Information on final exam
The final exam will consist of three sections:
A: 10 multiple choice questions (25%)
B: 3 short answer questions (25%)
C: 3 problem-type questions (50%)
Section A will have 10 multiple choice questions that are of the same type as has been asked in the pre-tutorial quizzes.
Sections B and C will include 1 question from each main section of the subject:
• Perfectly competitive markets/Welfare and markets
• Theory of the firm/Managerial economics
• Game theory
The section B questions will be the same type of ‘Alan Accountant and Edwina Economist’ questions as in the old exams (2011 and 2014) available on the LMS site. The section C questions will be the same type of problem questions as in the old exams (that is, the questions are likely to ask for numerical and/or graphical analysis).
The scope of the exam is material covered in lectures and tutorials.
Extra important information:
• Final exam is a ‘hurdle’ in this subject.
• Final exam will be held online – We will provide more information about the details of accessing and submitting the exam later.
• Duration of final exam will be 3 ½ hours. There will be an announced start time (when the exam paper will become available) and announced end time (by when the exam paper will need to be uploaded).
Introductory Microeconomics Semester 2, 2020
Introductory Microeconomics
Semester 2, 2020
Lecture 23: Review lecture
Subject administration
Assignment 2
Information on doing the exam
Past exams and solutions
Assistance during swot vac
1. Overview
1] International trade - Policy effects
2] Costs – The main measures; The shape of SRATC
3] Profit maximisation – MR/MC
4] Welfare and market types
5] Dynamics – Q3 on assignment 2; In a PC market; In monopolistic competition
6] 2nd degree price discrimination - Versioning
7] Order advantage in sequential games
2. International trade – Policy effects
Saus
Daus
P* = $15
wp = $10
world price
QS1
QD1
Import quota – Mkt outcome
2. International trade – Policy effects
Saus
Daus
P* = $15
wp = $10
world price
QS1
QD1
Import Quota
Import quota – Mkt outcome
Sausquota
2. International trade – Policy effects
Saus
Daus
P* = $15
wp = $10
world price
QS1
QD1
Import Quota
Import quota – Mkt outcome
Pquota
Sausquota
2. International trade – Policy effects
Saus
Daus
P* = $15
wp = $10
world price
QS1
QD1
Import quota – Mkt outcome
Pquota
QS2
QD2
Sausquota
2. International trade – Policy effects
Saus
Daus
wp = $10
world price
QS1
QD1
Import quota - Welfare
Pquota
QS2
QD2
A
C
B
D
E
F
G
Sausquota
2. International trade – Policy effects
Saus
Daus
wp = $10
world price
QS1
QD1
Import quota – Welfare – No restrictions
Pquota
QS2
QD2
A
C
B
D
E
F
G
Sausquota
2. International trade – Policy effects
Saus
Daus
wp = $10
world price
QS1
QD1
Import quota - Welfare
Pquota
QS2
QD2
A
C
B
D
E
F
G
Sausquota
2. International trade – Policy effects
International trade – No restrictions International trade – With import quota
Consumer surplus A+B+D+E+F+G A+D
Producer surplus C C+B
Import suppliers F
Total A+B+C+D+E+F+G A+B+C+D+F
Change in surplus -E-G
Import quota - Welfare
3. Costs – The main measures
Total Cost = Fixed Cost + Variable Cost
Marginal Cost = Cost of an additional unit of output
Variable cost of q units = Sum of MC of first q units
Average cost = Cost per unit of output (eg., ATC)
SRATC = SRAFC + SRAVC
LRATC = Minimum average cost of unit of output from all available SR methods of production
3. Costs – The shape of SRATC
SRATC = SRAFC + SRAVC
Hence, shape of SRATC depends on:
i] ‘Combination’ of shapes of SRAFC and SRAVC
ii] Relative shares of fixed cost and variable cost; and
Shapes of SRAFC and SRAVC
a] SRAFC decreases continuously as qty of output increases;
] SRAVC: i] Constant MC => Constant SRAVC; ii] Increasing MC => SRAVC will be increasing
3. Costs – The shape of SRATC
5
10
15
20
25
30
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Number of students
Dollars (000s)
Commerce/law
Medicine
Computing/nursing/languages
$
qty
AFC
AVC
SRATC
Medicine
Average Total Cost
3. Costs – The shape of SRATC
5
10
15
20
25
30
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Number of students
Dollars (000s)
Commerce/law
Medicine
Computing/nursing/languages
qty
$
Commerce/Law
AFC
SRATC
AVC
Average Total Cost
4. Profit maximisation: MR/MC + 5. Welfare
On RHS is data on quantity demanded and price per hour for car park spaces in Boomtown. Suppose marginal cost of supplying each car park space is $1 per hour, and fixed costs equal zero.
a] What will be outcome if car park market is PC?
] What will be outcome if car parking is controlled by a monopolist supplier?
c] What are CS and profits for each market type?
Price per hour($) Quantity demanded per hou
8 1
7 2
6 3
5 4
4 5
3 6
2 7
1 8
4. Profit maximisation: MR/MC + 5. Welfare
a] PC:
Profits = 0 => MC = ATC = Price
=> P* = 1
=> Q* = 8
c]
=> Profits = 0
=> CS = XXXXXXXXXX XXXXXXXXXX1)+(1-1) = 28
4. Profit maximisation: MR/MC + 5. Welfare
] Monopoly:
= 4; = 5
c]
Profits = 4[5-1] = 16
CS = XXXXXXXXXX5-5) = 6
Total surplus = 22
=> DWL = 28-22 = 6
Price per hour($) Quantity demanded per hour Total revenue Marginal revenue Marginal Cost
8 1 8 8 1
7 2 14 6 1
6 3 18 4 1
5 4 20 2 1
4 5 20 0 1
3 6 18 -2 1
2 7 14 -4 1
1 8 8 -8 1
6. Dynamics – Q3 on Assignment 2
1] Q3 on Assignment 2 – See solution sheet – Part (b) more difficult than I intended. Didn’t mean for you to have to study dynamics of entry to a monopolistically competitive market.
Main point of question was to try to show the idea that whether banks pass through the full amount of decreases in costs to customers will depend on the degree of competition in a market: In PC market, cost decrease is fully passed on (as long as industry is constant cost). Where firms have market power, not all of the decrease will be passed on.
6. Dynamics – Q3 on Assignment 2
qty
$
Demand
MR
MC1
P1*
q1*
Part
6. Dynamics – Q3 on Assignment 2
qty
$
Demand
MR
MC1
P1*
q1*
MC2
q2*
P2*
Part
6. Dynamics – Q3 on Assignment 2
qty
$
Demand
MR
MC1
P1*
q1*
MC2
q2*
P2*
Part
6. Dynamics – Dynamics in monopolistic competition
2] Effect of entry by new firms on an incumbent supplie
q
q
q
$
$
$
MC
D
MR
P*
q*
ATC
Positive profits
Entry by new
suppliers
D1
D2
Effect on firm’s demand of
entry by new suppliers:
a] Decrease level of demand;
] Increase own-price elasticity of demand
1] If imitation is the only force:
MC
ATC
D
q*
P*
MR
P = ATC
=> Zero profits
2] Innovation: Product differentiation
To seek to preserve market power &
earn positive economic profits
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Decrease in MC/SRATC – What happens?
Stage 1: Initial situation (Point A):
Price = P1*, Firm produces q1* and makes zero profits; Market Qty traded = Q1*.
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Market
Firm
$
$
Qty
qty
D1
P1*
Q1*
P1*
MR1*
Marginal Cost
q1*
ATC
A
A
SR Market S1
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Decrease in MC/SRATC – What happens?
Stage 1: Initial situation (Point A):
Price = P1*, Firm produces q1* and makes zero profits; Market Qty traded = Q1*.
Stage 2: Decrease in MC/SRATC (Point B) – Short-run:
Increase in mkt supply: Price = P2*, Firm produces q2* and makes positive profits, Market Qty traded = Q2*.
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Market
Firm
$
$
Qty
qty
D1
P1*
Q1*
P1*
MR1*
MC1
q1*
ATC1
A
A
SR Market S1
q2*
MC2
ATC2
SR Market S2
P2*
P2*
MR2*
Q2*
B
B
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Market
Firm
$
$
Qty
qty
D1
P1*
Q1*
P1*
MR1*
MC1
q1*
ATC1
A
A
SR Market S1
q2*
MC2
ATC2
SR Market S@
P2*
P2*
MR2*
Q2*
B
B
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Decrease in MC/SRATC
Stage 1: Initial situation (Point A):
Price = P1*, Firm produces q1* and makes zero profits; Market Qty traded = Q1*.
Stage 2: Decrease in MC/SRATC (Point B) – Short-run:
Increase in mkt supply: Price = P2*, Firm produces q2* and makes positive profits, Market Qty traded = Q2*.
Stage 3: Long-run: Positive economic profits induces entry of new firms. Entry continues until all firms make zero economic profits (Point C):
Price = P3*, Firm produces q1* and makes zero profits, Market Qty traded = Q3*.
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Market
Firm
$
$
Qty
qty
D1
P1*
Q1*
P1*
MR1*
MC1
q1*
ATC1
A
A
SR Market S1
q2*
MC2
ATC2
SR Market S2
P2*
P2*
MR2*
Q2*
B
B
P3*
MR3*
6. Dynamics – Dynamics in a PC market
3] Effect of change in costs in a PC market
Market
Firm
$
$
Qty
qty
D1
P1*
Q1*
P1*
MR1*
MC1
q1*
ATC1
A
A
SR Market S1
q2*
MC2
ATC2
SR Market S2
P2*
P2*
MR2*
Q2*
B
B
P3*
MR3*
P3*
SR Market S3
C
Q3*
C
6. Dynamics – Dynamics in a PC market
4] Long-run market supply in PC market
Maps out LR equili
ium (P*; Q*) combinations that occur when there are changes in market demand
Eg., Increase in demand -> SR: Increase in P*
Firms make profits in SR -> Entry of new firms -> Scenarios for LR:
1] Entry of new firms has no effect on firms’ costs => Price must decrease back to original equili
ium price for firms to make zero profits => LR Supply is constant at original equili
ium price
2] Entry of new firms increases MC/ATC for firms in the market => Price only needs to decrease part of the way back to original equili
ium for firms to earn zero profits => LR supply is upward sloping
3] Entry of new firms decreases MC/ATC for firms in the market ??
7. 2nd degree price discrimination
‘Second degree’ = Other types of price discrimination: Eg., Versioning; Two-part pricing
2014, qn B2: Peta the Publisher must decide on a publication strategy for the new economics blockbuster book ‘Maxxing Your Profit’. She can publish only a hardback version, only a pape
ack version, or both hardback and pape
ack versions (with the pape
ack version being published 6 months after the hardback version). Peta believes there are two types of customers – ‘Economics enthusiasts’ (of whom there are 10) and ‘Others’ (of whom there are 40). Information on the willingness