Mid-Semester Examination, Short Answer Section – April 2023
Business Economics
ECON 8069
Writing Time: TWO Hours, 15 Minutes
Permitted Materials: Non-programmable Calculator
Answer all questions using pen (or pencil) and paper. Answers written on a
tablet or computer will not be marked. Answers are expected to be succinct
but complete. Answers that are too long or irrelevant will be penalized. All
answers must be explained, even if this is not explicitly requested. Diagrams
are often useful to illustrate your solutions, even if they are not explicitly
requested. Questions are not worth equal marks.
Page 1 of 4 – Business Economics (ECON 8069)
1. Consider the graphs in Figure 1 below. On these graphs D is a demand curve, S is
a supply curve, and sMB is a Social Marginal Benefit curve.
D
S
sMB
q
$
(a) Constant MEB
D
S
sMB
q
$
(b) Increasing MEB
Figure 1: Marginal External Benefits
a) Give a brief example of an instance where the marginal benefit to society (the
social marginal benefit) may be different from the private marginal benefit (the
benefit the accrues to the person consuming the good or service). What do we
call this phenomenon?
b) Explain why Figure 1(a) is illustrating constant marginal external benefit,
while Figure 1(b) is showing increasing marginal external benefit.
c) In an attempt to increase Total Surplus in this market, the government is
considering implementing price controls. For this question, focus your analysis
on Figure 1(a). (i) Can a price floor be used to increase total surplus? If it can,
show how; if not, explain why not. (ii) Can a price ceiling be used to increase
total surplus? If it can, show how; if not, explain why not.
d) Suppose instead the government wants to increase total surplus by implement-
ing a tax or subsidy. For this question, focus your analysis on Figure 1(a).
(i) Can a per-unit tax be used to increase total surplus? If it can, show how;
if not, explain why not. (ii) Can a per-unit subsidy be used to increase total
surplus? If it can, show how; if not, explain why not.
e) A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus.
Let m∗ be the size of the Pigouvian tax/subsidy in the market shown in Figure
1(a). What happens if a tax/subsidy of size m∗ is applied in the market shown
in Figure 1(b)? [Assume both graphs are to scale. Your analysis should discuss
any changes to prices and quantities, Consumer, Producer, and Total Surplus,
any remaining DWL if any.]
f) Briefly discuss an alternative method which may increase total surplus in these
markets.
Page 2 of 4 – Business Economics (ECON 8069)
2. Over the course of the pandemic, mask prices (and quantities sold in Australia have
followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early
Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low
prices and high quantity. (We are now in an ‘endemic’ stage for Covid, you do not
need to consider this stage in your answers.)
a) Explain why the pandemic caused an increase in demand for masks.
b) Assume the mask market is a perfectly competitive market, and that the market
was hit by the initial shock as in part (a). Perform a short-run and long-run
analysis of the effect of this shock on the market for masks. Evaluate to what
extent the predictions of the model accord with the real-world observations.
c) In your opinion, to what extent does the market for masks have the character-
istics of a perfectly competitive market.
d) Assume now that the market for masks is a monopoly, and that the market
was hit by the initial shock as in part (a). Perform a short-run and long-run
analysis of the effect of this shock on the market for masks. Evaluate to what
extent the predictions of the model accord with the real-world observations.
e) In your opinion, to what extent does the market for masks have the character-
istics of a monopoly.
3. The early 20th Century saw a substantial push from governments to break-up mo-
nopolies into smaller entities which then compete with each other. Describe cir-
cumstances where this break-up would not lead to increased social welfare (and
why).
4. Two firms are competing in a market (strategically). Each firm can either compete
aggressively, or can compete passively. The payoffs (in millions of dollars) for each
firm for each of the possibilities are given in Table 1. For example, if Firm 1 is
Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M.
Firm 2
Aggressive Passive
Firm 1
Aggressive
-10 -5
-10 5
Passive
5 0
-5 0
Table 1: Payoff Matrix
Find all Nash Equilibria of this strategic interaction. [In your answer, you will
need to explain how you found these, and why no other strategy profile is a Nash
Equilibrium.]
5. Discuss the following claim: Given two public policy options, economics can give us
insight into what will happen under each policy, but does not recommend one policy
over the other.
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