Reference no: EM132379487

ECO10004 Economic Principles Part B

Due Date - See Canvas under the assessment tab

Task 2: Elasticity

1. Consider hotel accommodation in Cairns in the off-season with accommodation in the peak season. Which season 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

In the following graph, the demand for tyres has shifted to the left because the price of cars has increased from, on average $20,000 to $35,000 per car. Use the graph to answer question 2.

2. Calculate the cross-price elasticity of demand between tyres and cars. Show your calculations and explain your answer in words.

3. Suppose you own a bookstore. You believe that you can sell 40 copies per day of the latest John Grisham novel when the price is $35. You consider lowering the price to $25 and believe this will increase the quantity sold to 50 books per day. Compute the price elasticity of demand using the midpoint formula and these data. What are the implications for revenue based on your calculation of elasticity and why? Show all working.

Quantity demanded and price for the "the latest John Grisham novel"

Price	Quantity
$35	40
$25	50

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 once off fee on every airplane used for domestic flights in Australia of 100,000 AUD to cover inspection costs.

2. Samsung spends an additional $50 million US on research and development for the next generation of its mobile phone.

Read the following excerpt and answer question 3.

Money down the drain

Households hit by sky high power bills have also been silently battling surging water and sewage costs in a double - whammy on their budgets A Herald Sun analysis of 10 years of bureau of Statistics data has found that water and sewerage charges jumped an average 91 per cent since 2007, not far behind electricity's jump 116 per cent jump. ......

Water economics specialist and Australian National University professor Quentin Grafton said the costs to "drought-proof" cities [by building higher cost desalination plants] had been passed on to customers over the past decade, and authorities had started charging households more for water use above certain thresholds. ...

Author Anthony Keane
Source: The Herald Sun October 21st, 2017

3. Using the cost diagrams, including drawing a graph, explain, what is happening to costs of the firm. Identify any relevant information provided in the article.

What solution would you recommend to the government to address any equity concerns where poorer households experiencing high water prices (noting that clean water is an important commodity)? Explain your solution carefully. (4 marks) Word count 350.

Task 4: Market Power

1. Strong demand and accompanying higher prices will result in higher profits. However, eventually the high prices will bring an end to existing companies increased prosperity in a market with lower barriers to entry. Explain, using appropriate diagrams (hint: use the perfectly competitive market framework to analysis this question). (2 marks) - Word count 200

2. What is a network externality? How does a network externality serve as a barrier to entry? Is this barrier surmountable? Provide one example. Make sure you carefully explain your answer. (2 marks) - Maximum number of words 120

Task 5: Business Strategy and Market Failure

Melbourne Limousine Company (MLC) and Airport Connections (AC) are the only two airport limousine rental service companies. Each firm must decide whether to increase its advertising spending to compete for customers. The following figure shows the payoff matrix for this advertising game.

		Melbourne Limousine Company (MLC)
		Increase advertising budget	Leave advertising budget as is
Airport Connections (AC)	Increase advertising budget	MLC: $1,000,000 AC: $1,300,000	MLC: $900,000 AC: $1,250,000
	Leave advertising budget as is	MLC: $1,400,000 AC: $1,000,000	MLC: $1,000,000 AC: $1,200,000

1. Define dominant strategy. Does MLC have a dominant strategy? Explain. (2 marks) - Maximum number of words 130

2. What would happen if AC increases their advertising budget but MLC does not? Explain. (1 mark) - Maximum number of words 100

3. What is (are) the Nash equilibrium(s) in this game. Explain. Why are the alternative scenarios from the payoff matrix not Nash? Explain. (2 marks) - Word count 150