EXAMPLE FINAL EXAM QUESTIONS – short answer section
B1 - (14 MARKS)
Jeff has a vineyard in the Tamar Valley in Tasmania where he produces premium quality wine. He
sells the wine online, mainly to consumers in Tasmania and NSW who have the following demand
curves:
TqpTasmania 2160 −=
NqpNSW −= 80
Jeff’s marginal (and average) cost of producing premium quality wine is equal to 10. Assume that
there can be no resale of wine by purchasers and that Jeff can determine the location of the buyer,
Tasmania or NSW, based on where the wine is to be sent.
a) If Jeff engages in third degree price discrimination, at what price does he sell wine to buyers in
Tasmania and NSW? How much does he sell in each market and what are his total profits?
Indicate the market equilibrium in a clear and well-labeled diagram. [4 marks]
b) If Jeff must act as a single price monopolist at what price does he sell his wine to consumers?
What are his profits? Who gains and who loses compared to the outcome in (a)? Show the
outcome in a well-labeled diagram [4 marks]
[if you need to work with decimal numbers, please work with 2 digits behind the decimal point
only]
c) Consider the whole market (consisting of Tasmania and NSW). If Jeff was able to engage in
perfect price discrimination, how much wine would he sell and what would be his profit? Explain
in a few words what this means and at what price he would be selling his wine. Is this a desirable
market outcome from an efficiency point of view? Why or why not? [3 marks]
d) Jeff realizes that there is large demand across both states for a low-quality table wine, with low
alcohol content. For simplicity, assume he can produce table wine at a marginal (and average)
cost of $0. There seem to be two different types of consumers in the market, but Jeff cannot
distinguish between them.
qpaddictswinetable −= 50
qpsliwinetable 2140ker −=
Jeff is considering making the following offers. He offers both “packages” and consumers can
choose which one they prefer:
• 50 units of table wine at a price of $1250
• 60 units of table wine at a price of $1350
What profits will Jeff make from selling these offers of table wine? What type of pricing
behaviour is this called? Using this type of pricing, could Jeff do better and increase his profits?
If so, give an example. [3 marks]
BUSS1040 final exam practice 1
B2 - (11 MARKS)
Whooping cough is on the rise: the number of recorded sufferers has increased noticeably in the past
few years. Whooping cough is a serious and highly contagious respiratory infection. It causes some
suffering for adults and teenagers, but it is particularly dangerous for infants. The latter group is
affected more seriously and it may be fatal in extreme cases. Immunisation is the best way to prevent
the disease and the spreading of it. However, very few individuals actually get a vaccination.
Suppose demand for vaccination against whooping cough is Q = 200-2p and supply can be
represented as p = 22+Q/4. Suppose the external benefit to society of immunisation is EB = 21.
a) What is the market equilibrium without any government intervention? Compute it and draw it in
a well-labelled diagram. Note: draw a large and clear figure since you will need to add to it in
parts (b) and (c) of this question. [2 marks]
b) What is the socially optimal outcome in this market and the resulting deadweight loss? Compute
and clearly indicate both of these in the diagram from part (a). Explain briefly why there is a
DWL. [3 marks]
c) Suppose the government decides to provide a subsidy per vaccination, and pays the subsidy to
sellers. What is the optimal subsidy per vaccination? Explain why and clearly show your answer
in the diagram from part (a). [If it gets too messy, please draw a new diagram] [3 marks]
d) In case study 4.2. (How can we unjam traffic jams?) and 4.3 (Why would we want to trade
pollution?) there was a discussion about different ways to address externalities. Discuss
alternative mechanisms to address positive and negative externalities [3 marks].
BUSS1040 final exam practice 2
B.3 – (10 marks)
(a) Suppose the aggregate expenditures (AE) curve is given by the equation AE = 56.25 + G + MPC
(Y – tY – T), where G is government spending, MPC is the marginal propensity to consume, t is
the proportional tax rate, T is lump-sum taxes, and Y is real income (GDP).
i. Suppose G = 475, T = 300, MPC = 0.75, and t = 0.25. Draw the AE curve on a graph
with AE on the y-axis and Y on the x-axis. Draw a 45 degree line and indicate the
intercept and slope of the AE curve. [1 mark]
ii. Solve for the equilibrium level of output. Show this on the graph. [1 mark]
iii. Calculate the budget deficit? (Hint: what is G – T – tY ?) [1 mark]
iv. Now suppose the government increases spending to G = 635 and lump-sum taxes to
T = 420. Show the new AE curve on the diagram and solve for the new equilibrium level
of output. [1 mark]
v. Calculate the new budget deficit and compare your answer to (iii). Explain what
happened as clearly as possible. [2 marks]
(b) The Reserve Bank lowered the cash rate by 4.25 percentage points between August 2008 and
April 2009 to support the Australian economy during the Global Financial Crisis. What effect would
the reduction in interest rates have on consumption, business investment, the exchange rate and net
exports? Explain why. [4 marks]
BUSS1040 final exam practice 3