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 cover sheet 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). You must ensure your answer is below the word count. Anything written after the word count has been exceeded will not count towards your answer.

Task 2: Elasticity

1. Consider the following two products: 3D television and prescription. Which product would have a higher price elasticity of demand in absolute value? Explain your answer including identifying the determinant of elasticity. (1 mark) – Maximum number of words 60

2. Consider the following two products: Coffee sold in a café or electricity (assume limited excess capacity). Which product would have a higher price elasticity of supply in absolute value? Explain your answer including identifying the determinant of elasticity. Coffee sold in a café or electricity (assume limited excess capacity). (1 mark) – Maximum number of words 60

In the following graph, the demand for tyres has shifted to the left because the price of cars has increased from, on average $25,000 to $35,000 per car. Use the graph to answer question 3.

3. Calculate the cross-price elasticity of demand between tyres and cars. Show your calculations and explain your answer in words. (2 marks) – Maximum number of words 80 + calculation

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) Maximum number of words 40

2. Samsung signs a new contract changing the price it pays for ‘power boards’ that are used in its TVs. (1 mark) Maximum number of words 40

Read the following excerpt and answer question 3.

Airbus and Dreamliner Battle for Air Space

The world’s largest passenger plane [Airbus] has proven to be the most expensive civilian airplane ever developed. Airbus claims its fuel efficiency, control system and sound-reduction technology also make it the most advanced airliner ever built. The Dreamliner travels the same distance as the A380 [Airbus] at the same speed but carries half the passengers.

Author: Davin Coburn Jun 15, 2010

Source: http://www.popularmechanics.com/flight/a5819/airbus-vs-boeing-battle-for-air-space/

3. You are an executive in an airline company that uses both Dreamliner and Airbus planes. Thinking of the long run, when might it be best to use the Dreamliner? When might it be best to use the Airbus? Use the long run average total cost curve in explaining your answer. (4 marks) Maximum number of words 350

Task 4: Market Power

1. Graph and explain the situation for Adidas if it was the only seller of exercise running shoes in Australia. Contrast this with the situation when many other brands enter the market selling similar products. Use a graph and explain your answer. When drawing graphs assume the firm is in the long run. (2 marks) – Maximum number of words 120

2. There are many cattle farms in the world, and there are also many McDonald’s restaurants in the world. Why, then, does a McDonald’s restaurant face a downward-sloping demand curve while a cattle farms face a horizontal demand curve? How would this situation change if there were two McDonalds restaurants located next to each other? (2 marks) – Maximum number of words 200

Task 5: Business Strategy

Consider the example where Jim’s coffee (they seem to sell everything else) wants to open a store but a major existing company Stars and Coffee threatens Jim’s by saying if you enter I will charge lower prices. The pay-off matrix is below. Answer questions 1 to 5.

Stars and Coffee

 

	High Price			Low Price
	Jim’s earns			Jim’s earns
	2 million profit			1 million loss
Enter
		S and C earns			S and C earns
		3 million			1 million

Jim’s coffee

	Jim’s earns			Jim’s earns
	zero profit			zero profit
Do not enter		S and C earns			S and C earns
		7 million			2 million

 

1. Define dominant strategy. (1 mark) – Maximum number of words 50

2. Does Jim’s coffee have a dominant strategy? Explain. (1 mark) – Maximum number of words 80

3. Does Stars and Coffee have a dominant strategy? Explain. (1 mark) – Maximum number of words 80

4. Define Nash equilibrium. What is (are) the Nash equilibrium(s) in this game. Explain. (2 marks)

– Maximum number of words 150

5. Should Jim’s coffee believe Stars and Coffee threat? Explain. (1 mark) – Maximum number of words 100