Prices and Markets
0-63500
Prices and Markets
Assessment Task 3 Student Template
Assessment Task 3 Cover Sheet
Student Name Student ID Lecture Group Questions attempted (please tick only 5) Q1 Q2 Q3 Q4 Q5 Q6
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[Note: Delete all the text of the questions and instructions given in square brackets and simply retain question numbers and subparts numbers with each question while submitting your final document. You should also delete the text of the question not attempted, only retaining its question number.]
[This assessment is based on topics covered in Weeks 1 to 11. To successfully complete the assignment, answer any 5 of the following 6 questions. Each question is worth a total of 10 marks. If more than 5 questions are answered, marks will be awarded for the first 5 answers only. Follow the instructions and word limit while answering each of the questions and their sub-parts.]
Question 1
[McDonalds, a big burger joint, is charging $5 for its very famous Big Mac hamburger and selling 20 million Big Mac a year in Australia.]
[Suppose McDonalds increases the price of its Big Mac to $6 and still manages to sell the same quantity of the Big Mac. How much revenue will McDonalds gain? What can you infer about the price elasticity of demand (PED) for McDonalds Big Mac? Assume in an alternative scenario, the increase in the price of the Big Mac to $6 reduces its quantity sold to 18 million. How much revenue will McDonalds gain now? What can you conclude about the PED now? (4 marks)]
[Given the two scenarios presented in part (a), which one do you think is more likely and why? Present evidence in 100 words or less to support your prediction. Acceptable forms of evidence include books, journal articles, or news reports. (2 marks)]
[Suppose McDonalds Big Mac and movie tickets have a negative cross price elasticity of -1.5. What does this number tell us about the relationship between the Big Mac and movie tickets? Suppose that Village Cinemas, one of Australias leading cinema exhibitors, decides to increase the price of its movie tickets by 10%. How will this development affect McDonalds pricing decisions as indicated in part (a)? Discuss both the scenarios (as presented in part (a)) in 200 words or less. (4 marks)]
Answer
Question 2
[Tobacco King is a monopolist in the cigarette market in Nicotiana Republic, where the Australian dollar is used as the official currency. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. The firms demand curve can be expressed as P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $).]
[In a table show Tobacco Kings demand schedule, total revenue, average revenue, and marginal revenue for prices $2, $4, $6, and $8. (Hint: demand schedule refers to prices and quantity demanded at those prices). (4 marks)]
[Based on the table created in your answer to part (a), show Tobacco Kings average revenue and marginal revenue curves on a graph. Comment on why the MR curve lies below the AR curve in 100 words or less. (3 marks)]
[Add the marginal cost curve to the graph drawn in part (b). Find the price and quantity combination of cigarette packets at which Tobacco King will maximize its profit. (3 Marks)]
Answer
Question 3
[The drainage of waste products from the chemical factory, Ultra Chemicals, situated along the banks of the Misty River has led to the formation of a dead zone in the river that cannot support aquatic life.]
[Without any government intervention, will Ultra Chemicals produce a socially optimal quantity? Why or why not? Explain your answer in 200 words or less with the help of a suitable diagram. (5 marks)]
[Does Ultra Chemicals impose a deadweight loss on society? Explain in 100 words or less. Use your diagram to show the deadweight loss to society. (3 marks)]
[How can a government intervene to improve upon the outcome from societys point of view? Explain in 100 words or less. Diagram not needed. (2 marks)]
Answer
Question 4
[Two home-improvement stores (Great Home and Super Home) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. Two possible actions for both the firms are: increase the size of the store and parking lot and do not increase the size of the store and parking lot. Payoffs are defined in terms of increase in annual profits in $million. The following table describes the payoffs for both the firms to alternative actions taken by each of them. Note, Great Homes payoffs are given first and Super Homes payoff are given second.]
Super Home
Increase
Do not increase
Great Home Increase
($1.5 million, $1m) ($3.4m, $0.4m)
Do not increase
($0.6m $3.2m) ($2.5m, $2m)
You can delete this table as well from your submitted file.
[Lets say, each store is pursuing its own best interest. What will be a rational (or dominant) strategy for Super Home to follow? Explain in 3-4 sentences. What will be a rational (or dominant) strategy for Great Home to follow? Explain in 3-4 sentences. (4 marks)]
[What will be the annual profit growth for each store, if they both follow their dominant strategy? Define Nash Equilibrium and identify the Nash Equilibrium in the table above. (4 marks)]
[Suppose the owners of Super Home and Great Home meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize profit. What should the joint strategy be they should both agree to? What will annual profit growth be for each store under this agreement? (2 marks)]
Answer
Question 5
[There are 100 workers in Vietnam, and each worker can produce either 10 shirts or 2 hats. There are 200 workers in Bangladesh, and each can produce 4 shirts or 10 hats.]
[Draw the Production Possibility Curves (PPC) for each country. What is the opportunity cost of shirts in Vietnam? What is the opportunity cost of shirts in Bangladesh? Which country has a comparative advantage in the production of shirts? (5 marks)]
[In the absence of trade, if Vietnam consumes 600 shirts, how many hats can it consume? In the absence of trade, if Bangladesh consumes 500 hats, how many shirts can it consume? (2 marks)]
[Someone now proposes that Bangladesh and Vietnam enter into a trade agreement. Under this agreement, Bangladesh will give Vietnam 500 hats and Vietnam will give Bangladesh 200 shirts. If Vietnam continues to consume 600 shirts, how many hats will it be able to consume under this proposal? If Bangladesh continues to consume 500 hats, how many shirts will it be able to consume under this proposal? Should Vietnam accept this proposal? Should Bangladesh accept this proposal? (3 marks)]
Answer
Question 6
[Payroll tax is like a sales tax but applies to workers wages. Many economists have called the state payroll tax a tax on employment.]
[Suppose that the equilibrium wage is given by $18 per hour. The government introduces a payroll tax on employment of $4 per hour that must be paid to the government by employers. Show in a diagram, how this will lead to a reduction in employment (quantity of labour employed in hours). Explain in 100 words or less who will bear the cost of the payroll tax? (Hint: show wages on Y axis and quantity of labour in hours on X axis in your labour demand and supply model). (4 marks)]
[Now, suppose that before the government introduces the payroll tax, there is a minimum wage set at $22 per hour. Explain in 2-3 sentences why this wage floor is binding. Also, explain in 1-2 sentences the effect of this price floor on employment and unemployment, (i.e., quantity of labour employed in hours). No diagrams needed. (3 marks)]
[This minimum wage law stays in place when the payroll tax is introduced so that employers must pay workers at least $22 per hour and then pay an extra $4 per hour to the government in tax. Explain in 100 or less words how the payroll tax will affect the level of unemployment. (Hint: unemployment here refers to excess supply of labour). (3 marks)]
Answer
