Question 1
A movie cinema has identified two groups of customers in the market:
students and adults. To gain a concession students just have to show their
student card when buying a ticket. Each ticket costs the cinema $4
regardless of whether it is to a student or an adult. Use the following two
tables to answer each part of the question below:
Adult Buyers Students – Concession Buyers
Price Quantity Price Quantity
20 2 12 1
18 4 10 2
16 6 8 3
14 8 6 4
12 10 4 5
10 12 2 6
8 14
6 16
4 18
2 20
a) Explain what direct price discrimination is.
b) What is the effect on producer surplus, and consumer surplus from
the practice of price discrimination?
c) What prices will the cinema charge to maximise profit for adults and
students each?
d) Calculate the consumer surplus to adults and students separately
when the business uses price discrimination.
e) Calculate the consumer surplus when the business does NOT use
price discrimination (Hint: combine the demand curves from both
high and low value customers)
Question 2
Use the following table for this question
Good Own Price Elasticity of Demand
Cigarettes -0.50
Alcohol -1.00
Soft Drink -1.50
(a) If the government could raise taxes on one good, which product should
the government increase tax rates in order to raise tax revenue? Briefly
explain why.
(b) Which of the three products has a unitary elastic demand curve?
(c) If the government wants to decrease the quantity consumed of
cigarettes by 20%, what percentage of tax would they have to levy on
cigarette consumption? Show your working.
(d) If the government wants to decrease the quantity consumed of alcohol
by 20%, what percentage of tax would they have to levy on alcohol
consumption? Show your working.
(e) If the government wants to decrease the quantity consumed of soft
drink by 30%, what percentage of tax would they have to levy on soft drink
consumption? Show your working.
Question 3
Carl is the lead engineer on a smart HVAC cooling system that works with
minimal energy and is voice activated. Given the revolutionary nature of
the system, it took many failed tries to create a system that actually
worked, at a cost of $30,000. Now each unit sells for $6500 and it costs
$5000 in raw materials and labour to produce.
(a) What costs should Carl take into consideration when deciding to service
the order for an additional unit? Why?
(b) Carl receives an order for four new units for a customer, but when he
takes the order to his manager, the manager is enraged and asks Carl why
he wanted to produce something at a loss. What costs would the manager
be looking at to come to this conclusion?
Question 4
Energy/utility companies can use a mix of plants using different energy
sources to produce electricity. Mainly these are coal fired plants but
increasingly they are relying on gas turbines. Technological improvements
in hydraulic fracturing, or “fracking,” have decreased the cost of extracting
smaller pockets of natural gas.
Using labelled diagram(s) indicate and describe what effect fracking has on
the supply and demand for coal.
Question 5
The market for cigarettes in a country is dominated completely by two
firms, Chokoe Ltd and Fumed Lungs Ltd. The market size is fixed at $8
billion. Each firm can choose whether to advertise or not. Advertising costs
$1 billion for each firm that advertises. If one firm advertises and the other
does not, then the firm advertising captures the whole market. If both firms
advertise, they split the market 50:50 and pay for their respective
advertising. If neither advertises, they split the market 50:50 but without
the expense of advertising.
(a) Draw a game table to describe this game.
(b) What strategy would you advise Fumed Lungs Ltd to follow?
(c) What would you predict will be the strategy chosen by each firm?
(d) Is there an outcome that would make both firms better off? Why aren’t
they able to achieve this outcome?
Question 6
In 2013 the Australian coal producer, Yancoal, operated at a loss of $832
million. Yancoal has committed to long-term contracts (30 years) for access
to railway and port facilities for transporting its coal; and it is required to
make large payments for those facilities regardless of whether it uses them.
Is it possible that – despite making a large loss – it was still profitmaximising
for Yancoal to remain in operation in 2013? Explain why.
Question 7
Insurance firm A is offering motorists a discount on their insurance policies
if they are willing to install a device in their cars that monitors their driving
behavior. Another insurance firm B offers contracts to motorists where the
insurance premium they pay varies with distance travelled.
Why would the insurance firms be willing to offer these types of contracts
compared to the usual approach of setting insurance premiums based on
motorists’ characteristics, such as age and driving history?

 

 

 

 

 

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