ECON10004: Introductory Microeconomics
Introductory Microeconomics
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ECON10004: Introductory Microeconomics // Assignment
1000 words limit (does not include diagrams)
Submission:
- you must submit your assignment via the LMS subject page before 6.00 pm,
Wednesday 04-October, as a single .pdf file;
- the subject has a “no-extension policy”; thus, late submissions will not be accepted;
- to double check that you uploaded the correct file and to confirm your submission’s
timestamp, you may want to either view or download it; for step-by-step instructions,
- after you have submitted your assignment, please remember to also keep a local copy.
Logistics:
- there is a maximum limit of 1000 words (not including equations, diagrams, or the
text of the problem itself);
- all problems are compulsory, and must be solved in the order in which they appear;
- all answers must be clearly labelled (e.g., write “c)” before your third answer); you
may (but don’t have to) copy the question before providing your answer to it
- answers must be fully typed; diagrams may still be hand drawn, but please be sure to
insert them in the right place in the file, as only one file may be submitted
- a maximum of 100 points are awarded according to the quality of the answers
Note: Quality answers are succinct and legible; points may be deducted for exceeding
the word limit, or for not submitting a typed assignment. At the same time, quality
answers will show any relevant intermediary equations and steps that are required to
derive a result.
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ECON10004: Introductory Microeconomics // Assignment—2 (15%)
Due date: Wednesday 04-Oct by 6.00pm // 1000 words limit (does not include diagrams) // Good luck!
I. Consider the following simplified scenario. Suppose that the Australian Football League (for
short, AFL) has exclusive rights to organize the AFL Grand Final, which determines the
winners of the season. The AFL decides that the next Grand Final will be hosted at the
Melbourne Cricket Ground stadium (MCG). The contractual agreements are such that the AFL
has no fixed costs for organizing the game, but it must pay a marginal cost MC of $40 per seat
to the owners of the MCG. Suppose that two types of tickets will be sold for the game:
concession and full fare. Based on any official document that attests to their age, children and
pensioners qualify to purchase concession tickets that offer a discounted price; everyone else
pays the full fare. The demand for full-fare tickets is QF(P) = 160 – 2P. The demand for
concession tickets is QC(P) = 140 – 2P.
1. The market for full fare tickets (F) (35 points)
a) Calculate the inverse demand, write the profit maximizing condition, compute the
profit maximizing price !"and the number of tickets !" that the AFL will choose to
sell at full fare, as well as its profit π!". (5 points)
b) Use a diagram to illustrate the marginal revenue MR, the producer surplus PSF that the
AFL enjoys, the consumer surplus of the full fare paying customers CSF, and the
deadweight loss DWLF in this market. Then, compute CSF and DWLF. (6 points)
c) Tax per unit (TU): The government decides to tax the AFL at $2 per ticket sold. Find
the new optimal price #$" and quantity #$" that the AFL chooses and compute its
profit #$" . Compute the government’s tax revenue TRTU. (9 points)
d) Lump sum tax (LS): Instead of a tax per unit, the government imposes a lump tax of
$75 on the AFL. Find the new optimal price %&" and quantity %&" that the AFL
chooses and compute its profit %&" in this case. (9 points)
e) Suppose that the government is looking to tax the AFL to raise revenue for building
new sport facilities for kids and hires you to advise which one of the taxes above – a
tax per unit or a lump sum – to implement. Which one of the two taxes would you
recommend? Justify and explain why. (6 points)
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2. The market for concession tickets (C) (20 points)
f) Calculate the inverse demand, write the profit maximizing condition, compute the
profit maximizing price '"and the number of concession tickets '" that the AFL
will choose to sell, as well as its profit π'". (5 points)
g) Use a diagram to illustrate the marginal revenue MR, the producer surplus PSC that
the AFL enjoys, the consumer surplus for concession tickets customers CSC, and the
deadweight loss DWLC in this market. Then, compute CSC and DWLC. (6 points)
h) Suppose that the government wants to encourage children and pensioners to attend
sport events. To do so, it is willing to give the AFL a subsidy of s per concession
ticket sold, but the government wishes to calibrate this subsidy such that the AFL will
sell the same number of concession tickets as in perfect competition. Assuming that
the government knows the demand and the costs that the AFL has, compute how
much the subsidy s should be. (9 points)
3. Combined/merged market (M) (30 points)
i) Suppose that the AFL becomes unable to verify the age of its customers; thus, the
formerly distinct full fare and concessional ticket markets must be combined/merged
in one single market. First, write the equation of the combined demand and show it
using a diagram. Then show and calculate the profit maximizing price ""and number
of tickets "" that the AFL will choose to sell, as well as its profit "". (15 points)
j) How is each category of customers (i.e., full fare vs. concessional ticket customers)
affected by the market merger? Do customers in each category benefit, or are they
harmed by the merger? Justify and explain your answer. (6 points)
k) Given the choice, would a profit maximizing AFL prefer to operate distinct full fare
and concession ticket markets, or just one single merged market? Justify your answer.
(4 points)
l) If the government (seeking to maximize social welfare) could mandate which type of
market AFL should operate, should it opt for requiring distinct full fare and
concession ticket markets, or just one single merged market? Justify your answer.
(5 points)
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II. Suppose you work as a chief executive officer (CEO) for an airline. One of your airline’s
wide-body aircrafts is operated with a two-class configuration that has: 500 economy seats
and 200 business seats. (15 points)
On the route that this wide-body aircraft is operated, the airline’s marginal cost per passenger
(pax) is $1,000 in economy and $1,500 in business.
The airline’s internal data shows that the willingness to pay (WTP) of leisure pax for
travelling in economy is $2,000, while their WTP for travelling in business is $2,500;
meanwhile, the WTP of the business pax for travelling in economy is $4,500, while their
WTP for travelling in business is $10,000. Finally, the airline charges different prices for
economy and business, and there are more pax with WTP’s as specified above than there are
seats in each class.
Because the maximum certified capacity for this wide-body aircraft is 500 seats in economy,
the airline cannot further increase the number of seats in this class. However, if the airline
would deliberately further degrade its service in economy (by e.g., offering less tasty food,
slowing down the check-in process, and so on), thus effectively transforming economy into
misery, internal estimates show that the WTP of the leisure pax for travelling in misery-class
would be $1,800, while the WTP of the business pax to travel in misery would be $3,000.
The following table summarizes the information.
No. of
seats/pax
WTP & MC / type of pax Misery Economy Business
500 Leisure pax WTP $1,800 $2,000 $2,500
200 Business pax WTP $3,000 $4,500 $10,000
Marginal cost per pax $1,000 $1,000 $1,500
m) Your sole objective as CEO is to maximize the profit for the airline. Under this
assumption, would you as the CEO prefer to deliberately damage your service in
economy? That is, would you prefer to update your offering from [economy and
business] to [misery and business]? Justify your answer.