ECO201e Assignment 2
This is a group-based assignment. You should form a group of 3 members from your seminar group. Each group is required to upload a single report to Blackboard via your respective seminar group. Please elect a group leader. The responsibility of the group leader is to upload the report on behalf of the group.
It is important for each group member to contribute substantially to the final submitted work. All group members are equally responsible for the entire submitted assignment. If you feel that the work distribution is inequitable to either yourself or your group mates, please highlight this to your instructor as soon as possible. Your instructor will then investigate and decide on any action that needs to be taken. It is not necessary for all group members to be awarded the same mark.
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Question 1
(a) Consider the market for air travel. It is discovered that the demand for business class ticket is relatively more inelastic compared to the demand for economy class ticket.
(i) Assume that initially the equilibrium price and quantity of tickets for both classes are the same. Use a market diagram for air travel which illustrates both the business class and the economy class.
(5 marks)
(ii) An improvement in the technology of air travel has occurred which affects both classes equally. Draw a suitable diagram to illustrate and discuss the effect on the equilibrium price and quantity of business class and economy class tickets. From the diagram, explain which class has a larger change in price and which class has a larger change in quantity after the technological improvement.
(10 marks)
(b) Evaluate the following statements and discuss whether they are true, false or uncertain. Justify your answers.
(i) A monopolist encounters a linear demand curve should always produce at the point where the demand is unit elastic in order to maximise profit.
(5 marks)
(ii) Applying the rational spending rule, a consumer consuming two products A and B should always buy more A and less B if the marginal utility of the last unit of A consumed is higher than that of B.
(5 marks)
Question 2
(a) An airline offering flight services from Singapore to Bangkok, Thailand, has two classes of seats, business class and economy class. Due to the higher oil prices, the airline has increased the ticket prices for both classes. The prices and tickets sold for both classes before and after the price hike is shown in the table below.
Economy Class
Business Class
Price
Tickets Sold
Price
Tickets Sold
$300
280
$2000
50
$450
120
$3000
40
(i) Calculate the price elasticity of demand for both classes using the mid-point formula.
(6 marks)
(ii) Given that the income elasticity of demand for economy class ticket is 1.5 and the cross elasticity of demand between economy class quantity and high speed rail price is 1.2, other things equal, explain the impact on the economy class revenue if income of consumers increase by 5% and high speed rail price decreases by 8%. Analyse each incident separately.
(5 marks)
(b) The following table shows the total cost incurred by a perfectly competitive firm in the short run.
Output
Total Cost
0
10
1
16
2
20
3
22
4
23
5
26
6
36
7
48
8
61
9
81
10
106
(i) Describe the relationship between total cost and average cost. Calculate the average fixed cost at 4 units of output, the average variable cost at 5 units of output, the average total cost at 6 units and the marginal cost at the 7th units of output.
(8 marks)
(ii) Assume that the firm is able to sell any amount of its output at the price of $10 per unit. Explain how to determine the optimal quantity and calculate the total profit or loss at that quantity.
(6 marks)
Question 3
In a fishing village famous for its cuttlefish, there are many firms producing dried cuttlefish. The cuttlefish are identical and each firm has only a small market share with no control over the price. Hence the dried cuttlefish market can be considered as perfectly competitive.
(a) Initially all the producers are earning a normal profit. Discuss this situation with a suitable dried cuttlefish market and a representative firm diagrams.
(5 marks)
(b) There is a well-reputed medical report suggesting that eating dried cuttlefish may cause cancer. Explain the effect of this report on the dried cuttlefish market and a representative firm in the short run equilibrium. Support your answers with suitable market and firm diagrams.
(10 marks)
(c) What happen to the dried cuttlefish market and the firms in the long run? Explain with suitable dried cuttlefish market and a representative firm diagrams.
(10 marks)
Question 4
Consider a single pricing monopolist with a demand equation P = 60 – 2Q. It encounters a constant marginal cost of $20 which is also equals to the average total cost.
(a) Identify the optimal price and quantity for the monopolist. Illustrate your answers with a suitable diagram.
(7 marks)
(b) Identify the profit and the consumer surplus of the monopolist at the optimal output.
(6 marks)
(c) Compare to a perfectly competitive market. If this market were to be a perfectly competitive one, what is the equilibrium price and quantity? Illustrate your answer with a suitable diagram.
(7 marks)
(d) Compare to a perfectly competitive market, calculate the deadweight loss of the monopoly.
(5 marks)
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