginal benefit equals marginal cost

d) a change in consumers preferences

Hand-in Assignment 3 Question 2b

Which of the following statements define a natural

monopoly situation?

a) The firm is the only producer in an industry

b) The Marginal Cost is aways greater than the Average

Total Cost for the firm

c) It is a monopoly that occurs because economies of

scale are significant

d) The firm has exclusive ownership of an essential factor

of production

Hand-in Assignment 3 Question 3

Consider a market whose supply and demand curves are given by

Supply: P=4Qs

Demand: P=12-2Qd

a) How will the equilibrium price and quantity in this market be

affected if a $6 per-unit tax is imposed on sellers? What is the price
received by sellers?

b) Given the new quantity produced and sold, calculate consumer

surplus, producer surplus and the tax revenue. Then work out the
total economic surplus.

c) Calculate the deadweight loss of the tax.

Hand-in Assignment 3 Question 5

The publishers of two daily city newspapers, BUGLE and CLARION, compete vigorously for
sales. Each publishing company is considering whether to cut the price of its newspaper.

Assume that the strategy choices for each company can be modelled as a choice between
two alternative strategies: Cut Price or Maintain Price.

The following payoff matrix gives the expected monthly profits in ($000) for each
newspaper (BUGLE, CLARION) under alternative strategies (payoffs and strategies for
Clarion in italics)

What is

a) the dominant strategy for Bugle and Clarion? Explain.

b) the Nash equilibrium of this game? Explain.