Economics and Business Environment Coursework 2

Student Id: 10256925

Student Name: Moslem Behrooz

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1)

The marginal cost climbs sharply, indicating or showing that it would be expensive or very much
costly for the business to create or develop more units of the service. The monopolistic
corporation would find it challenging or interesting to compete with alternative or other means of
getting to the island, like boats or flights, because of these high expenses. Because of this, the
monopoly corporation would eventually be unable to maintain its position in the market. Due to
the high production costs, declining demand, and declining marginal profitability, the private
monopoly corporation would not be eager to offer the transport service to the far-off island. Due
to competition from other modes of transportation, the monopoly corporation would struggle to
cover its expenses and turn a profit. In addition to the previously mentioned considerations, the
graph's form suggests that the market for this service may not be particularly vast, which would
restrict the monopoly firm's potential earnings. Additionally, the increasing average total cost
and marginal cost suggest that the firm's efficiency declines with expanding production. This
inefficiency would make it unattractive for a private monopolistic corporation to offer this
service, along with the challenge of rising rates owing to the declining demand.

2) a)

Phillip advertises Phillip does not advertise

R.J.advertises Phillip:$50m<br>R.J.:$50m Phillip:$75m<br>R.J.:$25m

R.J.does not advertise Phillip:$25m<br>R.J.:$75m Phillip:$50m<br>R.J.:$50m

Table: Payoff Matrix

The columns in this matrix indicate Phillip's decision to advertise, and the rows in this matrix
represent R.J.'s decision to promote or not. The first number in the cells represents Phillip's
profits, while the second number represents R.J.'s profits. The values in the cells represent the
profits produced by each firm after advertising expenses.

As an example, If both businesses decide to promote, the market will be split equally and they
will each make $50 million in earnings. If Phillip decides to promote but R.J. does not, Phillip
will take 50 percent of R.J.'s clients and make earnings of $75 million while R.J. makes just $25
million. Both businesses will split the market equally and make equal earnings of $50 million

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each if they decide not to promote. The decisions made by each company and the tactics used by
their rivals determine how this game will turn out.

b)

A Nash equilibrium in game theory is a situation where each player is doing as best they can
given the other players' choices. The Nash equilibrium in this situation is when Phillip and R.J.
both decide to promote or decide not to advertise. If Phillip decides to promote but R.J. does not,
Phillip will take 50 percent of R.J.'s clients and make earnings of $75 million while R.J. makes
just $25 million. R.J. would therefore have the motive to advertise as well to prevent this result.
However, if both businesses decide against advertising, they will equally split the market and
both make $50 million in earnings, which is a steady result.

Because of this, the Nash equilibrium in this game is for both enterprises to choose to advertise
or not, and not to use alternative tactics. It is crucial to keep in mind that this equilibrium is
predicated on the idea that both businesses would behave rationally and in their own best
interests, which may not always be the case in real-world scenarios.

c)

In the scenario shown in the table above, the federal government's prohibition on tobacco
advertising on TV in 1971 would have affected the outcome. Both businesses would have been
obliged to find alternative methods of client attraction if they had not had the option of TV
advertising, such as through print advertisements, sponsorships, or product improvements. Given
that advertising has been a crucial component of tobacco corporations' marketing efforts for
many years, their objections to the prohibition were probably sincere. However, it's also
conceivable that the demonstrations were planned to persuade the administration to drop the ban
or postpone its implementation.

It is difficult to determine for sure whether the protests were sincere without learning more about
the precise objectives of the cigarette industry and its leaders. However, it is obvious that the
prohibition of TV advertising profoundly altered the advertising environment for cigarette
corporations, necessitating the adaptation of their methods for them to remain competitive.

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3)

It is not always a sign of cooperation when PepsiCo and Coca-Cola set similar prices for
respective goods. Collusion is when two or more businesses work together to reduce competition
and raise prices unnaturally.

PepsiCo has made several moves in the "Cola Wars" story from The Economist (26-09-2020)
that indicate the companies do not conspire. First off, PepsiCo has made significant investments
in advertising to outperform Coca-Cola in the market. Second, if the companies were conspiring
to reduce competition, PepsiCo would not have created new product lines and flavours to cater to
various market segments. Last but not least, PepsiCo has used aggressive price tactics, such as
providing discounts and promotions, which are incompatible with colluding behaviour.

4)

a) Shows that the Legal Department has more decision power than the Research and

Development Department TRUE / FALSE.

Ans: FALSE

b) Shows that the assumption of profit maximisation made by economists is unrealistic

because the firm incurs product development costs without concomitant gains from

manufacturing TRUE / FALSE.

Ans: FALSE

c) Creates barriers to entry for future competitors TRUE / FALSE.

Ans: TRUE

d) Illustrates that it is worried about being fined by the competition authorities TRUE /

FALSE.

Ans: FALSE

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5)

A)

Online second-hand clothing sites

c) reduce the market share of incumbent sellers

This is because online marketplaces for used clothing put traditional clothing retailers in
competition, which lowers their market share. There are more options available to consumers,
which may cause demand to shift away from established sellers. There is no proof that internet
marketplaces for used apparel restrict customer choice, earn monopolistic profits, or shift risk
from the consumer to the producer. In fact, these websites can give customers greater flexibility
and choice while lowering the likelihood of waste and promoting sustainability.

B)

a)

Due to the easy and effective platform that electronic apps have provided for consumers and
sellers to interact, the second-hand clothing sector has seen an increase in trade. The apps offer a
convenient and approachable venue for people to purchase and sell used apparel, which could
increase the market for these products. This new trade is more convenient for both buyers and
sellers because it is not constrained by physical store hours or location. Additionally, by creating
a market for used clothing items that may otherwise be thrown away, the usage of electronic
apps helps minimise waste and advance sustainability. As a result, the market for used apparel
has experienced rapid expansion and created new business prospects for both people and
corporations.

b)

Externalities are created when electronic apps are used in the second-hand clothing market
because they may have unanticipated good or bad consequences on people or businesses that are
not directly involved in the transaction. By lowering the amount of clothing trash that ends up in
landfills, for instance, the rising demand for used clothing items can benefit the environment.
However, the increasing competition from internet retailers can have a negative externality in the

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form of lost sales and probable job losses in traditional brick-and-mortar apparel stores. These
side effects illustrate the second-hand clothes market's broader social and economic effects that
go beyond the direct interactions between buyers and sellers.

c)

As the quality and condition of things can vary widely, it would be misleading to argue that the
use of electronic apps in the second-hand clothing market promotes individuals to buy rubbish.
Others may use these platforms to sell high-quality, gently-used apparel that is still in good
condition, while some people may use them to sell low-quality or worn-out stuff. Additionally,
by increasing garment reuse and lowering waste, the usage of second-hand clothes applications
can promote more sustainable purchase practices. However, it is crucial for purchasers to use
judgement and make sure they are investing in goods that satisfy their demands and are of a
livable quality.

6)

a) True, the use of antibiotics by farmers creates a negative externality problem by generating
drug-resistant bacteria that harm future users of antibiotics.

b) True, farmers may not have an incentive to stop administering antibiotics to their herds
because it benefits their immediate interests in protecting their animals, even though it may harm
the wider community by creating drug-resistant bacteria.

c) False, subsidizing antibiotics would create a moral hazard by encouraging farmers to use them
excessively and could exacerbate the harmful externality problem.

d) True, the use of antibiotics by farmers creates a negative externality problem by generating
drug-resistant bacteria that harm future users of antibiotics.

e) False, the use of antibiotics by farmers does not generate a positive externality problem as it
does not create a spillover benefit to the wider community beyond the farmers themselves.

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7)

1. “Hamburger: Private good, rival and excludable.

2. Lighthouse: Public good, nonrival and nonexcludable.
3. Flood control: Public good, nonrival and nonexcludable.
4. Swimming pool in my backyard: Private good, rival and excludable.
5. Public Park: Common resource, rival and non-excludable.
6. Broadcast television by the BBC: Public good, nonrival and nonexcludable.
7. Cellular telephone service: Club good, rival and excludable.
8. Computer software: Club good, rival and excludable.
9. Motorway: Common resource, rival and non-excludable.
10. Inoculation against the Covid-19 pandemic: Public good, nonrival and nonexcludable.
11. Grammar rules of the English language: Public good, nonrival and nonexcludable.
12. Streaming Video on Demand supplied by Netflix: Club good, rival and excludable.”

8)

i. YES

ii. YES

iii. YES

iv. YES

v. YES

vi. YES

vii. YES

viii. YES

ix.

Since regulations, subsidies, taxes, and transfer payments have an impact on the economy, the
ratio of government spending to GDP may not accurately indicate the extent of the government's

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engagement in the economy. The informal sector and shadow economy are not included in GDP,
further obscuring the true extent of government participation in the economy.

9)

1. NEITHER
2. FALSE
3. TRUE
4. NEITHER

10)

The equilibrium level of real GDP is:

c) 2400

11)

A)

The following formula can be used to determine the equilibrium income level:

Y=C+I

where Y stands for income, C for spending, and I for investment.

Given as £5 million, autonomous consumption has a marginal propensity of 0.75. Consumers

will spend £0.75 and save £0.25 for every additional £1 in income, according to this. Therefore,
consumption can be defined as

C = Marginal Propensity to Consume x Income + Autonomous Consumption.

C = £5,000,000 + (0.75 times Y)

The figure for business investment is £60 million.

Using these values as a substitute in the equilibrium equation, the user obtains

Y=C+I

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Y = £5,000,000 + (0.75 x Y) + £60,000,000

Y = £65,000,000 plus 0.75Y

To solve for Y, the user obtains:

0.25Y = £65,000,000

Y = £260,000,000

Therefore, £260 million is the equilibrium level of income.

The following formula can be used to calculate the multiplier of private investment:

Multiplier = 1 / (Marginal Consumption Propensity - 1)

Multiplier = 1 / (0.75 - 1.0)

Multiplier = 4

The multiplier of private investment is therefore 4, which means that an increase in private
investment of £1 will increase economic income of £4.

B)

By deducting taxes from total income and adding government spending, one can get the new
equilibrium level of income:

Y=C+I+G

Autonomous consumption plus MPC(Y - T) = C.

T = lump sum tax = 1,500 per person multiplied by 10,000 people is £15,000,000.

I = £60,000,000 in business investments

G is equal to £15,000,000 in government spending.

Consumption Autonomous = £5,000,000

MPC = 0.75

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Equations are changed by substituting the values:

Y = (5,000,000 + 0.75(Y - 15,000,000)) + 60,000,000 + 15,000,000

Y = 5,000,000 + 0.75Y - 11,250,000 + 60,000,000 + 15,000,000

Y = 68,750,000

Therefore, £68,750,00 is the new equilibrium income level.

C)

The marginal propensity to consume, or MPC, determines the multiplier for private investment,
which is equal to 1/(1-MPC). The multiplier for private investment is 1/(1-0.75) = 4 in this
instance since MPC = 0.75. Government spending is multiplied by 1/(1-MPC + 1-MPT + 1-
MPX), where MPT stands for marginal propensity to tax and MPX for marginal propensity to
import. In this scenario, MPT = 1, since the tax is a lump sum tax that is independent of income,
and MPX is considered to be zero. Therefore, 1/(1-0.75+1) = 1/(0.25) = 4 is the multiplier for
government spending.

12)

MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q
is real output, which is the equation for the Quantity Theory of Money. Solving for P, the user
gets P = MV/Q.

The user can say that Q rises by 1% if real income rises by 1%. If the money supply rises by 6%,
the user can say that M increases by 6%.the user assumes that V is constant in the short run.

Therefore, based on the equation for the quantity theory of money, the user can state that the rate
of inflation (or percentage change in the level of prices) is:

P = MV/Q

P = 1.05(M/Q) = (1.06M)/1.01Q

As a result, the inflation rate would be 5%.

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13)

The correct answer is (a) shift the long-run Phillips curve to the left.

14)

i. WRONG

ii. CORRECT

iii. WRONG

iv. CORRECT

v. WRONG

vi. CORRECT

vii. WRONG

viii. CORRECT

ix. WRONG

x. CORRECT

15)

a) TRUE

b) FALSE

c) TRUE

16)

The user can compare the costs of identical commodities in two different nations using the
exchange rate to see if the Purchasing Power Parity (PPP) holds. The fundamental tenet of PPP is
that the ratio of price levels in two nations should be reflected in the exchange rate between the
two currencies.

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We can use the following exchange rate to convert the cost of a Big Mac in London from pounds
to dollars in order to compare the prices of Big Macs in New York and London:

Big Mac costs £3.49 in London.

Currency conversion: $1 = £0.73

In London, a Big Mac costs £3.49 divided by 0.73 to equal $4.77.

Now that the user has the dollar prices for Big Macs in New York and London, the user can
compare them.

$5.65 is the Big Mac cost in New York.

Big Mac costs $4.77 in London in U.S. dollars.

According to PPP, the pound is undervalued in relation to the dollar because a Big Mac in
London costs less in dollars than a Big Mac in New York.

The user can therefore conclude that the pound is undervalued relative to the dollar according to
PPP based on the Big Mac prices in the two cities.

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