Economic Principles

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Written Assessment ECO10004 Economic Principles

Part B

Due Date – See Canvas under the assessment tab

All work must be submitted using the turnitin link (see below for more instructions)

Please do not attach a coversheet to your assignment. Also, do not include a copy of the questions in your document. You can insert pictures in your document but they must be low resolution pictures. If your file is larger than 1 to 2 MB then convert your file to pdf and upload this into turnitin.

Marking Scheme and word count

• The total marks for the written assessment is 50 and represents 50% of your total mark for the unit. Part A is worth 12; Part B is worth 20 and Part C is worth 18.

• Each question is worth either 1, 2 or 4 marks as indicated (at the end of each question).

• A word count is set for each question (at the end of each question). Answers should be within 10% of the word count.

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Task 2: Elasticity

1. Consider the following two products: an ‘overseas trip’ and ‘prescription medication’ (prescribed by a doctor). Which product would have a higher price elasticity of demand in absolute value? Explain your answer including identifying the determinant of elasticity. (1 mark) – Word count 60

2. Consider the following two products: ‘coffee’ sold in a café and ‘hotel accommodation’ in

Sydney during the Olympic Games. Which product would have a higher price elasticity of supply in absolute value? Explain your answer including identifying the determinant of elasticity. (1 mark) – Word count 60

3. A storm in North Coast of New South Wales destroyed thousands of hectares of pineapple

crops. Pineapple farmers whose crops were destroyed by the storm were much worse off, but those whose crops were not destroyed benefited from the floods. Assume that the demand curve for pineapples is inelastic. Have pineapple farmers as a group been hurt or helped by the floods? Explain using supply and demand diagrams. (2 marks) Word count 100.

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Task 3: Costs of Production

Explain whether the following events in questions 1 and 2 will affect fixed costs or variable costs (make sure you justify your answer):

1. The federal government applies a licence fee on every ‘television network’ of 1 million AUD. (1 mark) Word count 40

2. Samsung signs a new contract changing the price it pays for the ‘camera lens’ that are used in its mobile phones. (1 mark) Word count 40

3. With the use of a graph explain what is minimum efficient scale? What is likely to happen in

the long run to firms that do not reach minimum efficient scale? (2 marks) Word count 100.

4. What is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business. (1 mark) Word count 80.

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Task 4: Market Power

1. 'Being the only seller in the market, the monopolist can choose any price and quantity it desires. It can therefore price its product as high as it wants.' Evaluate this statement: Is it true or false? Explain your answer using a graph. (2 marks) – Word count 120

2. Callaway is a company that sells golf clubs. Callaway recently engaged in research and

development leading to the production, and released, of a new set of clubs designed for women that provides a significant advantage to players. Explain, using a graph, how will this impact on the price, quantity and profit of Callaway in the long run if the company is a monopoly? Explain, using a graph, how this will change if many other companies start selling similar products? (2 marks) – Word count 200

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Task 5: Business Strategy and Market Failure

Read the following excerpt and answer question 1.

TRAFFIC on Sydney’s clogged roads and motorways is now so congested it is costing the majority of businesses in Western Sydney up to $5000 a year. The startling figures were revealed as part of the NRMA Motoring & Services BusinessWise survey of almost 730 businesses that run vehicle fleets. Frustrated local businesses who took part in the survey said travel times for each of their work vehicles had jumped, on average, by 59 minutes every day due to roads clogged by commuters forced into their cars because of poor public transport options. In the past year about six out of 10 Western Sydney firms said their fuel bills had risen as a result of congestion …….

Author Jim O’Rourke

Source: The Australian web site April 08, 2014 12:00AM (http://www.theaustralian.com.au/news/fair-go-for-the-west-theres-a-costly-message-in-a- bottleneck-on-our-congested-roads/story-e6frg6n6-1226877298328) accessed 8th April 2014

1. Identify the negative externality discussed in the article? Explain, using a graph, how the negative externality leads to an inefficient price and level of output. Provide two solutions that you would recommend to the government to address the externality? (4 marks) Word count 350.

Consider the example where Intel and AMD are a duopoly that produces CPU chips. Intel and AMD can conduct R&D or they cannot conduct R&D. The table below shows the payoff matrix for the two firms. The numbers are millions of dollars of profit. Answer questions 2 and 3.

2. Define Nash equilibrium. (1 mark) – Word count 50

3. What is (are) the Nash equilibrium(s) in this game. Explain. (2 marks) – Word count 150