Coursework 2 – ECO701 – Jan 2023 term

ECO701 Economics and the Business Environment Coursework

January 2023 Semester

2nd Coursework
This coursework contains a series of questions. Please complete all the questions
utilising economic concepts, models and wider reading. There is no specific format
required i.e., report or essay format, but you are expected to write in appropriate
Professional and Academic English.
Please note the question that you are addressing and provide an answer to the
question.
The word limit of this coursework i.e., completion of all questions is 2000 words
(excluding graphs, tables and references).
The Deadline for submission is by 23:59 on the 07/05/2023. Submissions should be
made via the Blackboard site for this module.
The submission link can be found in the Assessment section, titled as: Coursework 2
Deadline: 07/05/23 by 23:59.

QUESTIONS
(1) The Figure below shows the Demand, Marginal Revenue (MR), Average Total Cost (AC)
and Marginal Cost (MC) of a transport to a remote island. Explain why a private monopoly
firm will not be interested in providing the service (8%)
Coursework 2 – ECO701 – Jan 2023 term

(2) In the 1960s, tobacco producers engaged in fierce battles for market share. The major
weapon in that war was advertising designed not to attract new smokers, but to lure smokers
away from competing brands. Consider the following scenario: There are two tobacco sellers,
Phillip and R.J., each of whom can choose to advertise on TV (at a cost of $20 million) or
not. There are $100 million of pre-advertising profits available to the two firms. If they both
adopt the same advertisement budget, they will split the market evenly and earn equal profits.
If one chooses a high advertisement budget of $20 million while the other chooses not to
advertise (cost of advertisement = $0), the advertising firm will steal half the other’s
customers and capture $75 million of pre-advertising profit; the other will earn $25 million.

a. Draw the payoff matrix of the game showing profits after advertisements expenses (3%)
b. What is the Nash equilibrium in this game? (3%)
c. In 1971 the federal government banned cigarette advertising on TV. Initially, tobacco
companies protested vehemently. Referring to the game table above, discuss whether the
protests were genuine (3%)

(3) Pepsi Co and Coca Cola charge very similar prices for almost identical products: The
Pepsi Max price is £0.12 /100ml and the Diet Coke price is £0.11 / 100 ml. This can be taken
as indication of collusion. Yet, by reading the article “Cola wars” from The Economist 26-09-
2020, suggest three types of actions taken by PepsiCo show that the firms do not collude
(3%)

(4) By filing patents that are not subsequently used a firm (4%)
a) Shows that the Legal Department has more decision power than the Research and
Development Department TRUE / FALSE. 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. FALSE
c) Creates barriers to entry for future competitors TRUE / FALSE TRUE
d) Illustrates that it worried about being fined by the competition authorities TRUE /
FALSE. FALSE

(5) Read the three “Fashion as an asset class _ Technology has made it easy and worthwhile
to sell old clothes”, The Economist 18-12-2021
(A) Which of the following statements are true and why
Online second-hand clothing sites
a) undermine consumer choice (1%)
b) generate monopoly profits (1%)
c) reduce the market share of incumbent sellers (1%)
d) transfer risk from consumer to producer (1%)

(B) Explain how the use of electronic Apps in the second-hand clothes market:
(a) generate new trade (2%)
(b) generates externalities (2%)
(c) encourages people to buy junk (2%)
Coursework 2 – ECO701 – Jan 2023 term

(6) Livestock farmers frequently give antibiotics to their herds to protect them from diseases.
However, the antibiotics create drug-resistant bacteria; in turn, the latter harms future users of
antibiotics, animals and humans who will be using less-effective drugs. Answer the following
a) The use of antibiotics by farmers must be banned because it generates a negative
externality problem
b) Farmers have no incentive to stop administering antibiotics to their herds YES / NO
(1%)
c) The government should subsidize antibiotics to encourage farmers to protect their
animals YES / NO (1%)
d) The use of antibiotics by farmers must be banned because it generates a negative
externality problem YES / NO (1%)
e) The use of antibiotics by farmers must be banned because it generates a positive
externality problem YES / NO (1%)

(7) Classify each of the following goods between private good, public good, club, and
common resource using and report whether it is rival / nonrival, and excludable /
nonexcludable (12%)
1. Hamburger
2. Lighthouse
3. Flood control
4. Swimming pool in my backyard
5. Public Park
6. Broadcast television by the BBC
7. Cellular telephone service
8. Computer software
9. Motorway
10. Inoculation against Covid-19 pandemic
11. Grammar rules of the English language
12. Streaming Video on Demand supplied by Netflix
 

(8) Read the article “Governments are not going to stop getting bigger” from “The
Economist Newspaper 20-11-2021. Answer the following:

The size of government grows because of …

i.
ii. The high wage claims by powerful public sector labour unions YES / NO (1%)
iii. High military spending during war never returns to its pre-war level YES / NO (1%)
iv. Heavy regulation of private industry for environmental protection YES / NO (1%)
v. Ideological conviction in favour of state intervention YES / NO (1%)
vi. Citizens are unaware of the true tax burden required to pay for public services YES /
NO (1%)
vii. Taxes to pay for public expenditures are shifted to future generations through deficit
government spending YES / NO (1%)
viii. Why the ratio of government spending to GDP may not reflect the true size of
government involvement in the economy? (2%)

(9) Read the article “A focus on GDP understates the strength of America’s recovery”
Coursework 2 – ECO701 – Jan 2023 term

from “The Economist” Newspaper 24-05-2022. Answer the following

1) GDI is a better indicator of human happiness than GDP TRUE / FALSE /
NEITHER (1%)
2) GDP and GDI should sum up to the same total, but they do not because of tax
evasion TRUE / FALSE / NEITHER (1%)
3) Covid 19 distorted the accuracy of GDP accounting TRUE / FALSE /
NEITHER (1%)
4) For policy purposes focusing on an overestimated GDI is worse than focusing on
an overestimated GDP. TRUE / FALSE / NEITHER (1%).

(10) In the table below, C is consumption expenditure, I is investment, G is government

expenditure, and NX is net exports. All figures are in pounds. (2%)

The equilibrium level of real GDP is:

(A) £2200 (B) £2500 (C) £2400 (D) £2300

(11) Assume an economy where Autonomous Consumption = £5 million; Marginal

Propensity to Consume = 0.75; Business Investment = £60 million; Population =10,000
A. Find the equilibrium level of income and the multiplier of private investment (4%)
B. Now assume that a government sector is introduced providing a variety of public
services at a total expenditure of £15 million. The latter is financed by a lump sum tax
of £1,500 per person (that is, each citizen pays a poll tax of £1,500 independently of
their income) so that the government budget is balance (10,000×1,500=15,000,000).
Find the new equilibrium level of income (4%)
C. Calculate the size of the multipliers of private investment and of government
expenditures and explain why they differ (4%)

(12) Use the Quantity Theory of Money to find the rate of inflation when real income grows
by 1% and the money supply rises by 6% (3%)

(13) An increase in worker productivity brought about by the introduction of new technology
into the workplace will (2%)
(a) shift the long-run Phillips curve to the left.
(b) shift the long-run Phillips curve to the right.
(c) decrease aggregate demand, since workers will lose their jobs.
(d) increase inflation in the short run
Coursework 2 – ECO701 – Jan 2023 term

(14) Which of the following views expressed by various journalists are CORRECT /
WRONG after the Bank of England increases the UK interest rate?

i. UK exports will increase CORRECT / WRONG (1%)

ii. The sterling will appreciate CORRECT / WRONG (1%)
iii. Because of higher rates commercial banks will be safe to lend bigger sums to riskier
applicants CORRECT / WRONG (1%)
iv. The cost of government debt will increase CORRECT / WRONG (1%)
v. The government must revoke the independence of the Bank of England and allow the
Treasury to set the interest rate CORRECT / WRONG (1%)
vi. Interest rates on consumer credit will increase CORRECT / WRONG (1%)
vii. Had Britain been a member of the EU, an even greater interest rate would have been
needed CORRECT / WRONG (1%)
viii. The interest rate increase would have taken place even if Britain had stayed in the EU
CORRECT / WRONG (1%)
ix. Since for long-run growth only the supply side of the economy matters interest rate
changes are irrelevant CORRECT / WRONG (1%)
x. We will hardly notice an immediate effect after the interest rate rise which may
prompt the Bank of England to raise the interest rate again CORRECT / WRONG
(1%)

(15) Read the article “Do the poor face higher inflation?” from the Economist Newspaper 09-
06-2022. Answer the following
a) If state pensions rise by the same rate as inflation hits the poor and the rich are equally
hit TRUE / FALSE (1%)
b) Faced with cost-push inflation, budget brands increase prices by higher percentages
than premium brands (1%)
c) The poor face higher inflation rate than the rich because they tend to buy budget
brands, while the rich tend to buy premium brands (1%)

(16) See the Table below: (4%)

New York London
Big Mac price $5.65 £3.49
Exchange rate of $1 $1 £0.73

Given the above values identify whether the Purchasing Power Parity is valid or the £
overvalued or undervalued against the $

NOTES:
Coursework 2 – ECO701 – Jan 2023 term

Plagiarism: Plagiarism is the act of taking or copying someone else’s work, including another student’s,
and presenting it as if it were one’s own. The University’s policy is that plagiarism, whether deliberate or
unintentional, is a form of cheating and is unacceptable.
The University has a plagiarism policy in place with the framework of penalties available at
http://www.ulster.ac.uk/academicservices/staff/offences.pdf

Exceeding the word limit: Penalties for exceeding the word limit:
Up to 10%: no penalty
11-20%: 10% deduction
>20%: fail, with a mark of zero awarded

Feedback: Assignments will be returned within two weeks from the submission deadline and model
solutions will be uploaded on the Blackboard.