Here is one thought I'll leave you with:
We do not need magic to change the world, we carry all the power we need inside ourselves already: we have the power to imagine better.
From JK Rowlings
Sunday 21 August 2011
Tuesday 16 August 2011
Exam paper June 2011 Hand written solutions
The first page :
http://www.scribd.com/doc/62387625/June-2011-page-1 - this has the solutions 2a - 2bi)
http://www.scribd.com/doc/62387625/June-2011-page-1 - this has the solutions 2a - 2bi)
http://www.scribd.com/doc/62389656/June-2011-page This has the solutions for 2bii) - 5
Apologies that its not all nicely written out .... and in 2 attachments, but I hope that it helps you somewhat.
Monday 15 August 2011
Sunday 14 August 2011
Most important areas to focus on
I don't get to see the exam paper, but this is what the exam setters suggest you look at:
http://www.scribd.com/doc/62306783/IMG
http://www.scribd.com/doc/62306783/IMG
Saturday 13 August 2011
Externalties - try out these websites and trial questions
Possible questions:
Explain why negative externalities lead to inefficient overproduction and how property rights, emission charges, marketable permits, and taxes can be used to achieve a more efficient outcome.
Explain why positive externalities lead to inefficient underproduction and how public provision, subsidies, vouchers, and patents can increase economic efficiency.
CA2: Solution
Generally you all did a huge effort here and it paid off well. If you were a little unsure of some of the answers, check them against this "model" that I have built from your submissions!
For those of you who might have received a little "help" from others. Make sure you've got it in YOUR head!
Thursday 11 August 2011
Solutions to Topic 12: Externalities
Exercise 12.1
If the equilibrium quantity is less than the socially optimal quantity, one can infer that
A) the supply curve for the activity is below the socially optimal supply curve.
B) the demand curve for the activity is above the socially optimal demand.
C) the production of this good has a positive externality.
D) the production of this good has a negative externality.
E) firm are not maximizing profits.
The correct answer is (C). When there is positive externality, the external benefits enjoy by outsides make the society prefer to have a larger quantity of output. But the market equilibrium quantity will not consider this external benefit and will produce a smaller quantity.
Exercise 12.2
Assume that reading economics produces a positive externality. It will be the case that the __________ than the socially optimal amount.
A) supply curve for reading will be greater
B) price of reading will be greater
C) supply curve for reading will be less
D) demand curve for reading will be greater
E) demand curve for reading will be less
The correct answer is (E). With positive externality, there is external benefit and the marginal social benefit exceeds marginal private benefit. The demand curve for reading is marginal private benefit will be less than the social optimal amount.
Exercise 12.3
Suppose coal mining produces a negative externality in the form of polluted streams. One can deduce that the unregulated
A) price of coal is too high.
B) quantity is too small.
C) quantity is too large.
D) supply curve is lower than the regulated supply curve.
E) demand curve is higher than the regulated demand curve.
The correct answer is (C). Producers will ignore the external cost and produces where MPC = MPB.
The society as a whole incur a higher cost and prefer a smaller quantity of output. Thus the market quantity is too large
Exercise 12.4
After correcting an externality, the equilibrium price and quantity both rose. What type of externality is this and what are the likely actions that are implemented to correct this externality?
Solution
This is a positive externality. When there is external benefit, the marginal social benefit exceeds marginal private benefit. The marginal social cost intersects the marginal social benefit at a larger quantity and a higher price compared to the market outcome. When the positive externality is corrected, both price and quantity rise.
The action needed is a government subsidy to increase the marginal private benefit to be the same as marginal social benefit.
Exercise 12.5
Consider the benefit and cost of industrial production, is the ideal amount of pollution equals zero? Explain.
Solution
The ideal amount of pollution is not zero but the amount where marginal social benefit equals marginal social cost. Production of goods and services are beneficial to society but bound to create some pollution. So long as the benefits of having output exceeds the cost of pollution it is efficient to have a small amount of pollution
Monday 8 August 2011
Sunday 7 August 2011
Solutions to Class questions Topic 11 - Oligopolies
Questions and Solutions for Topic 11: Oligopolies
1. What does the Kinked demand curve model tell us about prices in an Oligarchic market?
Prices are rigid, tend not to change frequently
2. Do Ologopolies optimize output where MC=MR? Draw a diagram to support your answer.
Yes, draw diagram from slide 9 in your notes
3. How might an Oligopoly increase its market share?
By using non-price competitive strategies .e.g product innovation, marketing, quality enhancements
Game theory – steps
1. Understand the rules
2. Identify the choices/strategies
3. Tabulate the pay-off matrix
4. First: column outcomes, then row outcomes
5. Look for a common choice / strategy
4 Prisoner’s Dilemma Question
Soapy Inc. and Suddies Inc. are the only producers of soap powder. They collude and agree to share the market equally. If neither firm cheats on the agreement, each makes $1 million profit. If either firm cheats, the cheat makes a profit of $1.5 million, while the complier incurs a loss of $0.5 million. If both cheat, they break even. Neither firm can monitor the other’s actions.
a) What are the strategies in this game?
Both agree: Soapy = $1 m and Suddies = $1 m
Both cheat: Soapy = $0 profit and Suddies = $0
Soapy cheats and Suddies agree : Soapy = $1.5 million profit, and Suddies = $0.5 million loss;
Suddies cheats and Soapy agree : Suddies = $1.5 million profit, and Soapy = $0.5 million loss.
Construct a payoff matrix
Soapy Inc | |||
Agree | Cheat | ||
Suddies Inc | Agree | $1 m S1m | -$5m $1.5m |
Cheat | $1.5m -$5m | $0 $0 | |
b) Is the equilibrium a dominant strategy/ Nash equilibrium? Explain.
Yes, The equilibrium is a dominant strategy equilibrium because for each firm, regardless of the opponent’s choice, the best strategy is to cheat.
If Suddies agrees, the best strategy for Soapy is to cheat = $1.5 million rather than $1 million.
If Suddies cheats, the best strategy for Soapy is to cheat = $0 rather than incur a loss of $0.5 million.
5 How does Prisoner’s dilemma substantiate the kinked demand curve model?
Prisoner’s dilemma shows the difficulty of cooperating. Firms need trust eachother if they are to get the best outcome. The dilemma or nash equilbiruim is not the best solution for each of the firms, if they cooperated with and trusted each other they could select an outcome which was better for both of them.
The kinked demand curve also shows how, in an interdependent oligarchic market, the firm selects a strategy erroneously, believing that they know what the other firms’ response will be. E.g. Firm does not raise prices, because no-one will follow.
Wednesday 3 August 2011
Solutions to Topic 11: Oligopoly
Question 11.1
The common feature in monopoly, oligopoly, and monopolistic competition is
A) the absence of close substitutes.
B) blocked entry.
C) interdependent decision making by firms.
D) price discrimination.
E) downward sloping demand.
• The correct answer is (e).
• In monopoly, monopolistic competition and oligopoly, firms have at least some market power and can set price over a range of output.
• Thus the demand curve is downward sloping.
Question 11.2
Refer to the table (in your notes) which shows the payoff matrix of two firms, Firm A and Firm B, each has two strategies, to set high price or low price. The figures in the matrix show the profits earned by each firm.
(a) Solve for the Nash equilibrium in this game.
(b) Is this game a prisoner’s dilemma game? Justify your answers.
(a) The Nash equilibrium is both firm set high price and that the payoff to Firm A is $100 and pay off to Firm B is $75.
(b) This is a prisoner’s dilemma game. The reason is that the Nash equilibrium is not the best outcome. The best outcome is in fact both firms set low price so that Firm A gets $150 and Firm B gets $300
Question 11.3
The table (in your notes) shows the payoff matrix for players A and B to strategies X and Z.
Player A finds that
A) strategy Z is a dominated strategy.
B) strategy X is a dominant strategy.
C) strategy Z is a dominant strategy.
D) he has no dominant strategy.
E) his best strategy depends on what player B chooses.
The correct answer is (c)
If Player B chooses X, Player A will choose Z since $500 is better than $300.
If Player B chooses Z, Player A will choose Z since $1000 is better than $200.
Thus strategy Z is a dominant strategy for Player A.
Question 11.4
(1) Why is there no incentive for a firm in the kinked demand curve model to change its price?
(2) Is the price always remain rigid in the kinked demand curve model
(1) In the kinked demand curve model, the price is stabilized at the kink level. If the firm charges a higher price, its demand becomes elastic and its revenue drops. If it charges a lower price, its demand becomes inelastic and its revenue drops. Thus it has no incentive to change the price.
(2) If there is a large change in the marginal cost such that the MC shifts by a larger amount than can be accommodated by the gap of MR, then the equilibrium price will change.
Friday 29 July 2011
Thursday 28 July 2011
Solutions to Topic 10: Monopolistic competition
Question 10.1
Of the following characteristics, which one applies exclusively to a monopolistic competitive firm?
A) It always earns a profit.
B) It produce differentiated product.
C) It can sell all it wants to at the market price.
D) It has no barriers to entry.
E) It has a range of prices it can charge for its output.
The correct answer is (B).
Monopolistic competitive firm competes from each other by differentiating their products so that each firm can have some market power.
Question 10.2
The similarity between monopoly and monopolistic competition is:
(a) There are barriers to entry
(b) They sell differentiated product
(c) There is perfect information
(d) There is long run normal profit
(e) The price is higher than marginal revenue
The correct answer is (e).
For monopoly and monopolistic competition, the demand curve is downward sloping and so marginal revenue curve is below the demand curve.
To sell one more unit the firms need to charge a lower price for all units.
Thus price is larger than marginal revenue for both market structures.
• Question 10.3
The similarity between perfect competition and monopolistic competition in the long run is:
(a) They both produces at the lowest point of the ATC
(b) They both charge a price equals marginal cost
(c) They both earn normal profit
(d) The number of firms are the same
(e) Firm’s demand curve is horizontal
The correct answer is (c).
There is free entry and exit of firms in perfect competition and monopolistic competition. In the long run
Profits will induce more firms to enter the industry and push down prices
Loss will lead to firms leaving the industry and push up prices
All firms earn zero economic profit in the long run.
Question 10.4
(a) Consider a monopolistic competitive firm selling shoes and make a normal profit. How can it differentiate its product in order to make economic profit?
(b) If the firm is able to differentiate successfully and earns an economic profit in the short run. What will happen to this firm in the long run?
a) The firm can differentiate its product by:
(1) Changing the shapes, sizes, cutting, colours of the shoes
(2) Provide quality service and after sales services
(3) Innovate and provide better quality shoes
(4) Produce at a low cost and charge a low price
(5) Advertise vigorously
b) Due to free entry and exit, in the long run more new firms attracted by the profit will enter the industry.
Each new firm produces a differentiated product, thus provides more substitutes in the market and take away existing firms’ customers.
Existing firms demand curve shifts leftwards and becomes flatter until all firms can only break even in the long run.
Question 10.5
1) What are the effects of advertising in the monopolistic competitive market?
2) Draw the diagram of a monopolistic competitive firm that is earning an economic profit. Be sure to label all the curves. Indicate the area that equals the firm’s economic profit. Is this a long-run equilibrium? Why or why not?
1) Advertising increases cost to the firm and hence raises the ATC curve.
It may also create awareness of the firm’s product so that demand and marginal revenue increases and the firm can charge higher price
The firm may earn higher profit in the short run if the effect on price exceeds cost.
In the long run, all firms advertise and thus demand becomes more elastic, price drops until no more profit for each firm.
2. Please draw a downward sloping demand curve, a downward sloping MR curve, a U-shaped ATC curve and a U-shaped MC curve which intersects the ATC curve at the lowest point of ATC curve.
This is a short run equilibrium, not a long run equilibrium. In the long run equilibrium, all firms earn zero profit.
Wednesday 27 July 2011
Solutions for Topic 9: Monopolies
Question 9.1
If the monopolist's demand curve is downward sloping, then the marginal revenue curve is
A) horizontal
B) vertical
C) downward sloping with the same slope
D) downward sloping with steeper slope
E) downward sloping with more gentle slope
The correct answer is (D).
When demand curve is a downward sloping straight line, the marginal revenue is also a downward sloping straight line, and it is twice the slope of the demand curve.
Question 9.2
For perfectly competitive firm price _____ marginal revenue, and for monopolist price ____ marginal revenue.
A) equals; equals
B) equals; is greater than
C) equals; is less than
D) is greater than; equals
E) is less than; equals
The correct answer is (B).
For perfect competition, price is fixed for every unit. The firm will always earn an additional revenue equal to the price when selling one more unit.
For monopoly, price drops for all units when selling one more unit of output. The firm earns an additional revenue less than the price when selling one more unit
Perfect Competition Monopoly
Q P TR MR Q P TR MR
1 5 5 5 1 5 5 5
2 5 10 5 2 4 8 3
3 5 15 5 3 3 9 1
Question 9.3
Perfect competition is efficient and monopoly is not because in perfect competition __________ while in monopoly __________.
A) P=MC; P>MC
B) P=MC; P<MC
C) P<MR; P=MR
D) P=MR; P=MC
E) P=MR; P<MR
The correct answer is (A).
For perfect competition, the optimal output is P = MC, which means allocative efficiency.
For monopoly, the optimal output is MR = MC. Since P > MR, at the optimal output P > MC, implies allocative inefficiency.
Question 9.4
(a) Explain why a firm that practices price discrimination tend to earn a higher profit than one that charge a single price.
(b) If the demand for residential phone line is elastic while the demand for commercial phone line is inelastic, what should the telecommunication firm do to its pricing in order to maximize profit?
(a) Different consumers have different willingness to pay. If the firm charge a single price to all customers, some consumers may actually be willing to pay more and hence they enjoy consumer surplus. With price discrimination, the firm can charge a higher price to those who are willing to pay more, hence profit can be increased.
(b) The firm should charge a higher price for commercial phone and a lower price for residential phone in order to maximize profit.
Question 9.5
(1) Can a monopoly incur losses?
(2) Is the monopoly always inefficient compared to perfect competition?
(1) A monopoly need not always earn economic profit. Economic profit occurs when P > ATC but some monopolists may encounter price control such that they operate at a loss. They need the government subsidy to remain operational.
(2) A natural monopoly can be more efficient than perfect competition when there are economies of scale to exploit. Also a monopolist that practice perfect price discrimination is as efficient as perfect competition.
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