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ECON10004: Introductory Microeconomics // Assignment—2 (15%)

Due date: Friday, 13 May by 4.00pm
Word limit: 1000 words (does not include diagrams)

Submission
• you must submit your assignment via the LMS subject page before 4.00 pm, Friday
13-May;
• this subject has a “no-extension policy”, and late submissions will not be accepted;
• to double check that you submitted the correct file and to confirm your submission
time and date, you may want to either view or download your submitted assignment;
for step-by-step instructions, check out for instance the “view submitted assignment”
in the link below: https://lms.unimelb.edu.au/students/student-guides/assignments
• after you have submitted your assignment, please remember to also keep a local copy.

Logistics
• there is a maximum limit of 1000 words (not including equations, diagrams, or the
text of the problem itself);
• all problems are compulsory, and must be solved in the order in which they appear;
• all answers have to be clearly labelled (e.g., write “c)” before your third answer);
• answers have to be fully typed; diagrams may still be hand drawn, but please be sure
inserted them in the right place in the file, as only one file may be submitted;
• please be aware of the University policy on plagiarism and collusion
https://academicintegrity.unimelb.edu.au/#plagiarism-and-collusion
• a maximum of 100 points are awarded according to the quality of the answers

NB: quality answers are, among other things, succinct and legible; thus, please be
aware that points will be deducted for exceeding the word limit, or for not submitting
a typed assignment.


QUESTION 1: Tax system design [30 points]
Because of the pandemic, low-income earners are entitled to a coronavirus supplement cash
payment depending on their income level (in addition to any Centrelink payments, which we
will ignore). The higher the income, the more the cash payment is reduced.

Here are two tables that show the coronavirus supplement and reduction thresholds:


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Here is also the income tax schedule for residents of Australia:

a) What is the maximum annual income anyone can earn to get the full cash payment
without deductions? [5 points]
b) Suppose the worker is a typical first-year uni student (i.e., single, 18 years old, lives at
parents' home). This student earns twice the maximum income level that is eligible for
the full coronavirus supplement. What are their average and marginal tax rates (ignore
the coronavirus supplement for now)? [5 points]
c) At this current income level, how much coronavirus supplement does the student get if
any? [5 points]
d) The student is deciding whether to increase their working hours to double their existing
gross income. What would be the student's average and marginal tax rates at the new
income level, inclusive of any coronavirus supplement (assume it is taxable)? [5 points]
e) What are the average and marginal tax rates of the student, at their original income level
and inclusive of the coronavirus supplement (assume it is taxable), if they decide to
move out of their parents' home? [5 points]
f) Is the student better off in terms of take-home income by moving out? [5 points]
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QUESTION 2: Game theory [25 points]
This is a two-player, simultaneous one-move game represented as a game table (normal form).
P1 \ P2 A B C D
A (17, 5) (11, 16) (15, 4) (3, 16)
B (7, 13) (2, 10) (13, 9) (20, 5)
C (12, 2) (6, 9) (20, 8) (3, 7)
D (1, 20) (10, 20) (2, 12) (1, 17)

a) What is the pure strategy Nash equilibrium outcome if there is one? [5 points]
b) Is this a socially optimal outcome? If not, which outcome is preferred? [5 points]
c) Do all three solution approaches for simultaneous games work independently (not
together)? If not, which do not? [5 points]
d) Draw the game as a game tree (extensive form). [5 points]
e) Switch the payoffs in cells (A, A) and (D, D). What is the pure strategy Nash
equilibrium outcome if there is one? [5 points]

QUESTION 3: Monopolies [25 points]
The demand and total cost functions for a monopoly firm are:
Q(P) = 39.5 – 0.5P
TC(Q) = 60 – Q + 0.5 Q2

a) Plot the demand, marginal revenue, marginal cost, and average total cost curves,
including the intersections with the horizontal and vertical axes. [5 points]
b) What are the profit maximising QM and PM for this firm? [5 points]
c) What is the firm’s profit πM? [5 points]
d) What are the firm's fixed and variable costs? [5 points]
e) What would be the socially optimal Q* and P* (round to 1 decimal place if needed)?
[5 points]

QUESTION 4: Monopolistic competition [20 points]
The demand and total cost functions for a monopolistically competitive market are:
Q(P) = 300/N – P, where N = number of firms
TC(Q) = 50 + Q2

There are currently three firms in this market and they are in a short run equilibrium.
a) What are the profit maximising QM and PM for each firm? [5 points]
b) What is each firm’s profit πM? [5 points]
c) In the long run, how many firms are in the market (round to the nearest integer)? [10
points]