ECON90015 Managerial Economic 2000 words

ECON90015 Managerial Economics Semester 1, 2021 Assignment (20%) Due date: Thursday May 6 by 5pm. Limit: 2000 words (Word limit does not include diagrams.) This assessment exercise will account for 20 per cent of your final grade in the subject. • Assignments must be submitted using the LMS Assignment Tool and Turnitin links available on the LMS Subject homepage. • Please note that you are required to keep a copy of your assignment after it has been submitted. • You should also read ‘Important notes on doing the assignments’ available on the LMS subject homepage. Questions Question 1 (2 points) Read attachment 1. a] (1 point) Use the demand/supply model to explain why low interest rates are likely to cause higher house prices. b] (1 point) What other factor mentioned in the attachment might explain higher house prices? Question 2 (6 points) Read attachment 2. a] (2 points) Use the demand supply/model to analyse the impact of half-price air tickets on the quantity and price of air travel to the locations covered by the government subsidy? [To answer this question, assume that the government pays one-half of whatever price the supplier needs to be paid to supply any given quantity of flights). b] (2 points) Show how the incidence of the subsidy will depend on the own-price elasticity of demand and own-price elasticity of supply. Explain your answer. c] (1 point) How do you expect that the government subsidy will affect the markets for flights to destinations not covered by the subsidy? d] (1 point) The article says that the government will be ‘relying on competition rather than regulation to make sure the benefits are passed on to consumers’. What potential problems can you see with the government following that approach?

Question 3 (2 points) Read attachment 3. a] (1 point) Explain why there is likely to be an external effect associated with the decision made by the state environment department about the timing of controlled burns? (A controlled burn is where bushland is set fire to, in order to reduce the size of any unintended fire that might occur in that area.) b] (1/2 point) What does the existence of the external effect imply about the timing of the controlled burns compared to the socially optimal timing? c] (1/2 point) What do you think would be the most effective policy solution to ensure socially optimal timing of the controlled burn? Question 4 (4 points) Read attachment 4. a] (1 point) How would you recommend that Qantas should have decided whether to invest in development of the new program for directing flight patterns? b] (1 point) Would you classify as a fixed or variable input: (i) Qantas’ new program for directing flight patterns; and (ii) fuel? c] (1 point) Once Qantas has made its investment in the new program, what do you think will be the main effect on its costs of operation? What factors are likely to determine the size of effect on costs? d] (1 point) In what way does the article suggest that the changed production method may also impact on the outputs that Qantas is able to supply? Question 5 (3 points) Read attachment 5. a] (1 point) Use the demand/supply model and information in the attachment to explain why daytime electricity prices have decreased. b] (2 points) Use the model of a firm operating in a competitive market to show how a decrease in the price of daytime electricity could cause suppliers with relatively high costs of production to need to exit the market. Question 6 (3 points) Read attachment 6. a] (2 points) Use the model of a firm with market power to analyse how the entry of a new firm (Qantas) to what was previously a market with only one supplier (Rex) will affect profitability of the existing supplier? b] (1 point) Is it credible that Rex would ‘cut off air services to some regional towns’ in response to entry to those markets by Qantas?

Attachments Attachment 1 Ultra-low interest rates are pushing up property prices, with figures showing the average home buyer could spend $41,000 more at auction that a year ago... With cheaper mortgage repayments, a borrower on an average income of $89,000 who has saved a 20 per cent deposit could have a budget of $806,250…A year ago, the same buyer would have had less borrowing power and a budget of only $765,000… Canstar group of executive of financial services Steve Mickenbecker said: ‘It obviously does push house prices up. There’s no question, people turn up with more money in their pockets, it means that demand is higher… Aside from low interest rates, Jellis Craig managing director Steven Abbott cites pent-up buyer demand after last year’s lockdowns and extra cash on hand from cancelled international holiday plans… ‘Low rates propel house price surge’ by Elizabeth Redman (The Age, Saturday March 13 2021, p.18) Attachment 2 Airline tickets will be sold at half-price to 800,000 travellers in a federal government bid to help the tourism industry survive the pandemic by encouraging more Australians to book flights. The subsidy will run from April to July to increase flights to priority tourist destinations as part of a $1.2 billion package that answers industry calls for assistance. Customers will see the subsidy in lower prices for flights to regions including the Gold Coast, Cairns, the Whitsundays, the Sunshine coast, Alice Springs, Launceston, Broome, regional Victoria, Merimbula and Kangaroo Island… Describing the subsidy as a ‘demand-driven’ scheme, the government says it will cut the price of about 46,000 fares every week. Customers will be able to buy the half-price tickets from April 1, with the government relying on competition rather than regulation to make sure the benefits are passed on to consumers. Airlines will have to show that they have flown the route over the previous two years to gain the subsidy. ‘Half-price air tickets in travel industry aid plan’ by David Crowe (The Age, Thursday March 11, 2021, p.5) Attachment 3 Wine growers reeling from the coronavirus pandemic have slammed the state environment department over the timing of controlled burns in the Macedon ranges that they fear will damage their harvest. A last-minute attempt by lawyers to stop the first of three burns failed yesterday, with the blaze sending ripples of panic through vineyards where grapes are in the last stages of ripening and particularly vulnerable to smoke taint. Wine growers have been pleading with state authorities to halt the burn for a few weeks until their crops have been harvested. ‘With grape harvest looming, controlled burns have Macedon winemakers fuming’ by Henrietta Cook (The Age, Saturday February 27, 2021, p.12)

Attachment 4 Qantas expects to cut its fuel bill by as much as $40 million a year thanks to a radical overhaul to how it plots its flights across the globe. The airline has spent five years and millions of dollars building a new flight planning program – which it says will materially cut its fuel bill and bring its ultra-haul ambitions closer to reality. Qantas’ team of dispatchers have used the same computer program for 30 years to plan the route of each flight, assessing weather, airspace traffic, safety and legal constraints on three of four possible routes. The new system uses cloud computing to crunch data on thousands of possible flight paths, using millions of data points – including the latest wind patterns, and varying altitudes and wind speeds – to build a cost map that presents the most efficient route… A flight to Johannesburg, for example, was directed to fly 160 nautical miles further than it would normally, but in doing so cut the headwinds it experienced by two-thirds. The 747 arrived only three minutes later than scheduled and saved more than a tonne of fuel. The new system comes as Qantas assesses the viability of launching ultra-long, non-stop flights from Melbourne and Sydney to London and New York. In these cases, fuel burn would be a key consideration… In the project’s business case, it [was estimated] Constellation would cut Qantas’ annual fuel bill by about 0.6 per cent. The airline now believes it will be closer to 1 per cent. That would translate to $40 million saving, based on this year’s expected fuel bill of $40 billion. ‘Flight path changes will boost Qantas’ by Patrick Hatch (The Age, December 10, 2018, p.20). Attachment 5 Most of Australia’s coal-fired power plants are running at a loss as electricity prices continue to slide, battering the profits of energy giants AGL and Origin and sparking warnings from within the industry of earlier-than-expected plant closures. An influx of renewable energy has been driving down daytime electricity prices and piling enormous pressure on the nation’s fleet of coal-fired power stations, which are far more expensive to operate and, increasingly, struggling to compete. New figures reveal baseload electricity prices in Victoria crashed 70 per cent from about $80 a megawatt hour in March 2020 to $24 this month… Price falls across the nation’s main grid have been driven largely by the pandemic-led downturn in energy demand, a cooler-than-usual summer and the accelerating rollout of rooftop solar panels. While demand is recovering, the flood of cheap renewable energy continues. With four gigawatts of new wind and solar already committed to enter the grid between 2021-23 and state governments in Victoria and NSW mapping out ambitious pro-renewables policies, investment bank UBS is projecting a ‘huge uplift’ in renewable penetration that could keep prices depressed.’ ‘Coal plants face closure as prices plunge’ by Nick Toscano (The Age, Monday March 8 2021, p.8)

Attachment 6 Country airline Regional Express (Rex) has accused Qantas of predatory behaviour by launching flights on some of its monopoly routes and has threatened to cut off air services to some regional towns in response. Rex’s deputy chairman John Sharp said yesterday that Qantas was trying to weaken the smaller airline in the hope of making it a ‘less formidable competitor’… ‘Qantas has clearly embarked on a deliberate strategy of moving into Rex’s routes that can only support one regional carrier in an attempt to intimidate and damage Rex in its traditional regional market’, Mr Sharp said yesterday in a statement released to the ASX… Since the start of the COVID-19 pandemic, Qantas has launched, or is planning to launch, on eight routes where Rex previously had a monopoly… ‘Rex, Qantas in regional routes battle’ by Patrick Hatch (The Age, Tuesday February 23, 2021, p.21)