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PRICES & MARKETS

Tutorial Exercises and Supplementary Materials

RMIT University

This document has been prepared for use in the Prices & Markets course at RMIT UniA versity. The le was compiled using L TEX, an open source typesetting system, and is viewable in all standards compliant PDF viewers. The PDF has been formatted for two-sided printing. Please address any queries to: pricesandmarkets@rmit.edu.au

Copyright Martin C. Byford (2012). This version compiled on Thursday 6th December, 2012.

Contents

Using This Volume 1 Introduction to Demand and Supply 1.1 Quiz . . . . . . . . . . . . . . . . . . 1.2 Group Exercise . . . . . . . . . . . . 1.3 Homework Questions . . . . . . . . . 1.4 Homework Solutions . . . . . . . . . 2 Elasticity 2.1 Quiz . . . . . . . . . 2.2 Group Exercise . . . 2.3 Homework Questions 2.4 Homework Solutions

iii 1 1 3 4 5 9 9 11 12 13 15 15 17 18 19 25 25 27 28 29 33 33 35 36 37 39 39 41 42 43

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3 Applications of Demand and Supply 3.1 Quiz . . . . . . . . . . . . . . . . . . 3.2 Group Exercise . . . . . . . . . . . . 3.3 Homework Questions . . . . . . . . . 3.4 Homework Solutions . . . . . . . . . 4 International Trade 4.1 Quiz . . . . . . . . . 4.2 Group Exercise . . . 4.3 Homework Questions 4.4 Homework Solutions 5 Market Failure 5.1 Quiz . . . . . . . . . 5.2 Group Exercise . . . 5.3 Homework Questions 5.4 Homework Solutions 6 Utility 6.1 Quiz . . . . . . . . . 6.2 Group Exercise . . . 6.3 Homework Questions 6.4 Homework Solutions

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ii 7 Production and Costs 7.1 Quiz . . . . . . . . . 7.2 Group Exercise . . . 7.3 Homework Questions 7.4 Homework Solutions 8 Perfect Competition 8.1 Quiz . . . . . . . . . 8.2 Group Exercise . . . 8.3 Homework Questions 8.4 Homework Solutions 9 Monopoly 9.1 Quiz . . . . . . . . . 9.2 Group Exercise . . . 9.3 Homework Questions 9.4 Homework Solutions

CONTENTS 45 45 47 48 49 51 51 53 54 55 57 57 59 60 61 63 63 65 66 67 69 69 72 73 75 77 79 79 79 80 80

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10 Monopolistic Competition 10.1 Quiz . . . . . . . . . . . 10.2 Group Exercise . . . . . 10.3 Homework Questions . . 10.4 Homework Solutions . .

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11 Oligopoly and Game Theory 11.1 Quiz . . . . . . . . . . . . . 11.2 Group Exercise . . . . . . . 11.3 Homework Questions . . . . 11.4 Homework Solutions . . . . A Formula Sheet

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B Learning Diary Assessment Task B.1 Overview . . . . . . . . . . . . . . . . . . B.2 Reective Exercise . . . . . . . . . . . . B.3 Feedback Exercise . . . . . . . . . . . . . B.4 Submitting Your Learning Diary Entries

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Using This Volume


Within this volume you will nd the tutorial activities for the Prices & Markets course. These materials are intended to be used in conjunction with the lecture notes and prescribed text. You should bring either a hard or soft copy of this document with you to your tutorial classes. Also included as an appendix to this volume are the details of the Learning Diary assessment task. Note that all information contained within this volume is superseded by the course guide as published on the RMIT University website.

Tutorial Content
Each topic contains a short quiz, a group exercise and a series of homework questions. These are the core activities for the tutorials in Prices & Markets. The quiz consists of ve multiple choice questions. You will be given ten minutes to attempt the quiz in the tutorial; an average of two minutes per question. The questions in each quiz are typical of the style and content of the questions that you will encounter on the nal exam. The main activity of each tutorial is the group exercise. This is will typically consist of one or more multi-part short answer questions that are likewise to be attempted in class. Your tutor will be available to provide you with guidance during the group exercise. Engaging in the group exercises is an excellent way for you to get to know your fellow class mates. Your fellow students will be an important learning resource throughout your university studies. Both the quizzes and group exercises are components of the Learning Diary assessment task. See appendix B for further details. Finally, a series of homework questions have been designed to practice and extend the knowledge and techniques developed in the lectures. While the nal exam does not include a short answer component, many of the multiple choice questions on the nal exam will require you to solve problems similar to the homework questions. To get the greatest value out of each tutorial you should attempt the homework questions before coming to class. The solutions to both the multiple choice questions, and the group exercise, will be posted online at the end of each week.

Study Plan
The study plan overleaf sets out the activities that you should complete for each topic; between attending the lecture and the corresponding tutorial. Each topic in this course builds upon the preceding topics so it is essential that you identify, and seek help for, any diculties that you encounter at the earliest opportunity.

iii

iv

USING THIS VOLUME

STUDY PLAN 1. Attend the Lecture


New content is developed in the lectures. The remaining activities in this study plan are designed to help you apply and reinforce the lecture content.

2. Review the Topic


A. Review the Lecture Notes
Your rst step in reviewing a topic is to look over the lecture notes. This will refresh your memory of the material developed in the lecture.

B. Read the Corresponding Textbook Chapters


The textbook chapter provides additional context for each topic. Be aware that all material covered in the lectures, tutorials and prescribed readings is assessable.

C. Complete the Learning Diary Reflective Exercise


The details of the learning diary assessment task can be found in appendix B of this volume. You are to complete the reective exercise questions prior to the tutorial.

3. Attempt the Homework Questions


Attempt the homework questions before your tutorial. Check your answers against the worked solutions to identify where you are having diculties. The homework questions and worked solutions can be found in sections 3 and 4 of each chapter in this volume.

4. Attend the Tutorial


Bring any questions you have regarding either the content of the topic, or the homework questions, with you to your tutorial. Be sure to bring both this volume, and a calculator, with you to your tutorials.

Chapter 1

Introduction to Demand and Supply


1.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: Which of the following statements concerning a market demand curve is NOT true? (a) The market demand curve can be constructed by adding together the demand curves of all consumers active within the market. (b) A change in consumer preferences will cause the demand curve to shift. (c) The law of demand states that the demand curve slopes down. (d) Consumer income is lower at the bottom of the demand curve. Question 2: Suppose that demand and supply in a market are given by the following equations, 1 QD = 300 P and QS = 60 + P. 2 The equilibrium quantity in the market is, (a) Q = 120. (b) Q = 180. (c) Q = 210. (d) Q = 240.

CHAPTER 1. INTRODUCTION TO DEMAND AND SUPPLY

Question 3: Suppose that demand and supply in a market are given by the following equations, QD = 100 2P and QS = 20 + P. If the market price is P = 30 then, (a) There is excess demand of 30 units of output in the market. (b) There is excess supply of 30 units of output in the market. (c) There is excess supply of 10 units of output in the market. (d) The market is in equilibrium. Question 4: An increase in the equilibrium price of good Y causes an increase in the equilibrium price of good X and a decrease in the equilibrium quantity of good X . It is most likely that, (a) Good Y is a complement for good X . (b) Good Y is a substitute for good X . (c) Good Y is an input into the production of good X . (d) The market for good Y is not in equilibrium. Question 5: Blu-Ray players are a normal good. Suppose that consumer incomes increase. At the same time the price of microchips, an input into the production of Blu-Ray players, decrease. Which of the following statements is true? (a) The equilibrium price of Blu-Ray players increases, while the change in the equilibrium quantity is indeterminate. (b) The equilibrium price of Blu-Ray players decreases, while the change in the equilibrium quantity is indeterminate. (c) The equilibrium quantity of Blu-Ray players increases, while the change in the equilibrium price is indeterminate. (d) The equilibrium quantity of Blu-Ray players decreases, while the change in the equilibrium price is indeterminate.

1.2. GROUP EXERCISE

1.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Suppose the demand and supply curves in the market for Chocolates are given by the following equations, QD = 200 5P and QS = 25 + 4P.

(a) Sketch the demand and supply curves. (b) What does the term ceteris paribus mean in relation to the demand curve above? (c) Calculate the equilibrium price and quantity for Chocolate. (d) Following a reduction in the price of cocoa the market supply curve shifts to, QS = 7 + 4P. Calculate the new equilibrium price and quantity. How does the shift in the supply curve illustrate the law of demand? Question 2: Demand curves are always negatively sloped. Discuss.

CHAPTER 1. INTRODUCTION TO DEMAND AND SUPPLY

1.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Suppose the demand and supply curves for good Y are as follows, QD = 600 7.5P and QS = 100 + 10P,

where P is price in dollars per kilogram, and Q is quantity measured in thousands of kilograms (000 kg). (a) Sketch the demand and supply curves for good Y . (b) Determine the equilibrium price and quantity. (c) Suppose that the price of a substitute good for Y increase. Illustrate the eect of this change on the demand and supply diagram from part (a) of this question. What is eect of the change on the equilibrium price and quantity of good Y ? (d) Assume that at the same time as (c) the price of labour used to produce good Y increases. Illustrate the combined eect of these changes on the demand and supply diagram. What is the eect of these changes on the equilibrium price and quantity? Question 2: The supply of tickets to a football match is limited by the number of seats in a football stadium. Suppose that a football stadium contains 80,000 seats and that the supply of tickets is perfectly inelastic at this quantity. (a) Write the equation for this supply curve expressing the quantity supplied in thousands (000) of tickets. What are the implications of perfectly inelastic supply for the market? (b) Suppose that demand for football tickets is given by the equation, 1 QD = 100 P, 2 where P is price in dollars per ticket and QD is measured in thousands (000) of tickets. Calculate the equilibrium price and quantity. (c) Illustrate the demand and supply equilibrium on a demand and supply diagram. (d) On the same diagram illustrate the impact of an increase in the demand for football tickets. What happens to the equilibrium price and quantity?

1.4. HOMEWORK SOLUTIONS

1.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Recall that the demand and supply curves are given by, QD = 600 7.5P and QS = 100 + 10P,

where P is price in dollars per kilogram, and Q is quantity measured in thousands of kilograms (000 kg). P 6 80 S2 (d) 40

Supply  (c)

10 100 0

D2
-

Demand 600 Q

300

Figure 1.1: The Market for Good Y

(a) The horizontal (quantity) intercept of the demand curve can be found by substituting P = 0 into the demand equation, QD = 600 7.5 0 = 600. Likewise, the horizontal intercept of the supply curve occurs at, QS = 100 + 10 0 = 100. The vertical (price) intercept of the demand curve can be found by substituting QD = 0 into the demand equation, 0 = 600 7.5P 7.5P = 600 P = 80.

CHAPTER 1. INTRODUCTION TO DEMAND AND SUPPLY To nd the vertical intercept for the supply curve set QS = 0, 0 = 100 + 10P 100 = 10P P = 10. The graphs of these two curves are illustrated in gure 1.1.

(b) In equilibrium, QD 600 7.5P 17.5P P = QS = 100 + 10P = 700 = $40 per kilogram

Substituting P = 40 into the demand equation, Q = 600 7.5 40 = 300, or 300,000 kilograms. (Note: It is important to report results in the correct units.) (c) The increase in the price of a substitute good causes demand for good Y to increase, shifting the demand curve to the right to D2 (see gure 1.1). Good Y has become relatively less expensive in comparison to the substitute good and so more attractive to consumers at each and every price. The position of the supply curve is not aected. The movement up along the supply curve causes an increase in both the equilibrium price and quantity. (d) The increase in the cost of labour increases the cost of production, reducing the willingness of producers to supply good Y at each and every price. The supply of good Y is thus reduced, shifting the supply curve to the left to the position S2 (see gure 1.1). The movement up along the demand curve D2 further increases the equilibrium price while reducing the equilibrium quantity. The net eect of the combined shifts in demand and supply is to increase the equilibrium price, however the impact on the equilibrium quantity is ambiguous without knowing the magnitudes of the shifts. Solution to Question 2: Recall that the supply of football tickets is perfectly inelastic at the quantity 80,000. (a) Perfectly inelastic (vertical) supply means that the quantity that rms are willing to supply does not vary with price. In this example QS = 80 regardless of the market price. Here the quantity supplied is stated in thousands (000) of tickets. (b) In equilibrium QD = QS , 1 100 P = 80 2 1 P = 20 2 P = $40 With perfectly inelastic (vertical) supply the equilibrium quantity is determined by the position of the supply curve thus the equilibrium quantity is 80,000 tickets.

1.4. HOMEWORK SOLUTIONS P 6 Supply


@ @ @ @

200
@ @ @ @

@ @ @ @ @ @ @

40 0

@ (d) @ @ @ @ @ @ @ @ @ @ @ @ - @ D2 @ @ @ @

Demand @@

80

100

Figure 1.2: The Market for Football Tickets

(c) Demand and supply for football tickets are illustrated in gure 1.2. (d) The increase in demand shifts the demand curve to the right. As illustrated in gure 1.2 the shift causes a movement up along the vertical supply curve, increasing the equilibrium price but leaving the equilibrium quantity unchanged.

CHAPTER 1. INTRODUCTION TO DEMAND AND SUPPLY

Chapter 2

Elasticity
2.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Questions 13 concern the market for motorcycles. A researcher studying the market for motorcycles acquired the following monthly sales data. The table includes the price of motorcycles, the number of sales and the average weekly earnings of consumers. Month September 2009 October 2009 October 2010 Price Sales $9,500 76 $10,500 68 $10,500 64 Average Weekly Earnings $885 $885 $915

Question 1: From the data collected in the market for motorcycles it can be concluded that, (a) Demand is elastic. (b) Demand is unit elastic. (c) Demand is inelastic but not perfectly inelastic. (d) Demand is perfectly inelastic. Question 2: The income elasticity of demand for motorcycles is, (a) 1.8. (b) 0.13. (c) 1.8. (d) 0.13.

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CHAPTER 2. ELASTICITY

Question 3: An increase in income tax rates will likely result in, (a) An increase in the equilibrium price and quantity in the market for motorcycles. (b) An increase in the equilibrium price and a decrease in the equilibrium quantity in the market for motorcycles. (c) A decrease in the equilibrium price and an increase in the equilibrium quantity in the market for motorcycles. (d) A decrease in the equilibrium price and quantity in the market for motorcycles. Question 4: The price elasticity of demand for beef is estimated to be 0.60 (in absolute value). This means that a 20 percent increase in the price of beef, holding everything else constant, will cause the quantity of beef demanded to, (a) Decrease by 12 percent. (b) Decrease by 26 percent. (c) Decrease by 32 percent. (d) Decrease by 60 percent. Question 5: Which of the following statements about price elasticity of demand is FALSE? (a) The value of the price elasticity of demand is the reciprocal of the value of the demand curves slope. (b) If quantity demanded changes by a larger percentage than the percentage change in price, demand is elastic. (c) The value of the price elasticity of demand along a downward-sloping demand curve is always negative. (d) A linear downward-sloping demand curve has a varying price elasticity coecient.

2.2. GROUP EXERCISE

11

2.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Wesson and Oozie are producers of pistols and automatic assault ries, respectively. (a) What is the meaning of the term elastic in relation to the own price elasticity of demand? (b) Assume that demand for Wessons pistols is elastic. Outline one important factor that determines the magnitude of a products own price elasticity of demand. How would a fall in Wessons price aect its total revenue? (c) When the price of Wesson guns increases from $20 to $23, Oozies sales increase from 105 to 120 per month. Calculate the arc cross price elasticity of demand and interpret your answer. (d) An increase in average weekly earnings of shady characters from $290 to $310 causes Oozies sales to increase from 120 to 130 guns per month. Calculate and interpret the income elasticity of demand.

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CHAPTER 2. ELASTICITY

2.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: The local movie rental store rents DVDs at $4 per night. On average, 1800 DVDs are hired per week. In response to an increase in running costs the store increases the price of renting a DVD to $5, after which number of DVDs rented per week falls to 1250. (a) Calculate and interpret the arc own price elasticity of demand for this stores DVD rentals. (b) Explain why the stores revenue from DVD rentals has fallen despite the increase in price. Question 2: State whether you would expect demand for the following products to be relatively elastic or inelastic. In each case outline the factors likely to be important in determining the products own price elasticity of demand. (a) Cigarettes. (b) M&Ms Chocolates (c) Potato Chips

2.4. HOMEWORK SOLUTIONS

13

2.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: From the information provided we have two observations of price and quantity; Q1 = 1800 at P1 = 4 and Q2 = 1250 at P2 = 5. (a) The arc own price elasticity of demand is given by the formula, P = Q2 Q1 P2 + P1 P2 P1 Q2 + Q1 5+4 1250 1800 = 54 1250 + 1800 9 550 = 1 3050 1.6.

Thus a 1% increase (decrease) in the price price of DVD rentals brings about a 1.6% decrease (increase) in the quantity demanded. As |P | > 1 demand is elastic. (b) The percentage fall in quantity is greater than the percentage increase in price. As this decrease in quantity outweighs the increase in price, total revenue decreases. Solution to Question 2: Price elasticity of demand measures how the quantity demanded by consumers responds to a change in the price of a product. In general demand for a product is more price elastic when close substitutes are available. In contrast, demand for necessities will typically be relatively price inelastic. (a) We would expect demand for cigarettes to be inelastic as cigarettes are addictive and have no close substitutes. (b) Smarties are a very close substitute for M&Ms. As such we would expect demand for M&Ms to be price elastic. (Note: In this question we are interested in the price elasticity of demand for a specic brand of chocolate, not demand for all brands of chocolate collectively.) (c) Potato chips are one of many snack foods that can substitute for one and other, and certainly not a necessity. It is therefore likely that the demand for potato chips is elastic.

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CHAPTER 2. ELASTICITY

Chapter 3

Applications of Demand and Supply


3.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: Which of the following statements best reects an economists view of consumer and producer surplus? (a) Consumer surplus is more important than producer surplus because consumers are real people. (b) Producer surplus is more important than consumer surplus because producers (rms) create jobs. (c) Government should prevent the transfer of consumer surplus to producers. (d) Any policy that distorts the quantity exchanged in a market away from the equilibrium quantity imposes a burden on society. Question 2: The demand for cigarettes is inelastic. Which of the following statements is NOT true about a tax on cigarettes, (a) The tax will generate substantial revenue for the government. (b) The tax will generate a relatively small dead weight loss. (c) The tax will substantially reduce the consumption of cigarettes. (d) The tax revenue can be used by the government to produce goods and services for public consumption. Question 3: Dead weight loss is, (a) Not a concern for government. (b) Never produced by a subsidy. (c) Stated as the dierence between the equilibrium quantity of a good and the quantity that is actually traded. (d) A measure of foregone gains from trade. 15

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CHAPTER 3. APPLICATIONS OF DEMAND AND SUPPLY

Question 4: Which of the following is NOT a similarity between a price ceiling and quota? (a) Both price ceilings and quotas reduce the quantity of goods or services traded in a market. (b) Both price ceilings and quotas result in the transfer of consumer surplus to producers. (c) Both price ceilings and quotas are the result of government intervention. (d) Both price ceilings and quotas create a dead weight loss. Question 5: The minimum wage is an example of a, (a) Price oor. (b) Price ceiling. (c) Quota. (d) Tax.

3.2. GROUP EXERCISE

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3.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Suppose that the demand and supply curves for steak are given by the following equations, QD = 70 2P and QS = 10 + 2P, where P is the price of steak in dollars per kilograms, and Q is quantity of steak in thousands (000) of kilograms. (a) Sketch the demand and supply curves. (b) Determine the equilibrium price and quantity. (c) Calculate the value of the consumer and producer surplus at the equilibrium price. (d) Suppose the government introduced a price ceiling at $15. Calculate the new consumer and producer surpluses, and the associated dead weight loss. Question 2: Who benets from the introduction of a price ceiling? Explain why government may introduce a price ceiling.

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CHAPTER 3. APPLICATIONS OF DEMAND AND SUPPLY

3.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Suppose that the demand and supply curves for seafood are given by the following equations, QD = 100 2P and QS = 20 + 4P,

where P is price of seafood in dollars per kilogram, and Q is quantity of seafood in thousands (000) of kilograms. (a) Sketch the demand and supply curves. (b) Determine the equilibrium price and quantity. (c) Calculate the value of the consumer and producer surplus at the equilibrium price. (d) Suppose the government introduced a price oor at $30. Calculate the new consumer and producer surpluses, and the associated dead weight loss. (e) Suppose the government introduced a quota of 40,000kg of seafood. Calculate the new consumer and producer surpluses, and the associated dead weight loss. (f) Discuss the similarities and dierences between price oors and quotas. Question 2: Suppose that the demand and supply curves for Widgets are given by the following equations, QD = 80 2P and QS = 2P. where P is the price of widgets in dollars per unit. (a) Sketch the demand and supply curves. (b) Determine the equilibrium price and quantity. (c) Suppose that the government places a $10 per unit tax on Widgets. Calculate the quantity that will be traded, and the prices that will be paid by consumers and received by suppliers. (d) Calculate the tax revenue and dead weight loss. What is the consumers share of the burden of taxation? (e) Repeat parts (a)(d) for the demand curve QD = 60 P . (f) Discuss the similarities and dierences between the outcomes under the two dierent demand curves.

3.4. HOMEWORK SOLUTIONS

19

3.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Recall that the demand and supply curves for seafood are given by the following equations, QD = 100 2P and QS = 20 + 4P,

where P is price of seafood in dollars per kilogram, and Q is quantity of seafood in thousands (000) of kilograms. (a) See gure 3.1. P 6 50 Quota

A 30 B 20 15 5 20 0 40 D F C E Price Floor Supply


Demand

60

100 Q

Figure 3.1: The Market for Seafood

(b) In equilibrium QD = QS thus, 100 2P = 20 + 4P 120 = 6P P = 20. Substituting P = 20 into the demand equation, Q = 100 2 20 = 60. Thus equilibrium occurs at a price of $20 and a quantity of 60,000kg of seafood.

20

CHAPTER 3. APPLICATIONS OF DEMAND AND SUPPLY

(c) Consumer surplus is the area below the demand curve and above the price paid by consumers (areas A, B and C in gure 3.1). The area of this triangle is, 1 CS = Base Height 2 1 = 60 (50 20) 2 = 900, or $900,000. Producer surplus is the area above the supply curve and below the price received by suppliers (areas D, E and F in gure 3.1). The area of this triangle is, 1 P S = Base Height 2 1 = 60 (20 5) 2 = 450, or $450,000. (d) A price oor reduces the quantity demanded by consumers by forcing the market price above the equilibrium price. In this question the price oor at $30 reduces the quantity demanded by consumers to QD = 100 2 30 = 40. The new consumer surplus is the area A in gure 3.1, 1 CS = 40 (50 30) 2 = 400, or $400,000. The minimum price at which producers are willing to supply the quantity Q = 40 can be found by substituting this value into the supply curve, 40 = 20 + 4P 4P = 60 P = 15. This gives us the position of the boundary between areas D and F in gure 3.1. The new producer surplus is the areas B, D and F, 1 P S = 40 (30 15) + 40 (15 5) 2 = 600 + 200 = 800, or $800,000. The dead weight loss is the areas C and E, 1 DWL = (60 40) (30 15) 2 = 150, or $150,000. Note that the dead weight loss can also be found by subtracting the new total surplus from the total surplus of the market in the absence of the price oor.

3.4. HOMEWORK SOLUTIONS

21

(e) A quota of 40,000kg of seafood restricts the suppliers in a market such that they may supply a maximum quantity Q = 40. Substituting this value into the demand equation gives us the maximum price that consumers are willing to pay for this quantity, 40 = 100 2P 2P = 60 P = 30. But a price of $30 and a quantity of 40,000kg is exactly the same conditions as were created by the price oor. Therefore the producer and consumer surpluses, and the dead weight loss, will be identical to that found in part (d). (f) A price oor limits the quantity demanded by lifting the market price above the equilibrium level. A quota limits the quantity traded by restricting the quantity that supplier are allowed to produce. Both interventions result in a higher than equilibrium price and a lower than equilibrium quantity traded. Both interventions also result in a transfer of consumer surplus to producers (area B in gure 3.1) and the creation of a dead weight loss. Solution to Question 2: Recall that the demand and supply curves for Widgets are given by the following equations, QD = 80 2P and QS = 2P.

where P is the price of widgets in dollars per unit. (a) See gure 3.2. P 6 40 Supply Pc = 25 20 Ps = 15 10

Supply + Tax

Demand

30

40

80

Figure 3.2: The Market for Widgets

22

CHAPTER 3. APPLICATIONS OF DEMAND AND SUPPLY

(b) In equilibrium QD = QS thus, 80 2P = 2P 80 = 4P P = 20. Substituting P = 20 into the demand equation, Q = 80 2 20 = 40. Thus equilibrium occurs at a price of $20 and a quantity of 40 widgets. (c) A $10 per unit tax on Widgets separates the price paid by consumers from the price received by suppliers. The Supply + Tax curve is illustrated in gure 3.2. Specically, suppliers receive the price Ps = Pc 10 when consumers pay the price Pc . Substituting these prices into the demand and supply equations yields, QD = 80 2Pc Equating demand and supply, 80 2Pc = 20 + 2Pc 100 = 4Pc Pc = $25. Substituting into the demand equation yields QD = 80 2 25 = 30 while suppliers receive the price Ps = 25 10 = $15. (d) Tax revenue is the amount of the unit tax multiplied by the quantity trade, Tax Revenue = 10 30 = $300. The dead weight loss is, 1 DW L = (40 30) (25 15) 2 = $50. Consumers share of the burden of taxation is, Consumer Burden = (25 20) 30 = $150. (e) The demand and supply curves are illustrated in gure 3.3. In equilibrium QD = QS thus, 60 P = 2P 60 = 3P P = 20. and QS = 2(Pc 10) = 20 + 2Pc .

3.4. HOMEWORK SOLUTIONS P 6 60

23

Supply + Tax

Pc = 26.7 20 Ps = 16.7 10

Supply

Demand

33.3 40 Figure 3.3: The Market for Widgets

60 Q

Substituting P = 20 into the demand equation, Q = 60 20 = 40. Thus equilibrium occurs at a price of $20 and a quantity of 40 widgets. Note that these are the same equilibrium values as in part (b). Substituting the $10 per unit tax into the demand and supply equations yields, QD = 60 Pc Equating demand and supply, 60 Pc = 20 + 2Pc 80 = 3Pc 80 Pc = $26.7. 3 = 100 33.3 while Substituting into the demand equation yields QD = 60 80 3 3 50 suppliers receive the price Ps = 80 10 = $16 . 7. 3 3 Tax revenue is the amount of the unit tax multiplied by the quantity trade, Tax Revenue = 10 = The dead weight loss is, DW L = 1 100 40 2 3 100 = $33.3. 3 80 50 3 3 100 3 and QS = 2(Pc 10) = 20 + 2Pc .

1000 $333. 3

24

CHAPTER 3. APPLICATIONS OF DEMAND AND SUPPLY Consumers share of the burden of taxation is, Consumer Burden = 80 100 20 3 3 2000 = $222. 9

(f) In the two examples both the market supply curve, the level of the tax and the equilibrium are identical. The only dierence is the slopes of the demand curves. Under the more inelastic demand curve of part (e) the government raises more tax revenue, the dead weight loss is smaller and consumers bear a greater proportion of the tax burden (half in part (d) as opposed to two thirds in part (e)). Moreover, the quantity traded in the market falls less with the introduction of the tax when demand is more inelastic.

Chapter 4

International Trade
4.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Questions 13 refer to the market for seafood. Suppose that the demand and supply curves for seafood are given by the following equations, QD = 100 2P and QS = 20 + 4P,

where P is price of seafood in dollars per kg, and Q is quantity of seafood in thousands (000) of kilograms. The world price for seafood is $12 per kilogram. This market is illustrated in gure 4.1. P 6 50 Demand

Supply

20 12 5 20

World Price

60

100 Q

Figure 4.1: The Market for Seafood

25

26

CHAPTER 4. INTERNATIONAL TRADE

Question 1: The total imports of seafood are, (a) 28,000kg. (b) 48,000kg. (c) 60,000kg. (d) 76,000kg. Question 2: Opening the market for seafood to international trade creates, (a) $192,000 of gains from trade. (b) A price rise of $8 per kilogram. (c) A dead weight loss of $384,000. (d) Exports from the local seafood industry. Question 3: A tari of $10 per kilogram, levied on imports of seafood, will, (a) Reduce the market price to $10 per kilogram. (b) Reduce imports of seafood to 12,000kg. (c) Implement the autarkic equilibrium. (d) Increase consumer surplus. Question 4: Opening a market to free trade necessarily, (a) Increases both consumer and producer surpluses. (b) Decreases both consumer and producer surpluses. (c) Increases either consumer or producer surplus but not both. (d) Has an ambiguous impact on the total surplus. Question 5: France and Italy both produce cheese and wine. If the opportunity cost of producing a bottle of wine in France is 0.3 wheels of cheese, while the opportunity cost of producing a wheel of cheese in Italy is 3 bottles of wine, we would expect, (a) France to export wine to Italy and import cheese from Italy. (b) France to import wine from Italy and export cheese to Italy. (c) France to export both wine and cheese to Italy. (d) France to import both wine and cheese from Italy.

4.2. GROUP EXERCISE

27

4.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Suppose the demand and supply curves for bananas are given by the following formulas, QD = 70 2P and QS = 10 + 2P, where P is price per kilogram of bananas in dollars, and Q is quantity of bananas measured in thousands (000) of kilograms. (a) Sketch the demand and supply curves. (b) Determine the equilibrium price and quantity under autarky. (c) Suppose that the market for bananas is opened to international trade. Calculate the net imports or exports of bananas if the world price is $25. How large are the gains from trade that result from opening the market for bananas to international trade at this price? (d) Repeat part (c) for a world price of $15. (e) Suppose that the world price is $15 (as above) and that the government imposes a $2.50 per kilogram tari on imported bananas. Calculate the dead weight loss and tari revenue. Question 2: Discuss the costs and benets of opening a market to international trade.

28

CHAPTER 4. INTERNATIONAL TRADE

4.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Suppose that the local demand and supply for insulin are given by the following functions, 1 QD = 40 and QS = 10 + P, 2 where P is the price per vial of insulin, and Q is the quantity of insulin in millions (000,000) of vials. (a) Sketch the demand and supply curves. (b) Determine the equilibrium price and quantity under autarky. (c) Suppose that the market is opened to international trade at the world price $50 per vial. Calculate the net imports or exports and the associated gains from trade. (d) Suppose that the government imposes an import quota of 15,000,000 vials of insulin. Find the new local price and calculate the dead weight loss and the gains to foreign producers. (e) Discuss the similarities and dierences between taris and quotas.

4.4. HOMEWORK SOLUTIONS

29

4.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Recall that the local demand and supply for insulin are given by the following functions, 1 QD = 40 and QS = 10 + P, 2 where P is the price per vial of insulin, and Q is the quantity of insulin in millions (000,000) of vials. (a) See gure 4.2. P 6 Demand Supply

100

50

World Price

20

10

15

40

Figure 4.2: The Market for Insulin (b) Under autarky there are no imports or exports. In equilibrium QD = QS , 1 40 = 10 + P 2 1 P = 50 2 P = $100. The equilibrium quantity is determined by the position of the perfectly inelastic demand curve Q = 40,000,000 vials. (c) Consumers demand 40,000,000 vials regardless of the price. At the world price of $50 per vial local suppliers produce, QS = 10 + 1 50 = 15, 2

30

CHAPTER 4. INTERNATIONAL TRADE or 15,000,000 vials. It follows that 25,000,000 vials are imported into the market. The gains from trade is the area bounded by the local supply and demand curves, and the local price. Thus, Gains from Trade = or $625,000,000. 1 (100 50) (40 15) = 625, 2

(d) An import quota of 15,000,000 implies that the dierence between the quantities demanded and supplied is 15 (that is QD QS = 15) or, 1 40 10 + P 2 1 50 P 2 1 P 2 P = 15 = 15 = 35 = 70.

Thus the local price that results from the quota is $70 per vial (see gure 4.3). P 6 Demand Supply Local Price

100

70 50

World Price

20

Quota
 -

10

15

25

40

Figure 4.3: The Market for Insulin with a Quota on Imports The dead weight loss in under the quota is given by the area A. Thus, DWL = 1 (70 50) (25 15) = 100, 2

or $100,000,000. The gain to foreign producers is the area B, Gain to Foreign Producers = (70 50) (40 25) = 300, or $300,000,000.

4.4. HOMEWORK SOLUTIONS

31

(e) Taris and quotas both function to limit imports. Quotas do so directly by limiting the quantity of a good that can cross a border, while taris do so indirectly by raising the local price above the world price. Government gains revenue under taris, while some foreign producers enjoys additional gains under a quota. Both taris and quotas impose a dead weight loss on the market, increase producer surplus and decrease consumer surplus.

32

CHAPTER 4. INTERNATIONAL TRADE

Chapter 5

Market Failure
5.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: Widgets are a new product. Suppose that each widget can only be consumed by one person at a time, and that rms cannot prevent people from consuming widgets. From this information we conclude that Widgets are a, (a) Private good (b) Common resource (c) Quasi-public good (d) Public good Question 2: Which of the following statements is TRUE? (a) Public goods may be a source of market failure. (b) A rm can deny a consumer access to a public good if the consumer refuses to pay the price for the good. (c) A private rm can never protably supply a public good. (d) A public good is any good produced using public funds. Question 3: Which of the following is NOT a source of market failure? (a) A positive externality created by education. (b) A price oor set above the market price. (c) A monopoly. (d) Pollution from a production process.

33

34

CHAPTER 5. MARKET FAILURE

Question 4: The market failure associated with a negative externality arises because, (a) The market produces too much of a good. (b) The market produces too little of a good. (c) Free riders consume all of the externality. (d) A quasi-public good is being traded in the market. Question 5: Government can correct the market failure associated with a negative externality by, (a) Imposing a unit tax on the product. (b) Granting a subsidy to producers. (c) Taking over production of the product. (d) Educating consumers.

5.2. GROUP EXERCISE

35

5.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Suppose that the demand and supply of healthcare are described by the following functions, QD = 30 2P and QS = 5 + 3P. Healthcare generates a positive externality with a Marginal Social Benet described by the function, QMSB = 45 2P. (a) Sketch the demand, supply and marginal social benet curves. What is the magnitude of the positive externality per unit of healthcare consumed? (b) Determine the equilibrium price and quantity. (c) Determine the socially optimal quantity. Does the market over or under produce? (d) Calculate the dead weight loss associated with this market. Illustrate the dead weight loss on the graph from part (a). (e) Describe a policy that government could implement to correct this market failure. Question 2: Education is not a public good. Discuss.

36

CHAPTER 5. MARKET FAILURE

5.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Suppose the demand and supply curves for bananas are given by the following formulas, QD = 70 2P and QS = 10 + 2P, where P is price per kilogram of bananas in dollars, and Q is quantity of bananas measured in thousands (000) of kilograms. (a) Sketch the demand and supply curves. (b) Determine the equilibrium price and quantity. (c) Suppose that a byproduct of the production of bananas is pollution that generates a $4 negative externality on the market. Sketch the Marginal Social Cost curve on the graph from part (a). (d) Find the socially optimal quantity of banana production. What is the dead weight loss associated with banana production. (e) How can government correct this market failure. Question 2: Explain why there is little incentive for rms to become involved in the supply of public goods. How can rms overcome these diculties.

5.4. HOMEWORK SOLUTIONS

37

5.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Recall that the demand and supply curves for bananas are given by the following formulas, QD = 70 2P and QS = 10 + 2P,

where P is price per kilogram of bananas in dollars, and Q is quantity of bananas measured in thousands (000) of kilograms. (a) See gure 5.1. P 6 35

Marginal Social Cost Supply


20

Demand
-

18

10

26 30

70 Q

Figure 5.1: The Market for Bananas

(b) In equilibrium QD = QS thus, 70 2P = 10 + 2P 4P = 80 P = 20, or $20. Substituting into demand Q = 70 2 20 = 30 or 30,000kg. (c) See gure 5.1. (d) At the socially optimal quantity the demand curve is $4 higher than the supply curve

38

CHAPTER 5. MARKET FAILURE (the same situation as a market equilibrium under a $4 tax). It follows that, 70 2P 70 2P 4P P = 10 + 2(P 4) = 18 + 2P = 88 = 22.

Substituting P = 22 into demand yields Q = 70 2 22 = 26 or 26,000kg. The dead weight loss associated with the market failure is thus, DWL = or $8,000. (e) A $4 per kilogram tax on bananas (equal in size to the externality) will eliminate the dead weight loss and correct the market failure. Solution to Question 2: Firms producing public goods have diculty generating revenue as consumers can enjoy the full benet of the public good regardless of whether or not they pay. The free-rider problem arises because public goods are non-excludable. For this reason public goods are typically nanced by the government. Some rms, such as free-to-air radio and television stations, are able to privately nance the provision of a public good through advertising. 1 4 4 = 8, 2

Chapter 6

Utility
6.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: An economist observes two consumers in a supermarket. One of the consumers buys a case of Coca-Cola and the other buys a case of Pepsi-Cola. Both colas sell for the same price and the ages and incomes of the consumers are also the same. Based on this information, how would the economist explain the consumers choices? (a) One of the consumers made the wrong choice, but it is impossible to say which one. (b) Both consumers should have considered buying other colas that had lower prices. (c) Both consumers should have purchased less than a case because they would be able to buy more later. (d) Apparently, the consumers had dierent tastes. Question 2: If Paul decides to buy a $60 ticket to watch Manchester United play football instead of a $45 ticket to watch Arsenal, we can conclude that, (a) The marginal utility per dollar spent on a ticket to a Manchester United game is higher than the marginal utility per dollar spent on a ticket to an Arsenal game. (b) Pauls demand for a ticket to a Manchester United game is more elastic than his demand for a ticket to an Arsenal Game. (c) Manchester United is a better football team than Arsenal. (d) The marginal utility per dollar spent on a ticket to a Manchester United game is lower than the marginal utility per dollar spent on a ticket to an Arsenal game.

39

40

CHAPTER 6. UTILITY

Question 3: Total utility is maximised in the consumption of two goods by, (a) Equating the marginal utility for each good consumed. (b) Equating the marginal utility per dollar for each good consumed. (c) Equating the total utility of each good divided by its price. (d) Maximising expenditure on each good. Question 4: During a study session for an economics exam with three other students, Peter commented on an example of a consumer who had to decide on the number of slices of pizza and cups of Coca-Cola he would consume. Peter explained that To maximise his utility this consumer must equate the marginal utility per dollar for pizza and Coca-Cola. Was Peters analysis correct? (a) Peter described one of the conditions necessary for utility maximisation. The consumer also must equate the marginal utility of pizza and the marginal utility of cups of Coca-Cola. (b) Peters statement is correct. (c) Peters statement is correct but we must also assume that the consumer is rational. (d) Peter describes one of the conditions necessary for utility maximisation. The second condition is that total spending on both goods must equal the amount available to be spent. Question 5: Suppose Barry is maximising his utility from consuming used paperback novels and audio books. The price of a used novel is $4 and the price of an audio book is $8. If the marginal utility of the last novel was 32 units of utility (utils) what was the marginal utility of the last audio book purchased? (a) 2 utils (b) 12 utils (c) 16 utils (d) 64 utils

6.2. GROUP EXERCISE

41

6.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Barney loves to smoke cigarettes and drink whiskey. The price of one cigarette is $1.00 and the price of whiskey is $2.00 per glass. Barneys marginal utility of consumption can be summarised by the following table: Cigarettes Number M UCigarettes 1 50 2 30 3 15 4 5 5 -2 Whiskey Glasses M UWhiskey 1 60 2 55 3 30 4 10 5 5

(a) If Barney has $9 of income. Barney can spend his income on cigarettes and whiskey. How many of each product will he consume? (b) Calculate Barneys marginal rate of substitution at the optimal consumption bundle (the answer to part a). (c) If Barneys income increases to $12 what is Barneys optimal consumption bundle? (d) A new tax on cigarettes increases the price to $2.00 per cigarette. What is Barneys optimal consumption bundle? Question 2: From your answers to question 1, what can you say about Barneys demand for cigarettes and whiskey?

42

CHAPTER 6. UTILITY

6.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Sully is a heavy smoker. He smokes between 25 to 30 cigarettes per day, deriving 50 to 60 utils of satisfaction (units of utility), respectively. In the future, however, Sully is likely to develop heart and lung disease. His utility in this stage will be -100. (a) Calculate Sullys marginal utility from smoking cigarettes. (b) Sully has a low valuation for the future relative to the present. In fact one additional util in the future is only worth 0.25 utils today. In terms of utility today, what is Sullys cost of smoking cigarettes? Does this explain why he smokes so much? (c) Sullys doctor has a very serious conversation with Sully about his future health. What relationship between Sullys utility today and in the future must the doctor achieve to stop Sully smoking?

6.4. HOMEWORK SOLUTIONS

43

6.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: When Sully smokes 25 cigarettes he experiences 50 utils, when he smokes 30 cigarettes this increases to 60 utils. If he continues smoking Sullys utility in the future will be -100 due to heart and lung disease. (a) To calculate Sullys marginal utility (the utility Sully derives from smoking one additional cigarette) we need to divide the change in utility by the change in quantity consumed, 60 50 U = = 2. M Ucigarettes = Q 30 25 See gure 6.1 for a graphical representation. U 6 60 50

Utility

25

30

Figure 6.1: Sullys Utility

(b) We can explain Sullys attitude to the future in terms of the following formula, Utoday = 0.25Ufuture where Utoday is utility experienced today and Ufuture is utility that will be experienced in the future. In terms of utility today, the future cost of smoking cigarettes is, Utoday = 0.25 (100) = 25. Since, the discounted future disutility (negative utility) of -25 is less than the utility of 50 to 60 that Sully derives from smoking, Sully is behaving rationally.

44

CHAPTER 6. UTILITY

(c) Sully will stop smoking as soon as present value of sullys future disutility is exactly equal to the maximum utility Sully can derive from smoking today. Thus, Utoday + xUfuture = 0 60 + x (100) = 0 x (100) = 60 60 x= 100 x = 0.6. So after speaking with his doctor Sully will quit smoking so long a Sully values one additional util in the future at least as much as 0.6 utils today.

Chapter 7

Production and Costs


7.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: Gobstopper Industries, a manufacturer of candy, has the short-run total cost function, T C = 50 + 2Q + Q2 , where Q represents the quantity of candy. The expression 2 + 2Q represents, (a) The average total cost of Gobstopper Industries. (b) The average variable cost of Gobstopper Industries. (c) The marginal cost of Gobstopper Industries. (d) None of the above. Question 2: Charlie owns a chocolate factory which employs twenty (20) workers. Charlie faces the short-run production function, Q = 50L L2 . What is the marginal product of labour from employing an additional worker? (a) MP L = 10. (b) MP L = 30. (c) MP L = 600. (d) MP L = 980.

45

46

CHAPTER 7. PRODUCTION AND COSTS

Question 3: A rm purchases an empty block of land for $150,000. One year later the value of the land has increased to $230,000. What is opportunity cost of the land to the rm if it uses the land to build a shopping centre at this time? (a) $80,000. (b) $150,000. (c) $230,000. (d) The opportunity cost cannot be determined without knowing the prot that the rm will earn from the shopping centre. Question 4: Barry starts a small business designing billboards. Barry rents oce space, purchases furniture, and hires his friend Roger as an artist. Which of the following is NOT an opportunity cost of establishing the small business? (a) The rent for the business premises. (b) The salary Barry could have earned working for a large advertising rm. (c) The salary Roger could have earned as an art teacher. (d) Depreciation in the value of the oce furniture. Question 5: Which of the following statements concerning marginal cost is FALSE? (a) Marginal cost slopes up where the law of diminishing marginal returns applies. (b) Marginal cost is the slope of the average total cost curve. (c) Marginal cost crosses the average variable cost curve at its minimum. (d) Average total cost decreases as output increases if AT C > M C .

7.2. GROUP EXERCISE

47

7.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Consider a total cost function of a rm, 1 T C = 190 + 5Q 2Q2 + Q3 . 3 Derive the equations for the rms, (a) Total variable cost TVC. (b) Total xed cost TFC. (c) Average total cost (ATC ). (d) Average variable cost (AVC ). (e) Average xed cost (AFC ). (f) Marginal cost (MC ). Question 2: Why is MC the same when computed from either TVC or from TC ? Question 3: Explain why the MC curve cuts AVC and ATC curves at their minimum points.

48

CHAPTER 7. PRODUCTION AND COSTS

7.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Bill owns and runs a kebab shop. The following data are about his nancial matters in his rst year of business. 190,000 65,000 90,000 9,000 70,000 4,200 14,000 30,000 67,000 Total revenue Salary that Bill could have earned if he had worked for another rm Loan from a bank Interest paid to the bank Purchase of durable assets with his own money Dividend that he could have earned by investing his $70,000 in shares Depreciation of the durable assets Salary for an assistant Raw materials purchased and used

Using only the relevant gures, calculate Bills accounting prot and economic prot for his rst year of business. Question 2: Explain the dierence between explicit and implicit costs, giving examples. Question 3: The equation below shows the short-run total product of a rm as a function of the quantity of labour employed. Q = 6L 2 . (a) Calculate the marginal product (MP L ) and the average product of labour (APL ). (b) Sketch the short-run total production function. (Hint: Try calculating Q for a range of values of L to get a sense of the shape.) (c) Is the marginal product calculated in part (a) consistent with the law of diminishing returns? Explain.
1

7.4. HOMEWORK SOLUTIONS

49

7.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Bills nances are summarised in the following table. Explicit costs are highlighted in red, while implicit costs are highlighted in purple. Entries in black are neither a component of opportunity cost nor prot. 190,000 65,000 90,000 9,000 70,000 4,200 14,000 30,000 67,000 Total revenue Salary that Bill could have earned if he had worked for another rm Loan from a bank Interest paid to the bank Purchase of durable assets with his own money Dividend that he could have earned by investing his $70,000 in shares Depreciation of the durable assets Salary for an assistant Raw materials purchased and used

The total explicit costs are, Total Explicit Costs = 9,000 + 14,000 + 30,000 + 67,000 = 120,000. Bills accounting prot is, Accounting Prot = 190,000 120,000 = 70,000. Bills total implicit costs are, Total Implicit Costs = 65,000 + 4,200 = 69,200. This delivers Bill an economic prot of, Economic Prot = 190,000 120,000 69,200 = 800. Solution to Question 2: Explicit costs are current expenses for purchasing or hiring the inputs required by the rm. Examples include payments for labour, raw materials, electricity, and depreciation of capital. Explicit costs are typically determined by the current market price for the inputs. Implicit costs are the opportunity costs in excess of the explicit cost, associated with the use of rm or proprietor owned inputs. Examples include the opportunity cost of the proprietors labour (salary foregone) or the interest foregone by the rms owner when using his own funds (which could have been invested) rather than borrowing funds and paying interest (an explicit cost).

50

CHAPTER 7. PRODUCTION AND COSTS

Solution to Question 3: Recall that the rms short-run total production is, Q = 6L 2 . (a) The marginal product of labour is the derivative of the total production function with respect to L, the quantity of labour employed by the rm, MP L = dQ dL 1 1 = 6L 2 1 2 1 = 3L 2 .
1

The average product of labour is found by dividing the total product by L, AP L = Q L 1 6L 2 = L 1 = 6L 2 L1 = 6L 2 . (b) See gure 7.1 Q
6
1

Total Product

0 Figure 7.1: Short-Run Total Product

(c) According to the law of diminishing returns as successive units of a variable input are added to a set of xed inputs, beyond some point the marginal product of the variable input declines. Figure 7.1 shows a concave short-run total production function implying that the MP L (the slope of Q) declines as L increases; consistent with the law of diminishing returns.

Chapter 8

Perfect Competition
8.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Questions 13 concern Firey Inc., a rm producing widgets in a perfectly competitive market. The total and marginal cost functions of Firey Inc. are, TC = 70 + 5Q + 2Q2 and MC = 5 + 4Q.

Question 1: The total xed costs of Firey Inc. are, (a) TFC = 5. (b) TFC = 35. (c) TFC = 70. (d) Cannot be determined from the information provided. Question 2: At a market price of P = 35 Firey Inc. will, (a) Produce 145 units. (b) Produce 40 units. (c) Produce 10 units. (d) Produce 7.5 units. Question 3: Firey Inc. will shutdown at a market price of, (a) P = 70. (b) P = 35. (c) P = 5. (d) P = 0.

51

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CHAPTER 8. PERFECT COMPETITION

Question 4: In the short run, if total revenue is less than total variable costs at the prot maximising (loss minimising) output, a perfectly competitive rm should, (a) Shut down. (b) Produce, but will necessarily earn an economic loss. (c) Produce, and could earn either an economic loss or an economic prot. (d) Promote consumer loyalty by advertising. Question 5: Which of the following statements is NOT consistent with long-run equilibrium in a perfectly competitive market? (a) Firms earn zero economic prot. (b) All rms select a quantity of output such that their M R = M C . (c) Firms experience economies of scale. (d) Firms neither want to enter nor exit the market.

8.2. GROUP EXERCISE

53

8.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: A perfectly competitive rm has the following cost function, T C = 120Q 8Q2 + 2Q3 . (a) Derive the average total cost (ATC ), average variable cost (AVC ) and marginal cost (MC ) functions for this rm. (b) At what price will this rm begin producing? What is the corresponding level of output? (c) Suppose that the market price is $120. What quantity will this rm produce? What is the rms prot (or loss) at this level of output? (d) Suppose this rms costs are the same as those of other rms in the perfectly competitive market. Indicate, together with a brief explanation, the numerical value of the critical price level below which this rm will leave the market in the long-run, and above which new rms will enter that market in the long-run. Question 2: Sketch the cost curves of a typical perfectly competitive rm. Show the prices associated with the break-even and shut-down points. Indicate the output ranges over which the rm produces to make a positive economic prot, and to minimise economic losses. Explain.

54

CHAPTER 8. PERFECT COMPETITION

8.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Consider the case of a rm operating in a perfectly competitive market. (a) Sketch market and rm level diagrams illustrating the long-run equilibrium. Be sure to show the relevant cost curves. (b) On the same graph illustrate the eect that an increase in population will have on the market and the rm. What is the consequence of this change for the rms prots? (c) Describe the mechanism by which the long-run equilibrium is restored. Question 2: In the long-run equilibrium of a perfectly competitive market, P = AC = M C. Of what signicance for the ecient allocation of resources are the equalities M C = AC and P = M C ?

8.4. HOMEWORK SOLUTIONS

55

8.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Consider the case of a rm operating in a perfectly competitive market. (a) See gure 8.1. The initial long-run equilibrium occurs at the intersection of the demand and supply curves D1 and S1 in the market level diagram, resulting in a market price P1 . At the long-run equilibrium price the rm produces the quantity Q1 and breaks even. P 6 ATC MC P 6 D1 D2

S1

S2 P2

P1

Q1

Q2

Q 0

Figure 8.1: Long-Run Perfect Competition (b) The increase in population causes the demand curve to shift right to D2 . In the shortrun the market price increases to P2 and the rm responds by increasing production to Q2 . The rm makes a prot as the market price is greater than the rms average total costs at this quantity. (c) Firms enter the market seeking prots. This entry causes the supply curve to shift right. Long-run equilibrium is restored once the supply curve reaches the position S2 , the market price returns to P1 and rms break even. Solution to Question 2: In the long-run equilibrium of a perfectly competitive market rms break even (P = AC ), and rms produce the quantities that maximise their prots (P = MC ). The condition P = MC ensures that the marginal benet that consumers derive from consumption is equal to the marginal cost of production. When consumer preferences are reected in production we say that the market has achieved allocative eciency.

56

CHAPTER 8. PERFECT COMPETITION

The condition MC = AC means that rms are producing at the minimum of their average cost. Production thus achieves productive eciency, minimising the average quantity of inputs used to produce each unit.

Chapter 9

Monopoly
9.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: If a monopolists price is $50 at 63 units of output, marginal revenue equals marginal cost, and average total cost equals $43, then the rms total prot is, (a) $3,150. (b) $2,709. (c) $441. (d) $7. Question 2: The presence of a dead weight loss in a market indicates that, (a) The market has not achieved allocative eciency. (b) The market has not achieved productive eciency. (c) Firms have selected quantities such that M C = M R. (d) The market is not operating at its long-run equilibrium. Question 3: A natural monopoly is a monopoly, (a) That extracts and sells natural resources. (b) That exists as a result of legislation. (c) For which the allocatively ecient level of output is less than the minimum ecient scale of the rm. (d) That has long-run total costs that fall as production increases.

57

58

CHAPTER 9. MONOPOLY

Question 4: The barriers to entry in a monopoly market allow a monopolist to, (a) Earn an economic prot in the short-run. (b) Earn an economic prot in the long-run. (c) Avoid government regulation. (d) Become a price-taker. Question 5: Which of the following factors CANNOT constitute a barrier to entry? (a) A price ceiling at the allocatively ecient price. (b) A reputation for aggressive discounting. (c) Economies of scale. (d) Patents.

9.2. GROUP EXERCISE

59

9.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: A monopoly faces the inverse demand function, P = 51 Q, and the total cost function, T C = 10 + Q. (a) Derive the rms total revenue (TR ) and marginal revenue (MR ) functions. (b) Determine the short-run prot maximising (loss minimising) output, price and total prot or loss for this monopoly. (c) Suppose the government were to impose a price ceiling at the allocative ecient price. What is the value of this price and resulting level of output? (d) Would the monopolist remain in business in the long-run if the price ceiling remained in place? Explain your answer.

60

CHAPTER 9. MONOPOLY

9.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Discuss the barriers to entry that may exist in a monopoly market. Explain how each barrier functions to protect a monopolist from competition. Which barriers, if any, do you feel give rise to monopoly power that is socially justiable?

9.4. HOMEWORK SOLUTIONS

61

9.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Signicant barriers to entry include: Economies of Scale: Economies of scale constitute a barrier to entry when a single rm can service market demand at a lower average total cost than is possible when two or more rms compete. Economies of scale typically arise when production involves large xed costs such as the cost of constructing distribution infrastructure (eg. power lines or water mains). A monopoly protected by economies of scale is called a natural monopoly. An entrant into a natural monopoly market will nd itself at a cost disadvantage, unable to match the low cost production that has already been achieved by the large scale incumbent. Legal Barriers: Legal barriers to entry are any law or legally enforceable right that grants a single rm exclusive access to a market. For example, around the world post oces are often granted exclusive rights to provide services associated with the delivery of letters. Similarly, patent and copyright laws grant the creators of technologies, products and art works exclusive rights to sell these products for a xed period of time. It is illegal to enter a market where the monopolist is protected by legal barriers to entry. Strategic Barriers: Strategic barriers to entry are barriers that result from a monopolys behaviour, or anticipated behaviour. For example, a monopoly could acquire a reputation for ruthlessly competing with entrants, driving them out of the market. Alternatively, a monopoly may seek to lock-in customers through the use of long-term contracts or proprietary technology. Lock-in acts as a barrier to entry by reducing the number of consumers who would be willing to purchase from an entrant. Ownership of Essential Resources: Some goods and services can only be produced by a rm that has access to a specic, scarce resource. For example, a port can only be built on coastal land that has access to deep shipping channels. A rm becomes a monopoly if it controls all of the essential resources in a market. Natural monopolies may be socially desirable because of the productive eciency of not replicating large capital investments. However, it is necessary for government to regulate the natural monopolies price in order to prevent a dead weight loss that outweighs the productive eciency gains. Monopolies created by patents and copyright may also be regarded as socially desirable because of the incentive they create for invention and innovation.

62

CHAPTER 9. MONOPOLY

Chapter 10

Monopolistic Competition
10.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: Which of the following statements is true of the long-run equilibrium in a monopolistically competitive market? (a) Each rms price is greater than its marginal cost indicating that rms make an economic prot. (b) Firms earn zero economic prots indicating that the market achieves allocative eciency. (c) Barriers to entry prevent the market from achieving allocative and productive eciency. (d) There is no market price. Question 2: Suppose that Gobstopper Industries faces the total revenue function, T R = 10Q Q2 . It is most likely that Gobstopper Industries, (a) Is a rm competing in a monopolistically competitive market with a marginal revenue function M R = 10 Q. (b) Is a monopoly with marginal revenue function M R = 10 2Q. (c) Faces the downward sloping inverse demand function P = 10 Q2 . (d) Is a rm competing in a perfectly competitive market. Question 3: As rms enter a monopolistically competitive market the demand of rms already operating within the market, (a) (b) (c) (d) Increases and becomes more elastic. Increases and becomes less elastic. Decreases and becomes more elastic. Decreases and becomes less elastic. 63

64

CHAPTER 10. MONOPOLISTIC COMPETITION

Question 4: Which of the following statements concerning product dierentiation in a monopolistically competitive market is FALSE? (a) Product dierentiation prevents a monopolistically competitive market from achieving allocative eciency in the short-run. (b) Product dierentiation prevents a monopolistically competitive market from achieving allocative eciency in the long-run. (c) Product dierentiation prevents a monopolistically competitive market from achieving productive eciency in the short-run. (d) Product dierentiation prevents a monopolistically competitive market from achieving productive eciency in the long-run. Question 5: A rm in a monopolistically competitive market may use marketing to dierentiate its product. A successful marketing campaign will make the rms demand, (a) Increase and becomes more elastic. (b) Increase and becomes less elastic. (c) Decrease and becomes more elastic. (d) Decrease and becomes less elastic.

10.2. GROUP EXERCISE

65

10.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Firms in perfectly competitive and monopolistically competitive markets are similar insofar as both types of rms earn zero economic prot in the long-run. (a) Draw diagrams illustrating how rms in these two markets can earn economic prots in the short-run. (b) Explain the process by which short-run prots are eliminated in the long-run. How does this process dier between the two market structures. (c) Use diagrams to illustrate this long-run adjustment process under the two market structures. Ensure that you illustrate the zero prot condition in each case. Question 2: Firms in monopolistically competitive markets provide consumers with the benet of product variety, but fail to achieve allocative or productive eciency. Discuss.

66

CHAPTER 10. MONOPOLISTIC COMPETITION

10.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: What are the main dierences between a monopolistically competitive market and a monopoly market? Question 2: Explain how the presence of product dierentiation inuences the way in which rms in a monopolistically competitive market set their prices, as compared to rms operating in a perfectly competitive market.

10.4. HOMEWORK SOLUTIONS

67

10.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: A monopoly market has high concentration (a single rm), high barriers to entry and product dierentiation is not relevant as there is only one rm. In a monopolistically competitive market concentration is low, barriers to entry are low and product dierentiation exists and is important. Firms in both market structures face downward sloping demand and marginal revenue curves and are thus price makers. For rms in a monopolistically competitive market, successful product dierentiation may grant a rm a degree of local monopoly control in the short-run. However, low barriers to entry mean that these short-run prots will be eliminated in the long-run, either as a result of increased competition from new entrants or because rival rms replicate the successful rms innovation. Solution to Question 2: In a perfectly competitive market no rm has market power, as there are a large number of small rms all selling homogeneous (identical) products. It follows that individual rms are unable to inuence the price; they are price takers facing a horizontal demand curve. The market price is determined by the interaction of market demand and supply, individual rms only determine their level of output. In a monopolistically competitive market rms sell dierentiated products granting rms a degree of market power represented by their downward sloping demand curves. Each rm determines its own price through the quantity that it decides to produce. However, even as a price maker the rm is vulnerable to competition from rival rms. The demand curve of a rm in a monopolistically competitive market will move in response to a change in a rivals price and the entry of rival rms into the market.

68

CHAPTER 10. MONOPOLISTIC COMPETITION

Chapter 11

Oligopoly and Game Theory


11.1 Quiz

This quiz consists of ve multiple choice questions typical of the questions that you will encounter on the nal exam. You have ten minutes to complete the quiz. The solutions to this quiz will be posted online on the Friday afternoon following the tutorial. Question 1: Which of the following is a characteristic of an oligopoly market? (a) High concentration of rms. (b) An absence of competition. (c) Free entry. (d) Price taking rms. Question 2: Consider the following game. Which of the following statements is TRUE? Jill Cooperate Cooperate Jack 20 20 1 5 1 5 Deceive 25

Deceive 25

(a) Cooperate is a dominant strategy for Jack, but not for Jill. (b) The Nash Equilibrium is for both players to cooperate. (c) The players in this game would benet from colluding. (d) Neither player has a dominant strategy.

69

70

CHAPTER 11. OLIGOPOLY AND GAME THEORY

Question 3: Identify the Nash Equilibrium of the following game. Jill Left Top Jack 20 21 15 21 19 20 Right 30

Bottom 19

(a) Top, Left. (b) Top, Right. (c) Bottom, Left. (d) Bottom, Right. Question 4: Firms that engage in collusion, (a) Always agree to play their respective dominant strategies. (b) Always agree to play their respective Nash equilibrium strategies. (c) Coordinate their actions to increase total industry prots. (d) Coordinate their actions to increase the prots of each and every rm in the cartel.

11.1. QUIZ Question 5: What is the equilibrium outcome for the game tree below? Jack

71

Left

Right

Jill

Jill

LEFT

RIGHT

LEFT

RIGHT

(20, 20)

(1, 25)

(25, 1)

(5, 5)

(a) Jack chooses Left and Jill chooses LEFT. (b) Jack chooses Right and Jill chooses LEFT. (c) Jack chooses Left and Jill chooses RIGHT. (d) Jack chooses Right and Jill chooses RIGHT.

72

CHAPTER 11. OLIGOPOLY AND GAME THEORY

11.2

Group Exercise

This exercise is to be completed in groups as part of the tutorial class. Your tutor will be available to provide you with guidance should you get stuck. The worked solutions to this exercise will be posted online on the Friday afternoon following the tutorial. Question 1: Answer the following questions regarding collusion with reference to the simultaneous moves game below. The game describes oligopoly competition between two rms. Each rm must choose between charging a high or low price. Payos represent prots in millions of dollars. Bargain Hut High High Big Buy 200 200 30 50 30 50 Low 250

Low 250

(a) What is meant by the term collusion ? (b) What are the diculties facing colluding rms? (c) Why is collusion regarded as socially undesirable? Question 2: When rms choose their prices independently we expect an oligopoly market to operate at its Nash equilibrium. Discuss.

11.3. HOMEWORK QUESTIONS

73

11.3

Homework Questions

Attempt the homework questions before your tutorial. Check your answers against the worked solutions in the following section. Raise any diculties that you have with these questions in your tutorial. Question 1: Suppose Alfa and Romeo are the only two rms in the car market. Each rm plans to put a single model onto the market. There are two possible choices a standard model at the price P = $50,000 or a luxury model at the price P = $80,000. The following payo matrix gives the prot outcomes in millions of dollars. Romeo P = $50,000 P = $80,000 P = $50,000 Alfa P = $80,000 40 35 35 40 45 30 30 45

(a) What is a dominant strategy? What is the signicance of a dominant strategy in game theory? (b) Which rms, if any, have a dominant strategy? (c) What is the Nash equilibrium of this market? (d) Would the rms benet by colluding?

74

CHAPTER 11. OLIGOPOLY AND GAME THEORY

Question 2: Consider the following sequential moves game. An incumbent rm Gorilla Inc. faces potential competition from Fox Ltd., a rival rm. Gorilla Inc. must choose whether or not to invest in new capital equipment, after which Fox Ltd. must decide whether or not to enter the market. The payos, in millions of dollars of prot, are listed in the game tree below. Gorilla Inc.

Invest

Dont Invest

Fox Ltd.

Fox Ltd.

Enter

Dont Enter

Enter

Dont Enter

(300, 100)

(400, 0)

(200, 200)

(500, 0)

(a) How would Fox Ltd. respond to a decision by Gorilla Inc. to invest in new capital equipment? (b) How would Fox Ltd. respond to a decision by Gorilla Inc. not to invest in new capital equipment? (c) What is the equilibrium of this game.

11.4. HOMEWORK SOLUTIONS

75

11.4

Homework Solutions

The worked solutions to the homework questions are included in this volume to aid you in your private study. For the best learning experience attempt the homework questions before referring to the solutions. Solution to Question 1: Recall the following game. Best responses are indicated in red. Romeo P = $50,000 P = $80,000 P = $50,000 Alfa P = $80,000 40 35 35 40 45 30 30 45

(a) A strategy is dominant for a player if it is the best response to each of their rivals strategies. A player who is selecting their strategy independently can never rationalise playing a dominated strategy (any strategy other than their dominant strategy, should one exist) as doing so reduces their payo. In turn, rival players realise this and should expect the dominant strategy to be played. (b) The strategy P = $80,000 is dominant for Alfa as it is the best response to each of Romeos strategies. Romeo does not have a dominant strategy. (c) Since Alfa will play its dominant strategy (P = $80,000), Romeo will select its best response to this strategy which is P = $50,000. (d) No. There does not exist another outcome to this game that is mutually preferred by all players.

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CHAPTER 11. OLIGOPOLY AND GAME THEORY

Solution to Question 2: The equilibrium is illustrated in the game tree below. Gorilla Inc.

Invest

Dont Invest

Fox Ltd.

Fox Ltd.

Enter

Dont Enter

Enter

Dont Enter

(300, 100)

(400, 0)

(200, 200)

(500, 0)

(a) If Gorilla Inc. invests, Fox Ltd. would not enter. (b) If Gorilla Inc. does not invest, Fox Ltd. would enter. (c) In equilibrium Gorilla Inc. invests and Fox Ltd. does not enter.

Appendix A

Formula Sheet
The formula sheet overleaf contains the principal formulas employed in this course. You are expected to become familiar with the notation used in these formulas, as well as the application of these formulas to basic microeconomic problems. This formula sheet will be reproduced on the nal exam.

77

78

APPENDIX A. FORMULA SHEET

Elasticity
= = = %Q %X

Q X X Q

X 2 + X1 Q2 Q1 X2 X1 Q2 + Q1

Production Curves
MP L = dTP dQ = dL dL Q TP = L L

AP L =

Revenue Curves
TR = P Q MR = dTR dQ

Cost Curves
TC = TFC + TVC AFC = AVC = ATC = TFC Q TVC Q

TC = AFC + AVC Q dTC dTVC = dQ dQ

MC =

Appendix B

Learning Diary Assessment Task


The learning diary is a journal that records your personal development as you progress through the Prices & Markets course. Completing the learning diary entry for each topic provides you with the opportunity to revise the content of the lecture, reect on the concepts developed, and relate these to the real world.

B.1

Overview

You are to complete a learning diary entry for each of the eleven (11) topics covered in the course. Your best eight (8) learning diary entries contribute 40% of your nal grade in Prices & Markets (5% per entry). There are a total of ve (5) marks available for each diary entry. Each entry consists of two components: A reective component to be prepared before the tutorial, and a feedback exercise (the quiz) which is incorporated into each tutorial class. Ensure that you clearly write your name, student number, tutors name and tutorial day/time on each diary entry. For your convenience a template diary entry is attached as the last page of this volume.

B.2

Reflective Exercise

The reective exercise is to be completed as part of your review of the lecture material, prior to attending the tutorial class. For each topic you must answer the following question: What did you learn in this topic and how did it change your understanding of the world? The reective exercise is graded out of four (4) marks. Marks will be awarded based on the thoughtfulness of your response. Your response to this question is not to exceed 100 words. You MUST record the total number of words you used at the end of the question. Responses that exceeds the prescribed length, or that do not include a word count, will be penalised. Hint: Complete the learning diary as soon as possible following the lecture, while the content of the lecture is still fresh in your mind. Be concise, remember the word limits. Identify one or two key themes from the lecture; DO NOT list every point covered in the topic. 79

80

APPENDIX B. LEARNING DIARY ASSESSMENT TASK

B.3

Feedback Exercise

The second component of each learning diary entry is the quiz conducted at the beginning of each tutorial class. Each quiz consists of ve (5) multiple choice questions in the style of the multiple choice questions on the nal exam. By completing the quiz in class you will gain valuable feedback both on your performance in the course, and on your mastery of the course content. Do not attempt the quiz before coming to class. The feedback exercise is designed to provide you with experience attempting exam style questions under exam conditions. You will be awarded one (1) mark for completing the quiz, regardless of your performance. This mark is awarded for your participation in the feedback exercise. Your tutor will go through the solutions following the quiz, providing you with immediate feedback on your performance. Important: Students who are late to class, who do not attempt the quiz in the time provided, or who talk or are otherwise disruptive during the quiz, will NOT be awarded the mark for the feedback exercise.

B.4

Submitting Your Learning Diary Entries

The arrangements for submitting your learning diary entries will be conrmed by your lecturer. More information can be found in the course guide.

PRICES & MARKETS Learning Diary

Name: Tutor: Lecture Topic:

Student Number: Tutorial Day/Time:

What did you learn in this topic and how did it change your understanding of the world?

Word Count (max 100):

Quiz Responses:
Q1: Q2: Q3: Q4: Q5:

Marks Awarded:
Reective Exercise: Feedback Exercise: Total: