Assignment - Short Answer Questions/Problems

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:

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

(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 profit maximising 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?