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ECON5101
Microeconomics
Assignment
Information:
1. DEADLINE: 9pm Thursday, 1st of February 2024.
2. The assignment comprises 3 pages excluding this cover page.
3. There are 3 questions. Answer all questions.
4. There are a maximum of 45 points to obtain in this assignment.
5. This assignment is worth 15 course marks.
6. Show your work in all questions, unless otherwise stated. Marks will be awarded for procedure
and reasoning, as well as for correct answers.
7. Illegible working and diagrams may not be awarded full marks. Ensure your writing is
sufficiently large and your scans are clear.
8. Submit your assignment as a PDF on Moodle. Please check that your file can be opened after
making your submission. Submissions which cannot opened will receive a mark of zero.
9. Late assignments will attract a penalty of 5% for each day it is late or part thereof. Techno-
logical failure is not a valid excuse for special consideration.
10. Any evidence of academic misconduct will be reported to the academic integrity
committee and may result in a mark of zero being awarded for this assessment
item or the course.
Question: 1 2 3 Total
Points: 18 10 17 45
Score:
Question 1 (18 points)
HobbiesCo is a firm that produces model trains in a perfectly competitive market. The pro-
duction of each model train requires millilitres of paint (P ), and grams of wood (W ). Their
production function is given by
f(P,W ) = min
{
6
√
P , 3W − 12
}
.
(a) (3 points) Draw the isoquant corresponding to q = 48 trains in a clearly labelled diagram
where P is the horizontal axis and W is the vertical axis. Label two distinct input bundles
(P,W ) in the diagram which give q = 48.
(b) (2 points) Compute the marginal products of each input.
(c) (1 point) Does this production function exhibit constant returns to scale? Using the
marginal products you have computed in the previous part, explain your answer
in no more than 25 words.
(d) (2 points) Suppose that HobbiesCo wants to produce q trains when the price of paint
is $72/mL and the price of wood is $18/g. Show that the minimum cost of such an
undertaking is
c(q) = 2q2 + 6q + 72.
(e) (1 point) Suppose that the market price is p, and HobbiesCo will produce q units of trains.
Using the cost function you found in the previous part, find the supply function of Hobbi-
esCo. Express it as a function of price.
(f) (2 points) Suppose that there are 60 identical firms like HobbiesCo who act as price-takers
and the market demand for model trains is given by
QD = 910− 5p.
Show that the short-run market equilibrium price in this industry is p∗ = 50.
(g) (3 points) Assuming no shocks to market demand, what is the largest whole number of
firms that this market can sustain in the long run equilibrium?
(h) (4 points) Suppose that we are in the long-run equilibrium given in the previous part.
Now, 20 of the firms successfully lobby the government for a subsidy of $5 per model train
sold. How many firms will there now be in the long run equilibrium?
Assignment 2 1
Question 2 (10 points)
Suppose that MiniChirp is a monopoly microchip manufacturer who faces the following demand
curves for its product in two different countries: Australia (A) and New Zealand (NZ).
Australia: QA = 400− pA,
New Zealand: QNZ = 150− 1
2
pNZ ,
where pi and Qi denote the price and quantity sold in country i respectively.
MiniChirp’s cost function is given by
c(Q) = 0.25(QA +QNZ)
2.
Assume that resale between countries is not possible and that MiniChirp is a profit maximiser.
(a) (3 points) Find the prices, pA and pNZ , which maximise MiniChirp’s profits, assuming no
capacity constraints.
(b) (1 point) Suppose that MiniChirp faces a capacity constraint of 250 units:
(QA +QNZ ≤ 250). What price that MiniChirp will charge in each country?
(c) (3 points) Suppose that MiniChirp faces a capacity constraint of 125 units:
(QA +QNZ ≤ 125). What price that MiniChirp will charge in each country?
(d) (3 points) Suppose that MiniChirp faces a capacity constraint of 20 units:
(QA +QNZ ≤ 20). What is the lowest price that MiniChirp will charge in each country?
Assignment 2 2
Question 3 (17 points)
Archibald Architecture and Erin’s Engineers are two firms that are working together to build a
new library for the local community. They must each contribute some amount of resources to
the build: Archibald will contribute a units of resources at a cost of a2, and Erin will contribute
e units at a cost of 2e2. The final value of the build is 10(a+ e− ae), which Archibald and Erin
split equally, so that each receives a revenue of 5(a+ e− ae).
(a) (2 points) Write down Archibald and Erin’s payoff functions.
(b) Suppose that the only resource contribution options available are 0, 1 and 2. Archibald
and Erin must make their decisions simultaneously without consulting one another.
i. (2 points) Compute the payoffs that correspond to w, x, y and z in the matrix below.
Erin
0 1 2
Archibald
0 0,w 5,3 10,x
1 4,5 4,3 4,-3
2 6,10 y,3 z,-8
ii. (2 points) Is (0,0) is a Nash equilibrium in this game? Justify your assertion in no
more than 25 words.
iii. (1 point) Is a resource contribution level of 2 rationalisable for Erin? Justify your
assertion in no more than 15 words.
iv. (2 points) Write down the two Nash equilibria of this game. No explanation is re-
quired.
v. (3 points) Suppose now, that instead of being limited to three contribution levels,
Archibald and Erin can contribute any non-negative amount of resources. Find the
contribution made by each firm in the unique Nash equilibrium of this game.
(c) Now, suppose that Erin makes her decision first, and Archibald observes this decision
before he makes his decision. Let the only resource contribution options available be 0, 1,
and 2 again.
i. (2 points) Draw a game tree to represent this dynamic game.
ii. (3 points) Write down the unique subgame perfect Nash equilibria of this game.