Written Assessment Eco10004 Economic Principles Part B Due D

written Assessment Eco10004 Economic Principlespart Bdue Date – See Canvas

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

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

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.

Sample Paper For Above instruction

The evaluation of price elasticity of demand and supply is central to understanding market responses to price changes. In the context of the two products—an overseas trip and prescription medication—it is generally observed that demand for prescription medication tends to be more inelastic compared to travel. This difference is mainly due to the necessity and lack of substitutes for medications, which makes consumers less responsive to price changes. Conversely, an overseas trip, being a luxury good with many substitutes, would have a higher price elasticity of demand. The determinant of demand elasticity here is the availability of substitutes; the more substitutes available, the higher the elasticity.

Similarly, when comparing the supply elasticity of coffee sold in a café and hotel accommodation during the Olympics, the accommodation market is likely more elastic. Hotel capacity can often be increased or decreased in response to demand fluctuations more readily than the supply of coffee in a café, which has more fixed inputs in the short run. The determinant influencing supply elasticity is the flexibility of production; the more easily supply can be adjusted in response to price changes, the higher the elasticity.

The storm in North Coast of New South Wales caused destruction of pineapple crops, creating a differentiated impact on farmers depending on whether their crops were affected. Since demand is inelastic, the overall quantity demanded does not significantly change due to price variations or external shocks like storms. Farmers whose crops were destroyed suffered losses, as their supply was abruptly reduced, leading to higher prices and less revenue for them. Conversely, farmers unaffected by the storm encountered lower supply and gained from higher prices, effectively benefiting from the floods. This scenario illustrates how external shocks can redistribute wealth within a market without significantly affecting total quantity demanded, especially when demand is inelastic.

In terms of costs, the event of implementing a license fee on television networks impacts fixed costs, as these fees are recurring expenses independent of the level of output. Changes in the price paid for camera lenses by Samsung influence variable costs because these costs fluctuate with the volume of production. The minimum efficient scale (MES) is the smallest output level at which long-run average costs are minimized, allowing firms to operate efficiently. Firms that do not achieve MES in the long run tend to face higher per-unit costs and may be unable to compete effectively, potentially leading to exit from the market or the need for scale expansion.

Explicit costs refer to direct, out-of-pocket payments, such as wages, rent, and raw materials, while implicit costs are opportunity costs of using owner-supplied resources, like the owner’s time or capital. Examples for a small business include explicit costs like wages paid to employees, utility bills, and inventory purchases; implicit costs could include the owner’s salary, the use of the owner's capital, and foregone rental income from alternative uses of owned property.

The statement about monopolists being able to set any price and quantity they desire is false because, despite being the sole seller, a monopolist faces the market demand curve, which limits the highest feasible price. It cannot set a price above the maximum consumers are willing to pay, or else demand drops to zero. The monopolist chooses a point on the demand curve where marginal revenue equals marginal cost, determining the optimal price and output. A graph illustrating the downward-sloping demand curve, marginal revenue, and profit-maximizing output clarifies this constraint.

Introducing a R&D advantage for Callaway's new women's golf clubs would shift the firm's demand curve outward, resulting in higher equilibrium price and quantity, and increased profits in the long run if the firm is a monopoly. If many other firms enter the market producing similar clubs, the demand for Callaway's product becomes more elastic, reducing the firm's ability to set higher prices, and profits may diminish as market competition intensifies. The graph demonstrates the shift from monopolistic power to more competitive market equilibrium, illustrating how increased competition erodes monopoly profits and market power.

The article highlights the external cost of traffic congestion in Western Sydney, resulting in higher fuel expenses and lost time for businesses. This negative externality leads to overconsumption of road usage because individual drivers do not face the full social cost of their trips, causing excessive congestion and inefficiency. To address this externality, government interventions such as implementing congestion charges or investing in public transportation infrastructure are recommended. Congestion charges would internalize the externality by making road use more costly during peak hours, whereas improving public transit offers alternative, cost-effective transportation options, reducing pressure on roads.

In the game between Intel and AMD, a Nash equilibrium occurs when neither firm can improve its payoff by unilaterally changing its strategy, given the other firm's choice. Analyzing the payoff matrix, the strategies where both firms choose R&D or both abstain from R&D often constitute Nash equilibria, depending on the payoffs. If both firms R&D, they secure higher future profits but at increased costs; if neither R&D, they avoid R&D costs but risk falling behind competitors. The precise equilibrium depends on the matrix values, but typically, mutual R&D can be a stable outcome if the benefits outweigh the costs, representing a Nash equilibrium under certain payoffs.

References

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