Assignment:
Question 1
Consider an everyday good or service. What are the most important, managerially significant, costs of supplying that good or service to you? Estimate and explain the costs from the best available information.
Be sure to:
i) Define the short-run period that you believe is managerially significant, and why;
ii) Identify which costs are variable and which are fixed, and provide estimates of the more managerially significant costs;
iii) Draw and describe the likely nature of the short-run cost curve with respect to managerially significant quantities;
iv) Discuss implications for the business based on your analysis.
This answer should not exceed 750 words and will be assessed holistically; components i-iv may be more or less important in your answer, depending on the good or service you choose
Question 2
The Singapore Government taxes motor fuel differently depending on the type of fuel. For many years, there was no tax on diesel fuel, but there was a substantial tax on petrol. At the same time, the annual road tax on diesel powered vehicles was substantially higher than the road tax on petrol powered vehicles.
a) Suppose (the numbers are loosely based on reality) that the tax on petrol is raised from 40 cents per litre to 60 cents per litre. The before-tax total cost of retailing petrol is $1.20 per litre. Assume that 100% of the tax is always passed through to consumers. After the increase in taxes, the quantity of petrol sold falls from 3,000,000 litres a day to 2,800,000 litres a day.
Calculate the price elasticity of demand for petrol using the mid-point formula, based on the change in price due to the tax. Use three decimal places in your calculations. What are the implications for policymakers who want to raise revenue, when considering raising taxes on petrol?
b) Predict the quantity of petrol sold if the before-tax total cost of retailing petrol rises from $1.20 to $1.50 per litre. The tax remains at 60 cents per litre. Assume that 100% of the tax is always passed through to consumers. Use the elasticity estimate from (a) to provide the prediction in percentage change terms, and predict the final quantity of petrol sold after the price rises.
c) Also, provide the predicted quantity of petrol sold in (b) based on deriving the demand curve from the information provided. First derive a linear equation for the demand curve, then, provide the predicted quantity.
d) Identify i) the price elasticity of demand relationship between petrol and dieselpowered vehicles, and; ii) the price elasticity of demand relationship between vehicle ownership and fuel consumption. Provide the technical term (e.g. substitutes, complements, inferior) and the sign (e.g. positive, negative, neither). Justify your responses.
e) Explain how a policymaker who is considering how to raise tax revenues from fuel and vehicles should make use of the insights from your elasticity analysis in (d).
Question 3
MedEcon develops and produces equipment for neurological surgery. It holds a patent on brain surgery implants and brain surgeons in the market are only trained to use MedEcon's implants.
Market demand for lifetime sales of the product is P = 12000 - 2Q.
MedEcon has research and development fixed costs of $2,000,000. Its marginal costs are $1,000 for the first 1500 implants. Starting with the 1501st implant onwards, marginal costs increase to $2,000 as MedEcon has to pay overtime wages.
a) Given the information provided, calculate the optimal monopoly price, monopoly quantity, as well as monopoly profit. Use a suitable diagram to identify the optimal monopoly price and quantity.
Hint: You will need to derive the marginal revenue curve from the market demand curve to answer this problem.
b) Calculate producer and consumer surplus under monopoly. Compare these figures to the producer and consumer surpluses under perfect competition, and explain why there is a difference.
c) Monopolies lead to a welfare loss compared to perfect competition. Calculate this "deadweight loss" of Monopoly in case of MedEcon. Should governments always try to eliminate monopolised markets? Why or why not?
Question 4
Retailers frequently hold sales promotions during the festive season, where goods are discounted heavily relative to their regular prices. Yet, the festive season is precisely when demand is high.
a) Discuss why this is puzzling from the viewpoint of standard supply and demand theory. Using a supply-demand graph for the market for festive goods (e.g. pineapple tarts, holiday decorations, etc.), explain why a simple increase in demand should not lead to discounting (lower prices) during the festive season.
b) Turning to an individual, perfectly competitive retailer in the short run, show and explain using a supply-demand graph why a simple increase in demand should not lead to discounting (lower prices) from an individual perfectly competitive retailer during the festive season. Contrast your supply-demand graph to that in (a).
c) Suppose individual retailers are imperfectly competitive in the short run. Using a supply-demand graph, show how an increase in demand combined with an increase in elasticity (more elastic) would lead to a reduction in price. Explain why the assumption of imperfect competition, rather than perfect competition, is required.
d) From the individual imperfectly competitive retailer's perspective, explain why the festive season could generate this combination of an increase in demand together with a change in elasticity. Consider the role of competition from other retailers in your analysis, and provide an example of this phenomenon from Singapore. No graph is needed.
e) Long-run analyses of competitive markets predict that prices should fall to the minimum of long-run average costs. Briefly discuss the relevance of this prediction for the market for seasonal / festive products. In your answer, consider one or two of the key assumptions motivating the theory of long-run market equilibrium, and assess whether they apply to the case of seasonal / festive products. No graph is needed.