Task 2: Elasticity
For each pair of items in questions 1 and 2, determine which product is more price elastic (would
have a higher price elasticity of demand in absolute value). Explain your answer including
identifying the determinant of elasticity.
1. Holiday to Europe and a bag of rice. (1 mark) –
2. Weetbix (a brand of cereal) and electricity used in your home. (1 mark)
Read the following excerpt and answer question 4.
Need a kindergarten spot in Mongolia? Play the lottery.
Mongolia’s baby boom is pushing its schools to breaking point, with desperate parents facing the stark choice of relying on a lottery system or paying for pricey private classes in capital Ulaanbaatar. Spots in coveted government-funded kindergartens, for children aged two to five, are determined by an online ballot. Those who miss out risk being left out of the early years education system altogether — unless they can afford a feepaying option. The city’s publicly funded kindergartens have space for just half of the 146,000 children between the ages of two and five who live there, according to the municipal education department. Experts blame the shortage on bad government policy and poor long-term planning. The majority of Mongolia’s state-run schools were built during the Soviet era, and relatively few new facilities have been added since the country became democratic in 1990. Those who do get in face crammed classrooms and overburdened teachers as resources are stretched. The overcrowding also poses health risks, with germs and the flu being passed around, leaving hospitals struggling to attend to a high number of sick children. Those with a high enough income no longer even bother with the ballot as the private options offer better learning environments. “There were enough warning signs, but not enough measures taken,” Batjargal said. Birth rates soared in the Year of the Golden Pig in 2007, as Mongolians believe that year brings wealth, but little was done in anticipation of the extra demands on resources as those babies grew up. The government is building schools in the ger, or slum, districts of Ulaanbaatar, but the country’s debt problems have restricted spending. Author Khaliun Bayartsogt, Ulan Bator (AFP) Source: Seven News, Yahoo web site (https://au.news.yahoo.com/world/a/37266208/need-akindergarten-spot-in-mongolia-play-the-lottery/)
4. Given the information in the article use the demand and supply framework to analyse the market for government provided childcare services. In a separate graph analyse the market for private childcare services. In your answer discuss the elasticity of supply in each case and contrast between the two markets. In addition, identify any shortage or surplus in each market. (4 marks) –
Task 3: Costs of Production
1. Suppose the total cost of producing 10 000 tennis balls is $60 000 and the fixed cost is $20 000. What is the variable cost? When output is 10 000, what are the average variable cost and the average fixed cost? (1 mark) – Maximum number of words 40 + calculations
2. Suppose you go to university and live in a residential college on campus. You pay the college for your room and board. Assume that you would have had to move out of home (with your parents) whether you went to university or taken up a full time job, and that you used some of your savings as payment for tuition). What are two examples of an explicit opportunity cost of attending university? What are two examples of an implicit opportunity cost of attending university? What is an example of a cost of attending university that is not an opportunity cost? (2 marks) – Maximum number of words 100
Task 4: Market Power
2. Explain why a firm in a perfectly competitive market charges the market price (as set by the market demand and market supply curve). How is this different to a firm in a monopolistically competitive market? (2 marks) –
Task 5: Business Strategy
Assume that two interior design companies, Alistair and Baine, are competing for customers and, if they both advertise, they would each earn $30 million in profits. If neither advertises, they each earn $50 million in profits. If one advertises and the other doesn’t, the firm that advertises earns $40 million in profit while the other earns $20 million in profit.
1. Present the information above in the form of a payoff matrix. Let Baine be the row player and Alistair the column player. (1 mark) – No words are required only payoff matrix
2. Define Nash equilibrium. What is (are) the Nash equilibrium(s) in this game. Explain. (2 marks) –
3. Define dominant strategy. Is there a dominant strategy for Baine and, if so, what is it? Explain. (2 marks)
