Faculty of Business, Economics and Law

Bachelor of Business
(Incorporating Graduate Diploma in Business & Graduate Certificate in Business)

ECONOMIC PRINCIPLES
ECON502

ASSIGNMENT 1
SEMESTER TWO 2020

INSTRUCTIONS

Due Date: Week 7 (Midday Friday 4 September, 2020)

Hand In: Electronic Submission via Blackboard

Marks: This assignment is marked out of 100 and carries a weight

of 40% of the total assessment for this paper. Show all
workings (There is only partial credit for correct answers
without work).
Question 1: CONSUMER CHOICE (20 marks)
(a) John has a budget of $160 a week to spend on food. He likes meat (x) which costs
$10 a unit, and potatoes (y) which cost $4 a unit. Calculate and illustrate his budget
constraint.
(b) Following on from (a) assume that the price of potatoes increases to $5 a unit.
Calculate and add this to your illustration.
(c) Assume that John’s optimal consumption bundle (OCB) contains 10 units of meat.
Calculate his OCB and add this to your illustration appropriately.
(d) Consider the below statements and comment on what they imply, and why, about
the consumer’s preferences:
i. Jane says she prefers walnuts over almonds and prefers almonds over
cashews. What can we reasonably expect her preference between walnuts
and cashews to be?
ii. Jim says he prefers bundle A=[ x 1 , y 1 ] over bundle B=[x 2 , y 2] . What can
reasonably conclude about the two bundles?
iii. June was initially keen to trade with her friends in the playground 2 of her
mints for 1 lemon sour, but after a few trades she started only offering 1
mint.
(e) Jack always consumes a unit of pie (x) with a unit of chips (y) and vice versa. He
budgets $210 a year for pie and chip consumption. If pie costs $5 a unit and chips
cost $2 a unit, specify his budget constraint as an equation and calculate his yearly
OCB.
(f) Use the following information to calculate Jill’s OCB and her resulting utility.
BC :360=3 x +2 y
IC :U ( x , y )=xy

Question 2: SUPPLY & DEMAND (15 marks)

(a) Consider the following demand and supply schedules and specify the inverse
demand and supply curves:

Price Quantity Demanded Quantity Supplied

$6 9 4
$10 7 12
$14 5 20

(b) Transpose the following inverse demand function into a demand function:
D : P=30−0.25 Q.

(c) Consider the following market information and solve for equilibrium price and
quantity.
D : P=100−0.5 Q
S : P=25+ 0.25Q
 (d) Consider the following market information and solve for equilibrium price and
quantity.
2
D : P=1250−3Q
S : P=125+2 Q2
(e) Consider the following market information and solve for equilibrium price and
quantity.
100
D : P=
Q
S :Q=20

Question 3: SUPPLY & DEMAND Applications (20 marks)

(a) Consider the following market information and solve for equilibrium price and
quantity. Then illustrate this market making sure to include all intercepts.
D : P=200−2Q
S : P=50+Q

(b) Based on your answers to (a) calculate consumer and producer surplus for the
market.
(c) Assume that the government now applies a price floor of $120 to this market.
Calculate the impact on the market. Add this to your illustration in (a).
(d) Following on from (c) calculate the new consumer surplus, producer surplus, and the
minimum deadweight loss.

Question 4: Externalities & Common Resources (15 marks)

(a) Consider the below information for a merit good and calculate the size of the
Pigouvian subsidy required to internalise the positive externality associated with the
consumption of this good.
D : P=70−10Q
S p c : P=30+ 4 Q
SSB : P=25+ 4 Q

(b) Consider a local market for firewood, which is associated with negative health
outcomes due to its contribution to air pollution. Currently, 35 homes burn
firewood. The local council wishes to reduce this number to 25 homes. What is the
minimum sized Pigouvian tax that will achieve this policy goal?
D : P=160−2Q
S : P=20+2 Q

(c) How much tax revenue will this raise for the local council?
(d) A Village has a common green that can be utilised by villagers. Seven Villagers each
have $125 to invest. They can invest in government bonds returning 4% in one year's
 time. Alternatively, they can purchase a goat to graze on the green for $125. The
return on goats, after a year, is given by the below table. Calculate the optimal
number of goats that should be purchased to maximise returns to the village.

Quantity of Goats Price of Goat(s) after a year

1 200
2 180
3 165
4 156
5 150
6 142
7 126

Question 5: Monopoly (15 marks)

(a) A monopoly’s demand function is given by: D ; P=180−4 Q . It’s costs are given by:
AC=MC =20. Calculate the firm’s profit.
(b) Based on (a) illustrate this market, including all intercepts, and calculate the
deadweight loss caused by the monopolisation of this market.
(c) The profit function for a second monopoly is given by: π=2304 Q−3 Q3−576 .
Calculate the firm’s fixed costs.
(d) Using the profit function in (c) calculate the firms profit if it firm produces 10 units.
(e) Using the profit function in (c) calculate the quantity of units this firm should
produce in order to maximise profit.
Question 6: Game Theory (15 marks)
(a) Consider the following payoff matrix for a game. Does either player have a dominant
strategy? Is there a Nash equilibrium/equilibria? Explain your answer.

Player B
Player A Left Right
Top 2,4 6,2
Bottom 4,8 8,6

(b) Consider the following payoff matrix for a game. Does either player have a dominant
strategy? Is there a Nash equilibrium/equilibria? Explain your answer.

Player B
Player A Left Right
Top 12,12 12,9
Bottom 15,6 9,9

(c) Reconsider the payoff matrix in (b) and sketch the payoff matrix as a game tree,
assuming player A is the first mover. Using backwards induction, solve your game
tree. Explain your answer.