Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 1 of 14 Desk Number ________ Student Number _______________________ Student Name _______________________ Newcastle Business School EXAMINATION Semester 1, 2018 ECON1001 Microeconomics for Business Decisions This paper is for CENTRALCST and NCLE_CITY students. Examination Duration: 150 minutes Reading Time: 10 minutes This exam has 8 questions Exam Conditions: This is a FORMAL examination This is a RESTRICTED OPEN book examination Notes permitted - Refer Materials Permitted Calculators Permitted - Refer Materials Permitted Materials Permitted In The Exam Venue: 1 A4 double sided sheet of handwritten or typed notes (Memory Aid sheet) Non programmable calculators are permitted Materials To Be Supplied To Students: None Special Instructions: Answer all questions in the spaces provided in this exam paper. This exam has a total 100 marks: each question is 12.5marks. The exam mark is worth 50% of the course assessment. Marker use only Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 TOTAL Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 2 of 14 Answer all parts of all questions. Question One a. Draw a diagram that illustrates a price-maker firm (i.e. downward sloping demand curve) with an economic profit. Clearly label your curves; indicate the profit maximising level of quantity and price; shade in the area of the economic profit. (3.5 marks) b. On your diagram above, identify two other outputs the firm might choose that are not profit maximising outputs. What are some reasons why a firm might choose these outputs? (3 marks) Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 3 of 14 c. A local cinema reduces its ticket price from $10 to $8. The quantity demanded of tickets soon increases from 1000 to 1400 tickets per week. What is the price elasticity of demand? Show your working. You can use either the percentage change method or the mid-point formula. (3 marks) d. When the cinema ticket prices were reduced from $10 to $8, there was a 20% increase in sales for a nearby popcorn seller. Calculate the cross- price elasticity of demand and determine whether these products are complements or substitutes. (3 marks) Question Two a. Briefly explain why a Production Possibility Frontier is a useful concept for demonstrating the economic problem of efficient allocation of scarce resources. (You can sketch a PPF to demonstrate points of efficiency and inefficiency.) (3 marks) Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 4 of 14 b. Give a real world example of a product that has highly inelastic demand and another example of a product whose demand is very elastic. (2 marks) c. Using a demand and supply diagram (i.e. D&S analysis), demonstrate what policies could be enacted to make housing more affordable in Australian cities. Use a few sentences to help explain your diagram. (3.5 marks) d. Assume in a business meeting that your colleague says that price should always be lowered in order to increase total revenue. How would you respond, knowing that this business sells products that have different price elasticities? (2 marks) e. What are opportunity costs? Refer to both explicit and implicit costs in your answer (2 marks). Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 5 of 14 Question Three a. Complete Table 1 by calculating: i. Average Total Costs (Column II) ii. Marginal Cost (Column IV) iii. Total Revenue (Column VI) iv. Marginal Revenue (Column VII) (4 marks) Table 1 Cost and revenue date Firm X (Note fill in the white cells; not the shaded cells) I Quantity COST DATA Demand (Revenue) Data II Average Total Cost (ATC) III Total Cost (TC) IV Marginal Cost (MC) V Average Revenue (Price) VI Total Revenue (TR) VII Marginal Revenue (MR) 1 28 40 1.5 2 42 35 2.5 3 48 30 3.5 4 52 25 4.5 5 60 20 5.5 6 78 15 6.5 7 112 10 Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 6 of 14 b. Plot and clearly label the Marginal Revenue (MR) and Marginal Cost (MC) curves on Figure 1 (below). {Hint: Remember to plot the MR and MC curves at mid-point quantities, that is, 1.5, 2.5 etc.} (2 marks) c. With reference to Figure 1: i. What is the profit maximising rule? (0.5 marks) ii. At what level of output (nearest whole number) is this firm’s profit maximised? Profit maximising quantity: = ________ units of output. (1 mark) iii. Briefly explain why this firm’s profits must be maximised at the level of output identified above. (1 mark) -30 -20 -10 0 10 20 30 40 0 1 2 3 4 5 6 7 R ev en ue a nd C os ts ($ ) Quantity of Output Figure 1: Marginal Cost and Marginal Revenue Firm X Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 7 of 14 Question Three (continued) d. At the profit maximising quantity of output, identified in part c. and referring to Table 2, determine: (4 marks) a. Price = $ _____________ b. ATC = $ _____________ c. Profit per Unit = $ _____________ Total Profit = $ _____________ Question Four Refer to Figure 2 ‘Perfect Competition’. a. On Figure 2 panel A, identify the intial market equilibrium price and clearly label it as P:0 (1 mark) b. Based on your answer to b., on Figure 2 panel B, draw in the perfeclty competitive firm’s demand curve and label it as D:0. (Note: the demand curve = marginal revenue) (1 mark) c. On Figure 2 panel B, identify the typical firm's short run profit maximising, or loss minimising, level of output and clearly label this as Q:0 (1 mark) d. Clearly identify the level of economic profit or loss the typical firm will be making by shading the apropriate area (box) labelling it as either PROFIT or LOSS. (2.5 marks) Price Costs Qty Price Costs Qty ATC MC Mkt D Mkt S A :Industry B: Typical Firm Figure 2: Perfect Competition Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 8 of 14 e. Referring to Figure 2, briefly explain why the typical firm in this industry cannot be described as being in a state of long run equilibrium. (1 mark) f. Because of this initial point of disequilibrium, there is a long-run adjustment process, that will take place at the industry-level (panel A) and for the typical firm (panel B). Explain this process. (2 marks) g. Assume that in this industry there is a seasonal drop in demand. The typical firm (as in the above example) is making a loss. The price (which is also MR) is still above the Average Variable Costs curve. Should the firm stop producing and shut down? Why or why not? (2 marks) h. Briefly explain why economics students still study perfect competition, even though actual real world examples are not common. (2 marks) Question Five a. Discuss the four alternative market structures (perfect competition, monopoly, monopolistic competition, and oligopoly) under which a firm might operate. Use the following headings to contrast these types: a. Number of firms b. Freedom of entry c. Nature of product (4 marks) (use space over page.) Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 9 of 14 b. Use a set of two sketches to compare and contrast the long run performance of firms in monopolistic competition and with that of firms in less competitive market structures (e.g. oligopoly or monopoly). Under each diagram briefly explain the features or each model with respect to long run profits and level of output. (Assume the ATC curve is U-shaped.) (4 marks) Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 10 of 14 c. Using three or four sketches, show what happens in the short run and long run when a monopolistic competitive firm advertises. Assume that before advertising, the firm is making zero economic profit. Write a few sentences to explain each sketch. In your answer include an explanation of the ‘advertising trap’. (4 marks) Question Six a. There are two competing companies - Ulysses Corporation and Xenophon Company - which compete in producing a sophisticated type of camera. They can engage in either advertising or not advertising in trade journals. The payoff matrix in millions of dollars is as follows: Xenophon Company (X) Ulysses Corporation (U) Advertise Not Advertise Advertise U: $12 m X: $ 12 m U: $14 m X: $ 9 m Not Advertise U: $5m X: $ 9 m U: $9 m X: $ 10 m i. Does Ulysses Corporation have a dominant strategy that it would choose no matter what Xenophon Company does? (1 mark) ii. Does Xenophon Company have a dominant strategy that it will choose no matter what Ulysses Corporation does? (1 mark) iii. What is the solution or equilibrium in this strategic game? (1 mark) Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 11 of 14 iv. How much would Ulysses Corporation be willing to pay Xenophon Company not to advertise? (1.5 marks) b. In a “kinked demand curve” model for a firm in an oligopolistic industry, explain what the kinked demand curve represents. (3 marks) c. Explain what a natural monopoly is. (2 marks) d. Explain the difference between regulation of a natural monopoly on the basis of price and on the basis of profit. (2 marks) e. Briefly provide a reason why the earning of above normal profits by oligopolies is usually accepted by competition authorities. (1 mark) Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 12 of 14 Question Seven a. Using a supply–demand diagram, demonstrate how pollution taxes (e.g. Pigovian taxes) could be used to improve social outcome. (3 marks) b. What are the two main features of a ‘public good’? Provide some examples. (3 marks) c. What is market failure? Briefly identify three causes of market failure. (3 marks) d. Suggest a policy to address one type of market failure you have identified. Briefly explain how the policy will address the market failure. (2 marks) e. What is moral hazard and how might it manifest in an employment relationship? What can an employer do to reduce the problem of moral hazard? (1.5 marks) Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 13 of 14 Question Eight a. Why is an understanding of the resources and capabilities of the firm, including an understanding of its ‘internal barriers to imitation’ (i.e. isolating mechanisms), a better explanation of firm-profitability compared with using an explanation solely based on the type of market structure the firm is in? Use industry and firm examples. (4.5 marks) b. The diagram below depicts the market for smart mobile phones for selected brands. i. Refer to the value map. Which firm is in the superior competitive position? (1 mark) Benefit Price Apple Iphone Samsung Galaxy Value Map of selected brands of Smartphone Nokia Lumia Semester 1, 2018 ECON1001 Microeconomics for Business Decisions Page 14 of 14 ii. Give two possible reasons that explain the position on the value map for this successful firm. (3 marks) iii. Apple Iphone is on the indifference line of the cost benefit tradeoff. What does this mean? (2 marks) c. What do understand by the term ‘marginal revenue product’? (2 marks) END OF EXAMINATION






































































































































































































































































































































































































































































































































































































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