ECON90015
Semester 1, 2023
Final Exam
8 Jun 2023
Managerial Economics Final Exam
ˆ You have two and a half hours to complete this exam from when it commences, which
includes 30 minutes of reading time. Monitor the allotted time and budget time to
submit your answers in LMS.
ˆ You are permitted up to 30 minutes after the scheduled completion time to upload and
check files. File uploads must be fully completed by that time (for example, an exam
scheduled at 12:00pm with 120 minutes of writing time, 30 minutes of reading time, and
30 minutes of upload allowance will have a final completion time of 3:00pm). You will
not be able to make a submission later than that.
ˆ This exam paper has 3 problems and 4 numbered pages (including this one).
ˆ Answer all questions to the best of your ability, showing your work and providing
sufficient explanation. No credit will be given to an answer without an explanation.
Partial credit will be given to partial or partially correct answers.
ˆ Start each problem on a new page and keep your answers to the subparts of a
problem together in the file you submit. You do not need to start every subpart on a new
page.
ˆ When you are done, submit a single file within LMS.
ˆ With the exception of any clarifying questions you ask me through the exam-support tool
in LMS, you MAY NOT discuss this exam with anyone else from within or from
outside the subject. Doing so would be a severe violation of the University’s academic-
integrity policy, and every occurrence will be investigated. You are allowed to use your
notes, textbooks, lecture slides, and other subject materials.
ˆ The exam total is 100 marks. Each problem is worth either 33 or 34 marks. The point
value of each sub-problem is indicated next to it.
ˆ Use these phone numbers for assistance if you are experiencing technical difficulties during
the exam: 13 6352 from inside Australia or +61 3 9035 5511 from overseas. Select option
1 for current students, then 1 again for exam enquiries.
ˆ Good luck!
Page 1 of 4
1. The use of nitrogen fertilisers by AgroTechCorp, an agricultural conglomerate, at one of
their plots of land leads to the release of nitrates into the groundwater. The nitrates
cause health problems for nearby residents: if the groundwater nitrate concentration is
x parts per million (ppm), the marginal externality cost to those residents, measured
in dollars, equals 487.2 × x. With AgroTechCorp’s current production technology, the
nitrate levels in the groundwater would be 19 ppm. Changing its production technology
(by, for example, introducing new planting patterns, incorporating precision fertilisation
technology, and reducing their reliance on nitrogen fertilisers) would allow AgroTechCorp
to mitigate the nitrate run-off but would increase its costs. The marginal cost of decreasing
the nitrate groundwater concentration by y ppm relative to the starting level of 19 ppm,
while maintaining the same output, is 174 × y dollars. (So, for example, the marginal
cost of further decreasing the nitrate concentration when it has been decreased by 1 ppm
to 18 ppm is $174, and $1740 when it has been decreased by 10 ppm to 9 ppm.)
(a) (10 marks) Find the socially efficient level of nitrate pollution in ppm. (Hint: You
need to express the marginal cost of abatement in terms of the actual groundwater
concentration.)
(b) (1 mark) Find the emission standard that would lead to the efficient level of nitrate
pollution.
(c) (4 marks) Find the emissions fee that would lead to the efficient level of nitrate pol-
lution. What is the total amount that AgroTechCorp would pay to the government
under the socially optimal emissions fee?
(d) (6 marks) The local environmental regulatory authority knows AgroTechCorp’s abate-
ment costs but incorrectly believes that the marginal externality cost is 652.5 × x
dollars, where, as before, x is the groundwater nitrate concentration in ppm. What
emission standard would the regulatory authority choose given its incorrect beliefs?
(e) (4 marks) Continuing from part (d), now assume that instead of setting an emission
standard, the regulator sets an emissions fee. What would that fee be? How much
would AgroTechCorp pay to the government under this fee?
(f) (8 marks) What is the loss in social welfare relative to the social optimum that
is brought about by the suboptimal emission standard in (d)? What about the
suboptimal emissions fee you found in (e)? Intuitively describe what is causing this
welfare loss.
Page 2 of 4
2. Assume that supply for motor scooters in the Australian domestic market is given by the
inverse-supply expression P = 1500 + 5QS and that inverse demand is P = 6500− 5QD,
where P is the price in dollars, QS the quantity supplied, and QD the quantity demanded
in the market. The world price for motor scooters is $2,000.
(a) (5 marks) Find the equilibrium price and quantity in the market for motor scooters
if Australia does not engage in any international trade. Compute the consumer
surplus, the producer surplus, and the total surplus in the market.
(b) (9 marks) Now assume that Australia trades on the world market for motor scooters,
exporting or importing depending on the relation between the world and domestic
prices. Find the price at which motor scooters will be sold in Australia, the quantity
purchased, the quantity produced, and the quantity of imports or exports. Compute
the consumer surplus, the producer surplus, and the total surplus in the market, as
well as the gains from trade relative to part (a).
(c) (10 marks) Worried about the health of the domestic motor scooter manufacturing
industry, the Australian government imposes a quota on the import of motor scoot-
ers, forbidding the import of more than 400 scooters. Find the price at which motor
scooters will be sold in Australia, the quantity purchased, the quantity produced,
and the quantity of imports or exports. Compute the consumer surplus, the pro-
ducer surplus, government revenue, and the total surplus in the market, as well as
the deadweight loss relative to part (b).
(d) (10 marks) After a think-tank report criticises the import quota, the Australian
government removes the quota, returns to free trade and instead announces a new
program to support domestic producers. The program pays $1,000 to domestic
manufacturers for each motor scooter produced. Find the price at which motor
scooters will be sold in Australia, the quantity purchased, the quantity produced,
and the quantity of imports or exports. Compute the consumer surplus, the producer
surplus, government revenue, and the total surplus in the market, as well as the
deadweight loss relative to part (b).
Page 3 of 4
3. This problem explores some issues around the regulation of monopolists. Assume a
monopoly firm that is facing a demand curve given by QD = 8 − 0.125P , where QD
is the quantity demanded and P the price in dollars. The marginal cost of the monopo-
list is given by MC = 4 + 4Q, where Q is its output.
(a) (7 marks) Find the socially efficient level of output in the market.
(b) (10 marks) Find an expression for the monopolist’s marginal revenue. What profit-
maximising uniform price would the monopolist set and what quantity would it sell
at that price? What would the deadweight loss be?
(c) (4 marks) Concerned about the deadweight loss, the competition regulator decides to
impose a price ceiling of $32 in the monopolist’s market. Find an expression for the
marginal revenue of the monopolist for quantities between 0 and 4 units under this
price-ceiling policy. (Hint: You may want to consider the prices that the monopolist
can charge if it produces four or fewer units of output and what the revenues in such
a case would be.)
(d) (4 marks) Under the same price-ceiling policy as in part (c), find an expression for
the marginal revenue of the monopolist for quantities above 4 units.
(e) (8 marks) Under the same price-ceiling policy as in part (c) and using your answers
to parts (c) and (d), find the monopolist’s profit-maximising uniform price and the
quantity it would sell. Compute the deadweight loss.