ECON10004 Introductory Microeconomics - Department of Economics

ECON10004Introductory MicroeconomicsSUBJECT GUIDESemester 2, 2012Prepared byNahid KhanDepartment of EconomicsFaculty of Economics and Commerce

2Subject Guide ContentsA. Key Information………………………………… 3B. Subject details………………………………........4C. Subject objectives……………………………….. 5D. Lecture Outline and Readings…………………... 6E. Details on Assessment…………………………... 8F. About Tutorials………………………………….. 9G. Tutorial Enrolment Information………………… 9H. How to Study…………………………………….10I. Resources for Study……………………………… 11J. Plagiarism……………………………………….. 13K. About Microeconomic Theory…………………...15Appendices1. Lecture outline and readings –Earlier textbook editions…………………………… 192. Sample multiple choice exam questions………… 213. Assessment exercise no.2 (Assignment 1)………. 254. Assessment exercise no.3 (Assignment 2)……… 325. Important notes on doing the assignments………. 346. 2011 Final examination…………………………..37

3A. Key informationLecturer:Nahid KhanRm. 606, Arts WestPhone: 8344-3621Email: n.khan@unimelb.edu.auOffice hours: Tuesdays 2pm – 4pmAssessment Dates1. Tuesday Aug 14 (12 midday) to Thursday Aug 16 (12 midday) – Multiple-choiceexam (on-line).2. Wednesday Sep 5 (4.00pm) – Assignment 1.3. Wednesday Oct 10 (4.00pm) – Assignment 2.Web address:http://www.lms.unimelb.edu.au[Use the same username and password that you use to access your University ofMelbourne email account.]

4B. Subject detailsClass times:a) Lectures – 2 x 1 hour each week –Lecture times:Monday - 1.00 and repeated on Tuesday 11.00 - Prince Phillip Theatre,Architecture.Thursday - 11.00 and repeated on Thursday 1.00 - Prince Phillip Theatre,Architecture.b) Tutorials – 1 x 1 hour each week (Timetable via ISIS – See section G of SubjectGuide for details.) Begin in Week 2 – from Monday July 30.Textbooks:• Required -Principles of Microeconomics – Joshua Gans, Stephen King, and N. Gregory Mankiw(GKM). [Any of the 1 st , 2 nd , 3 rd or 4 th editions can be used.]Microeconomics: Case Studies and Applications – Jeff BorlandReadings for each lecture from the current editions of the textbooks are listed insection D of the Subject Guide. Corresponding readings from previous editions of thetextbooks are listed in Appendix 1 of the Subject Guide.These texts are required for the subject. For most lectures they are the onlyprescribed reading. At some points in the subject however we will move beyond thecoverage of the GKM text. For these lectures reading material is provided to you inthe ‘Reading hand-outs’ that will be distributed.• Recommended –The Undercover Economist – Tim Harford (330.90511 HARF).Reinventing the Bazaar – John McMillan (330.122 MCMI).[These books provide excellent non-technical introductions to many topics that wewill study, and include plenty of useful examples. Either one or both could be read atthe start of semester as an introduction to the subject, or during the semester to helpyou review what we are studying. The books should be thought of as an optionalsupplement to the texts. Reading them is a way to develop your understanding ofmicroeconomics, and to see a range of applications of key concepts. But materialfrom these books will not be directly examined. Suggestions for other readings onmicroeconomics are in the ‘Ideas for Extra Reading’ section of the LMS subject site.]• Other resources –Principles of Microeconomics: Study Guide – Judy Tennant and David R. Hakes.Assessment:Exercise 1: Multiple choice exam (5%) – On-line - To be completed between TuesdayAug 14 (12 midday) to Thursday Aug 16 (12 midday)Exercise 2: Assignment 1 (10%) – Due: Wednesday Sep 5 (4.00pm).Exercise 3: Assignment 2 (15%) – Due: Wednesday Oct 10 (4.00pm).Exercise 4: Tutorial marks (10%).Exercise 5: Final examination (60%) – Two hour examination.

5C. Subject objectivesStudents who complete this subject will be able to:• Describe the main objectives of the study of economics - to seek to understand theoperation of the economy, and to guide decision-making by individuals, businessesand government.• Explain the nature and role of theory and models in economic analysis.• Explain the concepts of demand, supply, and market equilibrium; and apply themodel of demand and supply in a market to explain the determinants of prices andoutput of goods and services.• Explain how market and social welfare outcomes are affected by changes indemand/supply and government policy, and explain how and in what circumstancesintervention by government in the operation of the economy can improve efficiencyand social welfare.• Explain models of firm behaviour in choosing output, price, and how to produce.• Identify ‘strategic situations’ in economic activity, and be able to analyse andpredict outcomes of strategic situations.• Identify the main characteristics of different market types such as perfectlycompetitive and monopoly markets. Describe the nature of competitive behaviour inthose markets, analyzing and predicting price and output outcomes in the differentmarkets.• Use examples to illustrate key concepts – such as the role of demand and supplyfactors in determining market outcomes, the effects of government intervention onmarket outcomes, the existence of strategic situations in the economy, and differenttypes of markets.• Apply economic models of individual behaviour and markets to describe the mainfeatures of actual markets, and to explain outcomes in actual markets, including pricesand output levels, and business performance and profitability.• Evaluate and critically analyse government policy, and make an informedcontribution to public debate on economic issues.• Proceed to the study of other economics and commerce subjects that have aknowledge of introductory microeconomics as a prerequisite.

6D. Lecture Outline and ReadingsLecture Date Topic Reading 1 Reading 2GKM – 4 theditionCaseStudybookA. Introduction1 Jul 23, 24 Subject overview 17-332 Jul 26 Introduction to keyconcepts inmicroeconomicsReadinghand-out 1B. Perfectlycompetitivemarkets3 July 30, 31 Demand and supply 62-75 2.14 Aug 2 Market equilibriumand comparativestatics5 Aug 6,7 What determinesprice and quantity? –1. Elasticity andapplications6 Aug 9 What determinesprice and quantity? –2. GovernmentinterventionC. Welfare andmarkets7 Aug13, 14 Welfare in perfectlycompetitive markets1.2, 1.575-82 2.3, 2.488-108 2.5113-128 2.8134-50; 2.6155-648 Aug 16 International trade 173-89 3.2, 3.49 Aug 20, 21 Market failure 1: 200-19 4.1Externalities10 Aug 23 Market failure 2: 225-32 4.3Public goods11 Aug 27, 28 Markets – A review 1.6, 2.12,4.5D. The firm andmanagerialeconomics12 Aug 30 Key decisions andkey concepts270-77 5.113 Sep 3, 4 Measures of cost 278-86 5.214 Sep 6 Strategies to reducecosts/Introduction torevenue348-49 5.3, 5.4,5.5

715 Sep 10,11The ‘basic’price/quantitydecision16 Sep 13 The effect ofcompetition –Perfectly competitivemarketsSemester break17 Oct 1,2 The effect ofcompetition –Monopolisticcompetition andMonopoly/Governmentregulation293-98;315-26298-309 5.7327-30;339-40;371-81;396-4005.1018 Oct 4 What price to set? 330-39 5.9E. Game theory19 Oct 8, 9 Introduction to gametheoryReadinghand-out 220 Oct 11 Simultaneous games Readinghand-out 221 Oct 15, Sequential games Reading16hand-out 222 Oct 18 Application to 349-60oligopolyF. Review23 Oct 22, New developments23 in microeconomics24 Oct 25 Exam review6.1, 6.26.4

8E. Details on AssessmentExercise 1: Multiple choice question exam (5%)The multiple-choice exam will be conducted on-line through the LMS subjectwebpage. There will be 10 multiple-choice questions (each worth equal marks). Youwill have 30 minutes to complete the exam. Each student will receive a different setof questions randomly chosen from a much larger set of questions. A sample of thetypes of questions that might be asked is included as Appendix 2 to this SubjectGuide.Exercise 2: Assignment 1 – 1000 words (10%)In this assignment you will be required to use economic concepts to answer questionson material that relates to the sections B and C of the subject. Assignment 1 isincluded as Appendix 3 to this Subject Guide. You should also read ‘Important noteson doing the assignments’ which is Appendix 5 to this Subject Guide.Exercise 3: Assignment 2 – 1500 words (15%)In this assignment you will be required to use economic concepts to answer questionson material that relates to section D of the subject. Assignment 2 is included asAppendix 4 to this Subject Guide. You should also read ‘Important notes on doingthe assignments’ which is Appendix 5 to this Subject Guide.Exercise 4: Tutorial Marks (10%)At the end of semester your tutor will assign you a mark out of 10 for tutorialparticipation. Your grade (5marks) for participation will depend on: evidence ofpreparation for the tutorial; frequency of participation in discussion; relevance andlogic of comments in discussion; and evidence of active listening to other students’contributions. The other 5 marks will be awarded to you by doing some simplequizzes type questions each week in the tutorial. These questions will be fairlystraightforward if you have done the tutorial preparation. 10 quiz marks out of11weeks tutorials will constitute the 50% of tutorial marks. Note that to receive amark for tutorial participations, you must have a valid tutorial enrolment.Exercise 5: Final examination (60%)Held at the end of semester. Duration – Two hours. Will involve a mix of multiplechoice, short answer, and essay type questions. The final examination paper for 2011is Appendix 6 to this Subject Guide. More details about the exact format of the 2012exam will be provided later in the semester.Submitting Assignments 1 and 2Assignments 1 and 2 will be submitted in electronic format using the AssignmentTool. You can access the Assignment Tool by clicking on ‘Assignment Tool’ in thenavigation menu from the LMS subject website. A guide to using the AssignmentTool can be downloaded from:http://tlu.ecom.unimelb.edu.au/pdfs/StudentsGuideAssignmentTool.pdfPlease note that you are required to keep a copy of your assignment after it has beensubmitted, as it may be necessary for you to be able to provide a copy of yourassignment at some later date.Meeting DeadlinesIt is very important that you submit Assignments 1 and 2 by the specified times on thedue dates. After that time there will be a penalty for late submission. To request an

9extension for an assignment, you’ll need to submit an ‘Assignment Extension RequestForm’. The form must be submitted at Commerce Student Centre (ICT Building, 111Barry Street, Upper Ground Floor). Information on requesting an extension isavailable at: http://www.ecom.unimelb.edu.au/students/undergrad/assignment.htmlLate assignments, where approval for late submission has not been given, will bepenalised at the rate of 10% of the total mark per day, for up to 10 days, at which timea mark of zero will be given.Special ConsiderationIf you wish to apply for Special Consideration in relation to any component ofassessment in this subject you will need to lodge an application online with theCommerce Student Centre. Application for Special Consideration in relation to acomponent of assessment must be lodged within 3 working days of the date thatcomponent of assessment was due to be submitted/performed. Information on theprocess for applying for Special Consideration, and on the material you will need tosubmit is available at: http://www.ecom.unimelb.edu.au/students/special/F. About tutorialsPre-tutorial workEach week in tutorials a ‘blue sheet’ will be distributed. The blue sheet provides aguide to the subject matter of that week’s lectures and what will be the subject matterof the next week’s tutorial. For example, the blue sheet distributed in week 1 coversmaterial that is the subject of lectures in week 1, and will be reviewed in tutorials inweek 2. The blue sheet lists the main concepts and readings, and includes reviewquestions. It is an important part of learning in this subject that you should attemptthese questions. Usually solutions to the questions will not be covered in tutorials.Instead, solutions are posted on the LMS subject site. This happens at the end of theweek following when the blue sheet is distributed.In-tutorial workEach week in your tutorial a ‘pink sheet’ will be distributed. Before starting thetutorial tasks you will be given a 5 minute quiz for your own feedback. This will beworth 5 marks for the entire semester. The pink sheet lists the tasks that will becovered in the tutorial. Generally these tasks will be problem-type questions. Yourtutor will break you up into small groups where you will work out solutions to theproblems. At the end of the tutorial the tutor will bring everyone back together andreview solutions. Often this will involve asking the small groups to take turns inpresenting their suggested solutions.G. Tutorial enrolment informationThere will be weekly tutorials starting in the week beginning Monday July 30.Allocation to tutorials is determined by the student system ISIS. You must enroll in atutorial via ISIS as soon as possible. You access ISIS through the Student Portal.If you have any problems regarding tutorials contact me by email.Note that tutors are not permitted to authorise a transfer from one tutorial to another,not even from one of their own tutorials to another of their own tutorials. Tutors areonly permitted to allow you to attend their tutorial if you are not enrolled in that

10tutorial: Where because of illness you have missed your allocated tutorial in aparticular week. In that case a tutor may permit you to ‘sit in’ for that week only andon no subsequent occasion during the semester. In this case you may attend any othertutorial in that week and you should obtain an attendance form from the tutor to passon to their regular tutor to be entered into the tutorial participation and quiz marksrecord.H. How to study• Attend lectures. These will give you a broad understanding of each topic and whereit fits into the subject. You should also read the relevant pages of the textbook and thecase study reading.• Work outside class contact hours. Working outside class hours is essential forperforming to your full potential in the subject. It is recommended that 5-6 hours perweek (on average) should be spent on Introductory Microeconomics – This wouldconsist of about 1 hour per week reading the textbook, 2 hours per week doing thepre-tutorial exercises, 2 hours per week (averaged over the semester) on theassessment tasks, and ½ hour using the on-line revision tools.• Learn how to apply the main concepts. To do well in this subject it is not enoughto be able to remember definitions or to provide a summary of lectures; what is mostimportant is to be able to apply the concepts and approaches that are presented. Thebest way to develop this skill is through ‘active learning’ – for example, trying toanswer problems and questions, and discussing those answers with your fellowstudents and with your tutor. Of course, you also need to know things like definitionsof concepts – but this should be the start rather than the end of your study for thesubject.• Practice writing up answers and doing diagrams. You should attempt to write upanswers to each set of pre-tutorial and tutorial exercises, including drawing diagramsthat assist with explanations of the answers. This is good practice for the exam.• Do the assessment exercises. Ensure you attend exams, submit essays, andcontribute to tutorials.

11I. Resources for studySubject homepage:You can access the subject homepage at: http://www.lms.unimelb.edu.auTo access the homepage you need to use the same username and password that youuse to access your University of Melbourne email account.A range of information is available on the subject website:• Subject Guide.• Announcements about the subject.• Lecture overheads, audio lectures, and supplementary notes – ‘Economist’ workouts;‘Intro Micro Legend’ profiles.• Tutorial material - Solutions to ‘blue sheet’ questions.• Old exam papers.• Access to ‘On-line tutor’• Access to ‘Assignment Tool’.• Ideas for extra reading about economics, and links to economics-related websites.It is important to check regularly the subject homepage for any new messages aboutthe subject – Usually these messages would be placed under ‘Announcements’.Audio lectures:An audio recording of lectures delivered in this subject will be made available forreview in the days following each lecture. Audio recordings of lectures allow you torevise lectures during the semester, or to review lectures in preparation for the end ofsemester exam. Audio lectures can be accessed from ‘Audio lectures’ on the LMSsubject site. Audio streaming and podcast formats are available.Extra hand-outs:Copies of missed handouts from tutorials (blue and pink sheets) will be available fromthe LMS subject site at the end of the week in which those sheets were distributed.Tutor consultation times:Your tutor will have a designated consultation time when you will be able to consulton an individual basis about questions or problems you have with the subject materialor about assessment exercises.

12On-line tutor:The Online Tutor (OLT) provides the scope to ask questions of a tutor online. It canbe accessed via ‘TLU Tools’ on the LMS subject site. One role is for asking aboutmaterial covered in lectures or tutorials. The other role is for answering questionsabout the assessment exercises.Subject materialThe aim of the OLT is to help you understand key concepts. It needs to be stressedthat the OLT is not intended as a substitute for regular tutorials. It is therefore not afacility for providing solutions to tutorial questions, review questions, past exams orquestions from the textbook. What the OLT is intended to for is to assist you in beingable to work out solutions to those types of problems themselves. So if you have aquery about any one of these questions you need to describe what aspect of thequestion you do not understand and show that you have made some attempt to resolvethe problem yourself. You should also consult the relevant sections of your textbookbefore asking a question. Definitions, which are readily available in the textbook, willalso not be provided by the OLT. It is however appropriate to consult the OLT if youhave a question about an aspect of the definition you do not understand. The OLT willinform students directly if a question does not fall within the guidelines for thesystem’s use. Those questions that show some evidence of thinking and work will begiven the most thorough response. Each time you access the OLT you will beprompted for keywords that relate to the question you want to ask, and the OLTsystem will direct you to previously asked questions that relate to these keywords. Itis very important to check whether your question has been previously asked – sincethe OLT will not respond to questions that have already been asked, and are hencealready available for viewing.Assessment exercisesThe OLT is available to help point you in the right direction as far as what is expectedin an assessment exercise and to provide clarification on aspects of material, whichhas been read for the exercise that is not fully understood. Clearly OLT will not giveanswers to questions that relate too directly to a question set for the assessment.Answers will in general be provided within a 24-hour period although on certainoccasions when the system is particularly busy or on weekends a slightly longerperiod may be taken. The period before the mid-semester and end of semester examsis always particularly busy so it is always best to ask questions early. Whilst there isno limit on the number of questions which can be asked of the OLT by an individualstudent, the service is, like all resources, limited. If too many questions are asked by astudent this would also suggest that that student has not spent sufficient timeconsulting the textbook and others sources for answers. It should be noted that whilstthe use of humour is appropriate in relation to your dealings with the OLT insultingand offensive communications will not be tolerated.Faculty Teaching and Learning Unit:The Faculty Teaching and Learning Unit (TLU) offers a wide range of supportservices to students. If you are having any difficulty in studying for this subject you

13could arrange a consultation with the Unit’s learning skills specialist. The learningskills specialist can review your current approaches to study and offer advice. If youare a student from a non-English speaking background there is an ‘English as aSecond Language’ specialist who is available to help you with your written work.Both of these specialists are available for face-to-face consultations or electronicallythrough email. The TLU is located on Level 6 at 198 Berkeley Street. You canarrange for consultations or contact the TLU on-line through its webpage at:http://tlu.ecom.unimelb.edu.au/. Make use of the TLU. It is there to help.Supplementary texts:A range of alternative textbooks – appropriate for this subject - are available. There isno requirement to read any of these extra texts. However, if you are seeking toimprove your understanding by reading alternative explanations of key concepts, orlooking for extra examples, those texts may be useful.Copies of three texts have been placed on reserve at the Baillieu Library:Principles of Microeconomics – John Sloman and Keith Norris (2005, PearsonEducation) (338.5 SLOM).Microeconomics: A Contemporary Introduction – Michael Swann and WilliamMcEachern (2006, 3rd edition, Thomson Learning) (338.5 SWAN).Principles of Microeconomics – Robert Frank, Sarah Jennings and Ben Bernanke(2009, 2 nd edition, McGraw Hill) (338.5 FRAN).Other texts that could be consulted are:• Microeconomics – Paul Krugman and Robin Wells (2005, 1 st edition, Worth Publishers).• Microeconomics – John Jackson and Ron McIver (2004, 7 th edition, Irwin McGraw-Hill).• Microeconomics – Douglas McTaggart, Christopher Findlay and Michael Parkin (2006,5 th edition, Addison-Wesley).J. PlagiarismIt is the policy of the Department of Economics that attention be drawn to thenature and serious consequences of plagiarism and collusion.PlagiarismPlagiarism is the act of representing as one’s own original work the creative works ofanother, without appropriate acknowledgement of the author or source. (Creativeworks may include published and unpublished written documents, interpretations,computer software, designs, music, sounds, images, photographs, and ideas orideological frameworks gained through working with another person or in a group.These works may be in print and/or electronic media.)CollusionCollusion is the presentation by a student of an assignment as his or her own which isin fact the result in whole or in part of unauthorised collaboration with another personor persons. Collusion involves the cooperation of two or more students in plagiarismor other forms of academic misconduct. Both the student presenting the assignmentand the student(s) willingly supplying unauthorised material (colluders) are

14considered participants in the act of academic misconduct. There is no objection toassignments being discussed in a preliminary way among students. What is notpermissible is anything in the nature of joint planning and execution of anassignment.Where an allegation of academic misconduct involving either plagiarism or collusionis upheld, significant penalties such as deprivation of credit for a subject orcomponent or assessment can be imposed.The Faculty Teaching and Learning Unit has developed a web-based ‘AcademicHonesty Module’ that allows you to learn more about and test your knowledge ofplagiarism and collusion. I encourage you strongly to complete this module at:http://tlu.ecom.unimelb.edu.au/AcademicHonestyTest/index.cfm

15K. About microeconomic theory by Jeff BorlandThe objective of economics is to understand the operation of the economy, and toguide decision-making by individuals and organisations such as firms or governmentin the economy.Economists seek to achieve this objective by developing ‘theories’. The structure ofan economic theory consists of two components: a model and a set of hypotheses thatrepresent the logical consequences of that model. A model is a simplifiedrepresentation of an aspect of the economy that is to be the subject of theoreticalanalysis. Having specified a model to characterise the operation of some aspect of theeconomy, hypotheses or propositions are derived as logical consequences of thespecified model. The degree of consistency between the hypotheses and actualmarket outcomes provides one test of the value of the theory for understanding theoperation of the economy.It is not only economists who use models to seek to understand behaviour and socialoutcomes. For example, in political science and industrial relations the use of modelsis also common. A distinction between ‘economic’ and ‘non-economic’ models isgenerally made on the basis of the specific features of those models. Two types offeatures identify economic models. First, there is a range of general core assumptionscommon to most modern economic models. Neoclassical economists, for example,have as basic modelling assumptions that all decision-makers are rational and havewell-defined objectives they seek to achieve. The assumption of rationality meansthat in any environment, a decision-maker is aware of the complete set of actionsavailable, can calculate the consequences of each action, and chooses the action whichis best for achieving their objective. Second, in developing theories for studyingspecific economic situations, most economists would draw on the same general set ofmodels. For example, for modelling strategic situations a common approach wouldbe to apply a ‘game theoretic’ model.An important detail regarding an economic model is that it will necessarily be asimplified and subjective representation of the aspect of the economy it seeks todescribe. First, it would never be possible, or indeed useful, to provide arepresentation of the economy which included every possible detail about theeconomy. The objective of an economic theory is to identify and highlight the keyfactors which might explain some economic outcome, and to abstract from inessentialdetails regarding that outcome or the situation from which it arose. In this regard,Keith Whitfield (The Australian Labour Market, 1987, Sydney, Harper and Row, p.7)has noted with reference to labour economists that:"Some labour economists have likened their work to the making of a map - forthe objective is not so much to describe reality as to give a representationwhich will be useful to those having to plot a course through it. Instead ofcontours or symbols, the labour economist develops theories and concepts, butthe aim is much the same, that is, to develop a representation of a complexphenomenon which allows the main features to be highlighted and thesuperficial to be ignored."A second consideration is that each economist will perceive different aspects of theoperation of the economy, and different economic outcomes, in very different ways.

16The historian E.H. Carr (What is History?, 1964, Pelican Books, p.22) has observedthat:"...the facts of history never come to us 'pure', since they do not and cannotexist in a pure form: they are always refracted through the mind of thereader."The study of economics is no different. There are no objective facts about theoperation of the economy or the nature of economic outcomes - only individualeconomists' perceptions of economic activity. Hence, any representation of theeconomy, and any choice of what aspects of the economy should be highlighted in amodel, will be subjective.As Keynes wrote (in Essays in Biography, pp.207-208, Macmillan, London) in 1933:"The theory of economics does not furnish a body of settled conclusionsimmediately applicable to policy. It is a method rather than a doctrine, anapparatus of the mind, a technique of thinking, which helps its possessorto draw correct conclusions."All this suggests that an economist must have two main skills – first, a ‘tool-kit’ ofapproaches to modelling the economy; and second, knowledge of how to apply thoseapproaches to develop theories which fit the specific situations in which theeconomist is interested.The primary objective of this subject is to enhance both types of skills. Specificallythe subject will:a) Introduce approaches and concepts fundamental to microeconomics – theconcepts of demand, supply and market equilibrium in perfectly competitivemarkets; game theory; and firm behaviour in competitive and non-competitivemarkets; andb) Present applications of microeconomic theory – using case studies, tutorialproblem sets, and assessment exercises.Saying that economics is about applying particular types of theories to understand theoperation of the economy of course begs the question – what is the economy? Or putanother way, what types of situations does economics seek to understand? There isno simple answer to this question. One response is to say that economics is concernedwith situations involving choices about the allocation of scarce resources – and thatmicroeconomics is about situations where individual units such as households andfirms must make choices. This definition, however, still includes a wide range ofsituations. Amongst these situations there will be some where valuable insights canbe obtained using economic modelling, and others where economic models seem ofless use. For example, the application of economic models to seek to understand whatfactors influence consumers’ demand for food seems to provide useful insights; on theother hand, economic models seem much less relevant to understanding decisionsabout household formation (such as marriage). Economists however will disagreeabout what situations can and cannot usefully be understood using economic models(for example, some economists would disagree with my opinion on using economicmodels to study marriage). Therefore the decision about what types of situations canbe understood using economic models is also a subjective one.

One final issue about economic models concerns the use of mathematics. It isimportant to know that maths is just another language for describing a model of theeconomy. Any model expressed mathematically can also be expressed in words.There are a number of reasons though why it is often useful to express a model inmathematical form. First, maths provides a common language for communicating thedetails or structure of a model. And second, a mathematical representation makes iteasy to test the logical consistency of hypotheses or propositions derived from amodel, and clarifies the relation between the model and conclusions. (For morediscussion of this issue, see Krugman, P. (1998), ‘Two cheers for formalism’,Economic Journal, pages 1829-1836.17

Appendices1. Lecture outline and readings – Earlier textbook editions2. Sample multiple choice exam questions3. Assessment exercise no.2 (Assignment 1)4. Assessment exercise no.3 (Assignment 2)5. Important notes on doing the assignments6. 2011 Final examination

19Appendix 1: Lecture outline and readings – Earlier textbook editionsLecture Date Topic Reading 1 Reading 2GKM – 3 rdeditionGKM –1st editionGKM –2ndeditionA. Introduction1 Jul 23, 24 Subject overview 17-31 19-33 17-312 Jul 26 Introduction to keyconcepts inmicroeconomicsReadinghand-out 1B. Perfectlycompetitive marketsCaseStudybook –Orangeedition1.1, 1.23 Jul 30, 31 Demand and supply 58-71 63-77 61-75 2.14 Aug 2 Market equilibriumand comparativestatics71-78 77-84 76-83 2.2, 2.35 Aug 6,7 What determinesprice and quantity? –1. Elasticity andapplications6 Aug 9 What determinesprice and quantity? –2. GovernmentinterventionC. Welfare andmarkets7 Aug13,14 Welfare in perfectlycompetitive markets83-101 89-107 87-105 2.4105-20 111-27 109-25 2.5126-42; 133-49; 131-48; 2.6146-53 153-63 151-638 Aug 16 International trade 162-82 171-91 169-88 2.7, 2.89 Aug20,21 Market failure 1: 188-205 197-213 193-210 2.9Externalities10 Aug 23 Market failure 2: 209-14 219-224 215-220 2.10Public goods11 Aug27,28 Markets – A review 2.11, 2.12,2.13D. The firm andmanagerialeconomics12 Aug 30 Key decisions andkey concepts250-57 263-69 259-65 3.113 Sep 3,4 Measures of cost 258-66 269-78 265-73 3.214 Sep 6 Strategies to reducecosts/Introduction torevenue320-22 373-74 365-66 3.3, 3.4,3.5

2015 Sep 10,11 The ‘basic’price/quantitydecision16 Sep 13 The effect ofcompetition –Perfectly competitivemarketsSemester break17 Oct 1,2 The effect ofcompetition –Monopolisticcompetition andmonopoly/Governmentregulation271-76;292-303283-88;306-17277-82;299-311276-87 288-301 282-95 3.6303-06;313-14;347-54;368-71317-26;373-77311-21;366-6918 Oct 4 What price to set? 306-13 327-33 321-28 3.7E. Game theory19 Oct 8, 9 Introduction to gametheoryReadinghand-out 220 Oct 11 Simultaneous games Readinghand-out 221 Oct15, 16 Sequential games Readinghand-out 222 Oct 18 Application tooligopoly23 Oct22, 23F. Review24 Oct 25 Exam review322-36 341-56 335-503.8

21Appendix 2Sample multiple choice questions1. Fred decides to start a flower-growing business. To do this, he works only halftimein his job as a consultant, from which he could earn $100,000 per year as a fulltimeemployee. Hot houses for the flowers cost him $50,000, and if he decides at anytime to discontinue his business, he could sell the hot houses for $30,000. Seeds togrow the flowers cost $10,000. There are no other costs. Assume there is a zero rateof interest. Flowers to sell will not be available until one year after the businesscommences.The opportunity cost to Fred if he ceased to operate his business at the end of the firstyear would be:a) $50,000b) $160,000c) $80,000d) $130,000e) $110,0002. Dan the Developer owns a block of land on which he has been thinking of buildinga new house. He paid $200,000 for the land, and has already spent another $20,000on building permits and preliminary work. The cost of building the house would be$200,000. Costs of selling either the house and land, or just re-selling the land, wouldbe $10,000. Dan knows that he could re-sell the land for $160,000. He must decideto either sell the land, or to build a house and sell the land/house.What is the minimum amount for which Dan would need to expect to be able to sellthe house and land, in order for him to decide to build the house?a) $430,000b) $360,000c) $350,000d) $210,000e) $160,000

223. Tastes of television viewers change towards ‘reality TV’ and away from‘documentaries’. At the same time there is an increase in consumer income, andwatching TV is known to be a normal good.From the information provided, we can say that the following must occur:a) Demand for ‘reality TV’ will increase, and demand for ‘documentaries’ willdecrease.b) Demand for ‘reality TV’ will increase, and it is not possible to say what willhappen to demand for ‘documentaries’.c) It is not possible to say what will happen to demand for ‘reality TV’, and demandfor ‘documentaries’ will decrease.d) Supply of ‘reality TV’ will increase, and it is not possible to say what will happento supply of ‘documentaries’.e) Demand and supply of ‘reality TV’ will increase, and it is not possible to say whatwill happen to demand and supply of ‘documentaries’.4. There is a drought in regions in Australia where oranges are grown. At the sametime, there is an increase in the number of mango growers. Finally, an increase inincome of Australian consumers occurs.From the information provided, we would expect:a) An increase in demand for mangos and oranges.b) An increase in demand and supply of mangos.c) An increase in demand for mangos, and a decrease in supply of oranges.d) An increase in supply of mangos, and a decrease in supply of oranges.e) An increase in supply of mangos, and a decrease in demand for oranges.5. Assume the market for CDs is perfectly competitive. There is an improvement inproduction processes for manufacturing CDs.At the price that was the equilibrium price prior to the improvement in productionprocesses, following the improvement there will be:a) An excess supply of CDs.b) Excess demand for CDs.c) An increase in demand.d) A decrease in supply.e) Both a) and d).

236. Consider the following perfectly competitive market for a good:QS= 2PQ = 100 – 2PDWhich of the following is correct?a) At P = 50 there will be excess demand for the good.b) Only at prices below P = 30 will there be excess demand for the good.c) The equilibrium quantity traded is 25.d) At prices above P = 25 there will be excess supply for the good.e) The equilibrium price is 50.7. The price of the first-year microeconomics textbook, ‘Micro Made Easy’ by AlMarshall, has increased. Assume the market for first-year microeconomics textbooksis perfectly competitive.Which of the following could not explain the price increase?a) A new first-year microeconomics textbook ‘Micro Matters’ by the world-famouseconomist Adam Smith has been published.b) The price of other first-year microeconomics textbooks has increased.c) Enrolments in first-year microeconomics subjects have increased.d) The author of ‘Micro Made Easy’, Al Marshall, negotiates a new contract thatrequires the publisher to pays him a higher royalty per copy sold.e) There has been a decrease in supply of the type of paper used for ‘Micro MadeEasy’.8. In the world market for cocoa beans there have been two main recent phases:Phase 1: Pre-early 2001: Decrease price/Increase quantity traded; andPhase 2: Post-early 2001: Increase price/Decrease quantity traded.Assume the market for cocoa beans is perfectly competitive.Which of the following cannot be correct?a) Supply increased in both phases.b) Only supply changed in both phases.c) Only demand changed in both phases.d) In the first phase there was an increase in supply, and an increase in demand.e) Both a) and c).

249. Motor vehicles and petrol can be considered to be complements. Crude oil is aninput to petrol, and steel is an input to motor vehicles. Assume markets for petrol,motor vehicles, crude oil, and steel, are all perfectly competitive. Suppose that theprice of motor vehicles decreases, and the price of petrol increases.Which of the following could explain these changes?a) There is a decrease in supply of crude oil.b) There is an decrease in supply of steel.c) There is an increase in demand for steel.d) There is a decrease in demand for crude oil.e) Either a) or c).10. Beer is an inferior good, and wine is a normal good. Both goods are traded inperfectly competitive markets. There is a decrease in consumer income. We wouldexpect the direct effect of the change in income to be:a) A decrease in the equilibrium price of beer, and an increase in the equilibrium priceof wine.b) An increase in the equilibrium price of beer, and an increase in the equilibriumquantity traded of wine.c) No change in equilibrium price or quantity traded of either good since the decreasein income will have an equal effect on supply and demand of both goods.d) An increase in equilibrium price of beer, and a decrease in equilibrium quantitytraded of wine.e) A decrease in demand for both beer and wine.

25Subject Guide – Appendix 3ECON10004Introductory MicroeconomicsSemester 2, 2012Assignment 1 (10%)Due date: Wednesday Sep 5 (by 4.00pm).Assignments must be submitted using the ‘Assignment Tool’ via the LMS subject sitefor Introductory Microeconomics (For further instructions see the notes on‘Submitting Assignments 1 and 2’ in the Subject Guide.)Please remember to keep a copy of your assignment.This assessment exercise will account for 10 per cent of your final grade in thesubject.Limit: 1000 words (Word limit does not include diagrams.)QuestionsRead the attachments below to help you answer the questionsQuestion 1a) (1mark) What are the microeconomic consequences of climate change for anyparticular industry?b) (1mark) Use the demand/supply model to explain how climate change may have aneffect on the market outcome.Question 2a)(1 mark) Discuss major sources of climate change. What could be some policyoptions to prevent some of the adverse effects of climate change?b) (2 marks) Ross Gittins suggested that recent introduction of carbon tax in Australiawill increase the retail prices of electricity and gas by about 9 per cent and theincreases in other prices will be very small. Using a demand/supply model to explainthis difference in price increase.Question 3a)(3 marks) Rio Tinto managing director Australia David Peever commented a yearago on carbon tax announcement, “ ...an unfair tax on Australian exporter...”. Usingan international trade model explain the effect of carbon tax which justifies theconcern.b) (2 mark) Explain how might the proposed legislation, that compensate tradeexposedindustries like steel and aluminium up to 94.5% on the price of permits mightreverse the effect in part (a) to some extent?

26Attachment 1Shift minds on a tax? UnlikelyRoss Gittins, The Age, June 27, 2012Gittins: Why is our carbon tax so high?At $23 per tonne of carbon dioxide, Australia's carbon tax is the highest in the world.But what is the reason for this? Ross Gittins explains.....But with the carbon tax taking effect from this Sunday, the moment of truthapproaches. Soon enough it will become clear that, for consumers and the vast bulk ofbusinesses, the dreaded carbon tax will have an effect much smaller than the GST.The retail prices of electricity and gas will rise by about 9 per cent, but the increasesin other prices will be very small.....So we look for rationalisations, no matter how tenuous. And in these the carbon taxabounds. With the GST, the object of the exercise was clear and simple: to raise morerevenue. With the carbon tax the object is far from clear to anyone who hasn't donetheir homework. For a start, it's clear the object is not to raise revenue, because muchof the revenue raised is being returned to households as ''compensation'' in the form ofa small cut in income tax for most people and small increases in pensions, allowancesand family benefits.But if the object is simply to discourage people from using emissions-intensive goodsand services - which it is - why give back to most people the extra tax they'll bepaying?Because economists believe that to change people's behaviour it's necessary only tochange the relative prices they face: to raise the prices of fossil fuels (particularlyelectricity and gas) relative to all other prices. It's not necessary to leave people out ofpocket by keeping the proceeds from the tax you used to bring about the change inrelative prices.Actually, the price increase is aimed mainly at big industrial users of energy and,more particularly, the generators of electricity.If the industrial users can be induced to eliminate wasteful use of power, this willmake a difference. And if power companies can be induced to replace their presentgenerators with less emissions-intensive models when the time comes, this will makea big difference.Attachment 2Uncertainty hangs over Australia on eve of carbon tax introductionAlison Rourke, The Guardian, Friday, 29 June, 2012.....Under the new legislation, around 300 businesses will pay a fixed price of$AUD23/tonne for carmon emissions until 2015, when the market will set the price.Agriculture is exempt and trade-exposed industries like steel and aluminium willreceive compensation of up to 94.5% on the price of permits.

27The government's target is to reduce emissions by 5% by 2020 and 80% by 2050 on2000 levels."The questions around whether the scheme will be here in two years' time has stifledinvestment certainty," said Elisa de Wit, head of climate change at law firm NortonRose. She says companies are doing what they have to in order to comply with thetax, but many have reservations about investing too far into the future.The Treasury estimates the carbon tax will add about 0.7% to consumer prices in2012-13. To cushion the impact of price increases being passed on to consumers, thegovernment has put in place a $AUD15bn compensation package over the first fouryears, that will be delivered in the form of tax cuts and welfare and pension increases.It estimates that in some cases, those on the lowest incomes will receive compensationgreater than the impact of the tax.Australians generate more carbon pollution per head than any other developedcountry. With a population of 22 million, Australia is responsible for 1.5% for globalgreenhouse gas emissions. Britain, by comparison, with nearly three times thepopulation, produces just 1.7%.Attachment 3Mixed reception to carbon taxSource: http://www.abc.net.au/news/2012-07-02/cw-carbonimpact/4103816/?site=&source=rss...The Federal Government's carbon pricing scheme came into effect yesterday whichtargets the country's biggest polluters and subsequently increases the cost of energy,food and other essential items.The Bathurst-based Western Research Institute says communities reliant onmanufacturing will be impacted most and retailers will continue to feel the straindespite compensation being offered to certain households.The Chief Executive Tom Murphy says the biggest effect will be in the first fewmonths and the economy should stabilise in the long term."Bathurst, Orange is more likely to feel likely to feel it a little bit more than someother places, but I have to say I don't know which if any of the businesses here areliable for scope one carbon tax payments," he said."Nevertheless that's where the pressure is at the moment. Those that are exportorientated and the manufacturing in the Bathurst, Orange area.""I think the carbon tax will have a negative effect on business in the Central West..."Pretty much everything we do, the abattoirs at Cowra it will cost them considerablymore." ...

28Kevin Parton is a Professor at the Institute for Land, Water and Society at CharlesSturt University in Orange.He says the benefits for the environment and the financial incentives for residents tosave power will outweigh the impact on local businesses."The research that's been done confirms that most families will actually be netbeneficiaries from the whole package remembering that families not only have got topay the tax, but also get direct payments from the government and also receiveincome tax cuts," he said.Professor Parton says the increased cost in electricity will make people more aware ofthe power they are wasting."Hopefully that's the incentive and in fact if everybody did switch off that power,were conscious of their lights, if people were to be conscious of their standby power,that is the power that goes to appliances when you switch them off but you don'tswitch them off at the wall, they would totally off set the electricity costs of the tax."Attachment 4Australian carbon tax will hold back export industries, investmentand jobs growthA media release on 10 July 2011Source: http://www.riotinto.com/media/18435_media_releases_20740.aspRio Tinto is disappointed with the Australian Government's carbon tax proposal,warning it will inevitably hinder investment and jobs growth in Australia withoutreducing global carbon emissions.Rio Tinto believes the Government's carbon tax will undermine Australia'sinternational competitiveness and hurt the nation's export-competing industries.Rio Tinto managing director Australia David Peever said "Today's announcement isan unfair tax on Australian exporters. We are deeply concerned the proposed carbontax fails to shield Australia's export sector and leaves it at a disadvantage compared tointernational competitors.Extra information on doing assignment 1Some general hintsThe objective in this assignment is to answer questions 1-3. So the most importantpiece of advice is to do what the questions are asking. For example, some questionsask you to apply the demand/supply model to answer questions about changes inmarket outcomes. This means that to answer these questions you should explicitlyuse the concepts of demand and supply, and equilibrium price and quantity traded.You don’t need to state definitions of any of the concepts such as demand and supply,or equilibrium. Assume that your tutor knows what these concepts mean. Instead, theassignment is trying to test your knowledge of the concepts by how you apply them inanswering the questions.

29To complete the assignment the only reading you should need to do is lecture notesand the relevant sections of the textbook, and the excerpts from the articles includedwith the questions.Marking criteriaThree main factors will be considered in marking your assignment:a) Knowledge of economic concepts – For example: Has the answer used theappropriate economic concepts? Does the answer show a thorough understanding ofthose concepts?b) Quality of analysis and application of economic concepts – For example: Is there alogical and thorough supporting argument or description of how conclusions havebeen drawn? Have economic concepts been applied in an effective manner in theparticular application? Are assumptions clearly described? Is an understandingshown of any relevant qualifications to the conclusion?c) Presentation – For example: Are the writing style and organisation of material suchthat the main ideas and arguments can be understood? Are diagrams presented clearlyand effectively integrated with text?

30Subject Guide – Appendix 4Econ10004Introductory MicroeconomicsSemester 2, 2012Assignment 2 (15%)Due date: Wednesday October 10 (By 4.00pm).Assignments must be submitted using the ‘Assignment Tool’ via the LMS subject sitefor Introductory Microeconomics (For further instructions see the notes on‘Submitting Assignments 1 and 2’ in the Subject Guide.)Please remember to keep a copy of your assignment.This assessment exercise will account for 15 per cent of your final grade in thesubject.Limit: 1500 words (Word limit does not include diagrams)Part A (10 marks) (1000 words)QuestionsPresent a model to evaluate the effects of a cost reducing technological change on thedecisions taken by firms, the effects on market prices and quantities, and on the shareof the cost savings passed on to consumers. Potential examples are biotechnologythat lowers the cost of food production, nanotechnology to lower the cost of DVDs ormobile phones, but you are free to choose your own example.As a guideline to the material to be covered and the allocation of marks, your essayshould cover the following:(a) Choose an appropriate industry structure, accept market demand as given, andrepresent an equilibrium situation for the market and a typical firm in the longrun. (2marks)(b) Work through the effects of the new technology on firm cost functions: (5marks)i) what are the short run effects?ii) what are the long run effects?iii) what factors might determine the short run and long run effects?(c) Assess the effects of the new technology on market prices to analyse, i) ifthere is any welfare improvement, and ii) how would you determine whowould gain more of the cost savings between consumers and producers,explain. (3 marks)Part B Case study (5 marks) (500 words)The objective of the case study is for you to choose some aspect of economic activity,and to show how a concept or theory we’ve studied can be used to understand whathappens in that situation, and/or to make policy recommendations on how socialwelfare could be improved through some type of intervention.

31I encourage you to discuss your proposed topic for the case study with your tutor, donot use any text book example or an example from the lectures, find your own topic.Possible topics for case studies might be:• Using the model of perfectly competitive markets to explain price changes thathave occurred, or to analyse the effects of some type of market intervention;• Using the concept of incentives to explain behaviour by market participants;• Using the concepts of surplus to analyse the effect on society’s well-being of agovernment policy; or• Use the theory of market power to analyse or explain prices.• Choose a newspaper article and analyse that with the aid of theories we havelearnt in this course so far.There is also a variety of books that illustrate (in differing amounts of detail) the ideaof a case study that you could consult:The Economic Naturalist by Robert FrankFreakonomics by Stephen Dubner and Steven LevittIn the case study you should:a. Introduce the aspect of economic activity that you will analyse;b. Briefly describe the theory or concept you’ll use in the case study;c. (most importantly) Apply the concept or theory to analyse the aspect of economicactivity you’ve chosen; andd. Provide any concluding remarks.Four main factors will be considered in marking your case study:a) Knowledge of economic concepts – For example: Has the answer used theappropriate economic concepts? Does the answer show a thorough understanding ofthose concepts?b) Quality of analysis and application of economic concepts – For example: Is there alogical and thorough supporting argument or description of how conclusions havebeen drawn? Have economic concepts been applied in an effective manner in theparticular application? Are assumptions clearly described? Is an understandingshown of any relevant qualifications to the conclusion?c) Presentation – For example: Are the writing style and organisation of material suchthat the main ideas and arguments can be understood? Are diagrams presented clearlyand effectively integrated with text?d) Research – Have examples been chosen that have taken some effort to find? Whatis the quality of evidence supporting arguments that are made?

32Appendix 5Important notes on doing the assignments1. PlagiarismPlease be aware of the University policy on plagiarism. There is no problemdiscussing with other students how you are planning to answer the questions, orsharing ideas about how to complete the assignment. But the writing up of youranswers to the assignment MUST be something that is your work alone.2. Word limitRemember that there is a word limit. As well, if you can provide a thorough answerin fewer words then that is fine; a precise answer is always preferred to an answer thatincludes content that is not directly relevant to the question.3. DiagramsUse diagrams where you believe this will assist you in giving the most effectiveanswer to a question. (But it’s not required to use diagrams for every question.)For a diagram to contribute to your answer you’ll need to:Represent the diagram correctly - Each diagram should be titled and all axes andcurves should be labeled. The initial point of equilibrium should be identified.Changes in points on the diagram should always be explained with reference to thechanges measured along both axes.Explain the diagram - You should be able to explain the diagram in words and relateit to the point you are making or question you are answering. Remember, a diagramby itself does not constitute an answer.Relate the diagram to the relevant theory – Make sure your diagram is consistentwith the model and theory you are using, and represents them correctly and logically.Source: Cowie J., Findlay C., McTaggart D., Reading between the linesAddison-Wesley Sydney, 1994.4. ReferencingYou need to reference any direct quotes or major pieces of evidence you cite, as wellas where you are drawing extensively on another work in your own writing. Thestandard referencing system in economics is the Harvard system, but you can usewhatever referencing system you find suits you best.

33Example: The Harvard SystemHow to cite references within the text of your essayReferences in the text give the author’s surname, the date of publication and, if aquote or specific fact is referred to, the page number as well.For example:Where reference is made in the essay to more than one work by the same author thatwas published in the same year, the distinction is shown by using letters (both withinthe text and in the reference list), as follows:‘As shown in Rockett (1990b), in industries where…’The abbreviation ‘et al.’ may be used where there are more than three authors, asfollows:See Kamien et al. (1992) for a comparison of optimal…’When citing several references to support a particular point, list them chronologicallyand separate them with semi-colons:‘There exists a vast theoretical literature exploring the reasons for and consequencesof this type of policy (Abowd, 1976; Wooden & Dawkins, 1983; Williams et al.,1995).’How to cite references in your essay reference list or bibliographyA. BOOKSThe following information should be provided in the order stated:• Author’s name and initials• Date of publication• Title, underlined or in italics, with initial letters of first word and of propernouns in capitals• Publisher• Place of publication• Page numbers, if a specific reference in a long work under the Oxford system.Authors are cited in the order used on the title page. (All authors should be shown inthe reference citation, though, as mentioned above, in the text the name of the firstauthor and ‘et al.’ can be used where there are more than three authors.)Woodward, R., 1983, Maestro: How Alan Greenspan Conducts the Economy.Simon & Schuster, New York.

34B. JOURNAL ARTICLESThe format for referring to journals and periodicals is as follows:• Author’s name and initials• Date• Article title in lower case• Journal title, underlined or in italics• Volume number• Page numbers.Applebaum, E., 1992, ‘Estimation of oligopoly power’, Journal of Econometrics.Vol. 19, pp. 287-99.C. ARTICLES OR CHAPTERS IN BOOKSGrindley, P.C. and Nickerson, J.A., 1997, ‘Licensing in the chemical industry: Acase study’ in Licensing Strategy, edited by R. Parr and P. Sullivan, John Wiley& Sons, New York.D. GOVERNMENT PUBLICATIONSAPRA (Australian Prudential Regulation Authority), 2003, Superannuation Trends,Sydney.E. NEWSPAPER ARTICLES'Unsightly problem of plastics'. The Age. 4 January 1990, p. 13.Silkstone, Dan 'Levy on city car parks proposed to cut congestion'. TheAge, 8 April 2005, p3.F. WEBSITESList the author, year of publication, and title of the reference. As well it is necessaryto include the address of the site from which the material was accessed, and the dateat which it was accessed.

35Appendix 6THE UNIVERSITY OF MELBOURNEDEPARTMENT OF ECONOMICSSEMESTER 2 ASSESSMENT, 2011ECON10004 INTRODUCTORY MICROECONOMICSTime Allowed: TWO hoursReading Time: 15 minutesThis examination paper contributes 60% to the assessment in ECON10004.The Response Sheet for the multiple-choice questions should be inserted in the backof the examination script book at the end of the examination. For the multiple-choicequestions, you may use the examination script books to make notes or calculations.These notes will NOT be taken into account for your assessment.SECTION A: ANSWER ALL QUESTIONSThis section is worth 25% of the total exam marks.Answer all questions. Fill in the small circle in the appropriate place with a 2B pencilon the Response Sheet. An incorrect answer, no answer, or more than one answer,will receive a zero mark.SECTION B: ANSWER ALL QUESTIONSThis section is worth 25% of the total exam marks.Answer all questions. Each question is worth equal marks.SECTION C: ANSWER ALL QUESTIONSThis section is worth 50% of the total exam marks.Answer all questions. Questions are worth different marks.The following items are authorised in the examination room:A print dictionary that translates English into a foreign languageA scientific calculatorThis exam paper cannot be removed from the examination room.A copy of this exam paper will be held in the Baillieu Library.This exam paper has 9 pages

36SECTION AANSWER ALL QUESTIONS IN THIS SECTIONThis section is worth 25% of the total exam marks.All questions in this section are worth the same number of marks.For each question select the one BEST answer. Incorrect answers, multipleanswers, or no answer, will receive zero.Mark your answer on the Response Sheet.Question A1Sam is a manager of a local video rental shop. His business is facing a cash crisis andhe needs to increase his sales revenue. If the supply of rental videos is elastic, then inorder for Sam to increase his sales revenue:a) He should increase the rental price of videosb) He should decrease the rental price of videosc) He should not change the rental price of videosd) He could not determine what to do until he had information on whether demandfor videos is elastic or inelastic.Question A2The market for tomatoes is perfectly competitive. Suppose there is a simultaneousincrease in the price of fertiliser (an input to production of tomatoes) and a decrease inthe price of cucumbers (a complement to tomatoes). The effect of these changes onthe market for tomatoes will be:a) An increase in equilibrium price and decrease in equilibrium quantity tradedb) An increase in equilibrium quantity traded, and it is not possible to say what theeffect on equilibrium price would bec) A decrease in equilibrium price and a decrease in equilibrium quantity traded.d) An increase in equilibrium price, and it is not possible to say what the effect onequilibrium quantity traded will be.Question A3The mango market in Australia is perfectly competitive. The cross price elasticity ofdemand for mangoes with regard to the price of papaws is 0.6. This means that:

37a) A rise in the price of papaws will lead to an increase in the revenue of mangoesfarmersb) A rise in the price of papaws will lead to a decrease in the revenue of mangoesfarmersc) A rise in the price of papaws will not alter the revenue of mangoes farmersd) A rise in the price of papaws will lead to an excess supply of mangoes inequilibriumQuestion A4At its current level of output a firm has a marginal cost of $10, an average total cost of$12, and an average variable cost of $8. Marginal cost is increasing at its current levelof output. The firm operates in a perfectly competitive market where the price of eachunit of output sold is $10. From this information we can infer that:a) The firm should increase output to maximize profits.b) The firm would be willing to operate at this level of output both in the short runand long run.c) The firm will not be willing to operate either in the short run or long run.d) The firm is willing to operate at this level of output in the short run but not in thelong run.Question A5Suppose the Australian government imposes a tariff on imports of apples intoAustralia. The deadweight loss caused by that tariff will be:a) Larger the more elastic is the supply curve of Australian suppliers and the moreelastic is the demand curve of Australian consumers.b) Larger the less elastic is the supply curve of Australian producers and the lesselastic is the demand curve of Australian consumers.c) Larger the greater is the tariff rated) Both (a) and (c).Question A6The market for grapes in Australia can be represented by the following supply anddemand diagram:

38$SupplyP’P*ABECFGDHIDemandQ*QSuppose the government implements a price support scheme in the grape market.Under the scheme, the government guarantees a price of P’ per kilo of grapes, andagrees to buy any excess supply of grapes at that price. Assume that prior to theimposition of the price support scheme, the price in the grape market was P* and thequantity sold is Q*. The effect on the wellbeing outcomes of the price supportscheme are:a) Consumer surplus equals area A, and producer surplus equals areas B+C+D+E+F.b) Producer surplus decreases by the area B, and consumer surplus decreases by thearea C.c) Deadweight loss equals the area B+C+D.d) Deadweight loss equals the area C+D+F+G+H+IQuestion A7Greenacres Golf Club is the only golf club in a regional centre. Each customer to thegolf club incurs a marginal cost of $10. The demand for the golf club by eachindividual customer can be expressed as P = 40 – q, where q = number of rounds ofgolf and P = price per round of golf. What price per round of golf and what annualmembership fee will earn the highest profits for the club?a) Set a price per round of golf of $40 and a membership fee of $300.b) Set a price per round of golf of zero, and a membership fee of $800.c) Set a price per round of golf of $10, and a membership fee of $450.d) Set a price per round of golf of $10, and a membership fee of $750.Question A8Wheat is traded in a perfectly competitive market. Australia is an exporter of wheat. Agrowth in world demand for wheat increases the world price of wheat. The effect ofan increase in the world price of wheat will be to:

39a) Increase the quantity of wheat consumed by Australian consumers, and decreaseexports of wheat.b) Decrease consumer surplus for Australian consumers, and increase producersurplus for Australian producers.c) Increase the deadweight loss caused by international trade.d) Increase the quantity of wheat consumed by Australian consumers, and increaseexports of wheat.Question A9A telecommunications company is the only supplier of telephones to a small town. Inthe town there are 100 consumers who are willing to pay $30 per month for telephoneservices, and another 100 consumers who are willing to pay $15 per month fortelephone services. The marginal cost of providing telephone services to a consumeris $10 per consumer, and the fixed cost is $500 per week. To maximise profits thetelecommunication company should:a) Set a price of $10 per week.b) Set a price of $15 per week.c) Set a price of $22.50 per week.d) Set a price of $30 per week.Question A10Suppose that Australian and US dollars are traded in a perfectly competitive market.Treat the price in this market as the amount of $US that can be traded for $1AUS(referred to as the US/AUS exchange rate), and the quantity traded as the quantity of$AUS traded. Suppose that there is an increase in the rate of interest in Australiarelative to the US. The predicted effect would be:a) A decrease in the US/AUS exchange rateb) An increase in the US/AUS exchange ratec) A decrease in demand for $AUSd) An increase in the supply of $AUS

40SECTION BANSWER ALL QUESTIONS IN THIS SECTIONThis section is worth 25% of the total exam marks.All questions in this section are worth the same number of marks.For each of the following questions:Consider the statements made by Dan and Sue. Say whether you believe eachstatement is correct or incorrect. Briefly explain your answer and use diagramswhere appropriate. Note that most of the marks will be given for yourexplanation.Question B1In the United States during the 1960’s, the various state governments had vastlydifferent views about advertising by optometrists. Some states allowed advertising forglasses and eye examinations. Many states, however, prohibited it. For example, theFlorida law read as follows: ‘It is unlawful for any person, firm, or corporation to…advertise either directly or indirectly by any means whatsoever any definite orindefinite price or credit terms on prescriptive or corrective lens, frames, completeprescriptive or corrective glasses, or any optometric service…This section is passed inthe interest of public health, safety, and welfare, and its provisions shall be liberallyconstrued to carry out its objects and purposes.’ Dan agrees with the Florida law andargues that: ‘Advertising is bad for consumers as it leads to less competition andhigher prices.’ Sue disagrees and argues that: ‘Advertising is good for consumers as itleads to more competition and lower prices.’Question B2Dan and Sue are discussing the structure of the satellite broadcasting market in theUnited Kingdom. In the early 1990’s, there were two firms in the market – BritishSatellite Broadcasting and Skye Television but they later merged to form the satellitetelevision monopolist BSkyeB. Dan says: ‘The creation of a monopolist in this marketwill be bad for the British public as monopolies are always more inefficient than acompetitive market and so will charge higher prices’. Sue disagrees and says:‘Depending on the size of the market and the technology of the industry, somemonopolies can be more efficient than a competitive market. This may well apply tothe satellite broadcasting market in the United Kingdom’.Question B3Dan and Sue are discussing various government policies to reduce the consumption ofcigarette smoking. They note that the Professor of Health Economics at the Universityof North West Oz recommended that the best way to reduce cigarette smoking was toput a per unit sales tax on the cigarette manufacturers rather than banning theadvertising of cigarettes. Dan says: ‘I agree with the Professor, as a tax on the sale ofcigarettes is a more effective way of reducing cigarette smoking as this will increasethe price of cigarettes and so reduce their consumption’. Sue disagrees and says: ‘Amore effective way of reducing the consumption of cigarettes would be to ban theadvertising of cigarettes as this will reduce the preference for cigarettes’. [Assumethat the demand for cigarettes is relatively inelastic and the supply of cigarettes is

41relatively elastic; and that each policy will shift the respective curve by the sameamount].SECTION CANSWER ALL QUESTIONS IN THIS SECTIONThis section is worth 50% of the total exam marks.Question C1 (20 marks)Suppose two firms dominate the steel industry in Australia – BHP and Smorgons.Assume that the products of these firms are considered perfect substitutes byconsumers - the two firms only compete on quantity. Both firms are considering anexpansion of their production capacity. By adding more capacity each firm would beable to sell more steel. Suppose that each firm has two capacity expansion strategies –‘Expand’ and ‘Do not expand’. The table below describes the potential impact of eachfirms’ expansion strategy on its profits (in millions of dollars).SmorgonsBHPExpand Do not expandExpand 40, 40 180, 60Do not expand 60, 180 120, 120a) If the firms make their expansion decision simultaneously, does either firm have adominant strategy in this game? Is there a dominant strategy equilibrium? Is there aNash equilibrium? Explain your reasoning.(5 marks)b) Now suppose that BHP has the option of committing to a choice of expanding ornot expanding its production facilities prior to Smorgons making its choice of anexpansion strategy (and Smorgons observes BHP’s expansion strategy prior tomaking its choice of strategy).i) Draw the game tree for this situation. (4 marks)ii)What is the rollback equilibrium for this game? How does this result differfrom your outcome in part (a)? Explain your reasoning. (6 marks)c) Suppose the government introduces an investment subsidy for new capitalinvestment. Both BHP and Smorgons will be eligible for the subsidy if they invest inlarger production facilities. The subsidy will reduce the cost of expansion for eitherfirm by $40 million. How will this change your conclusions in part (a) and (b)?Explain your reasoning. (5 marks)Question C2 (15 marks)

42Enright Construction Company has been approached by the government to build ahighway by-pass around a country town. If the company gets the contract to constructthe highway by-pass it would be the sole contractor. The highway by-pass isestimated to cost $200,000 to build and nothing to maintain. Therefore the marginalcost of each vehicle using the highway by-pass is zero The company will charge aprice for each vehicle using the highway by-pass.. The following table shows theanticipated demand over the lifetime of the highway by-pass:Price (pervehicle)Q (number of vehiclesin thousands)$8 0$7 10$6 20$5 30$4 40$3 50$2 60$1 70$0 80a) If the company were to build the highway by-pass what would be the profitmaximising price to charge each vehicle and what would be the number of vehiclesusing the highway by-pass? Would the number of vehicles using the highway by-passbe the socially efficient level of output? Why or why not? Does the company have anincentive to build the highway by-pass? Explain. (6 marks)b) If the government were to build the highway by-pass what price should it chargefor each vehicle if it wants to maximise the total economic surplus? What would bethe number of vehicles using the highway by-pass at this price? What is the totaleconomic surplus from building the highway by-pass? Illustrate with a diagram. (6marks)c) Comparing the costs and benefits to society should the government build thehighway by-pass? Explain your reasoning. (3 marks)Question C3 (15 marks)Acme Chemicals is a manufacturer of pesticides and is located on a lake. Thecompany derives a private marginal benefit from selling its products of: PMB = 120 –Q, where Q = quantity sold per week. The company’s private marginal costs ofproduction are: PMC = 2Q. The social marginal benefit from producing its products isthe same as the private marginal benefit (that is, PMB = SMB). However, withrespect to the social marginal costs, each unit of production causes an additional costof $30 to a trout farmer through the dumping of chemical waste by the company intothe lake.

43a) What quantity of pesticide will Acme Chemicals produce if it considers only itsprivate costs and benefits? What is the socially efficient quantity of pesticide thatshould be produced? What is the deadweight loss associated with the private marketoutcome? Explain and illustrate your answer with a diagram. (7 marks)b) Would it be possible for Acme Chemicals and the trout farmer to enter into privatenegotiations and reach an agreement that achieves a socially efficient solution?Explain how private negotiations might lead to a socially efficient outcome. Whatrequirements are necessary for this to occur? (4 marks)c) If private negotiations fail to reach a socially efficient outcome and the governmentsubsequently imposes a production tax on the company, what per unit tax on outputwould achieve a socially efficient outcome? Explain and illustrate your answer with adiagram. (4 marks)END OF EXAMINATION