Questions

1. (A) What is the difference between a movement along a demand or supply curve and a shift of one of these curves? Why is it important to distinguish between the two? What mistake might a businessperson make if he or she failed to make this distinction?

Consider the following newspaper excerpt explaining the increase in milk prices which occurred a few years ago:

"The biggest force driving up milk prices is the same one that has driven up prices for conventional commodities like iron ore and copper: a roaring global economy. Rising incomes in emerging economies from China and India to Latin America and the Middle East are lifting millions of people out of poverty and into the middle class."

Explain this excerpt in terms of movements along and shifts of curves. Does this excerpt assume anything about whether milk is a normal or inferior good?

(B) Describe an industry in which an unanticipated shift in demand had an important impact. What was this impact? What difference would it have made had the shift been anticipated? What was the effect of any shifts in industry supply?

2. A) With asymmetric information, free markets may not lead to efficient outcomes because the market for a service or product may break down due to adverse selection. Explain what adverse selection is and why it might lead to market break down? Under what conditions is a market breakdown more likely?

Venture capitalists look for inventors with good ideas but venture capitalists may not be able to judge the quality of an idea as well as the inventor. Provide some ideas on how venture capitalists can separate inventors with good ideas from those with bad ideas. Explain why you expect your idea to work?

B) In the second part of your essay, pick a market for a service or a product with asymmetric information. Explain the nature of asymmetric information and how the market is organized to alleviate the problem. Discuss whether the asymmetric information is overcome or not.

3. A) Briefly describe the prisoner's dilemma and coordination games. Explain the fundamental difference between these games. What are some ways in which players may be able to achieve a better outcome in the prisoner's dilemma game?

What about in a coordination game? In particular, explain why or why not communication may help achieve a better outcome in either of these games.

B) In the second part of your essay describe a real world business situation that can be described as a coordination game. Did the players find a way to coordinate in your example? Was it successful? What factors could have improved coordination in your example?

Guidelines

The goal of the assignment is to demonstrate the ability to apply the principles of managerial economics to a real world example. A good assignment should review the key relevant theoretical issues, present an example that illustrates the theory, and use the theory to draw fresh insights that are relevant for managerial decision making.

Originality and depth of analysis are important.

You are highly advised to devote less than half of your answer to Part (A), the theory part. This part should review the relevant material. Because of the word constraint, you should review only the theoretical issues relevant to the question.

The discussion of the real-world case or example in Part (B) should be self-contained and have the right balance of description, interpretation and analysis. Rather than using examples that have already been extensively discussed during the lectures, it is best to introduce cases about which you have direct knowledge. Try your best at supporting your points with facts. Quantitative information is highly appreciated, but not necessary for success. You should try as much as possible to identify whether the example matches the assumptions of the theory and explore whether the predictions of the theory are consistent with your application. You should investigate in a critical way whether the facts are at odds with the theory, rather than forcing the application to fit the theory.

You are expected to give credit to any important source you used for your analysis, such as books, research articles, web pages - not doing so is considered plagiarism. The list or notes containing bibliographic and source references are not included in the word count. In case the information used is confidential, briefly explain the confidentiality issues and use acronyms if necessary.

When assessing your assignment, we will have the following criteria in mind

First part: How pertinent is the theory exposited to the question asked? How accurate and correct is the exposition of the theory? How much independent and personal elaboration is there in the theory part?

Second part: How relevant is the example to the question asked? How novel is the example? How well is the example documented with facts and how careful is the explanation of the facts? How much effort has been made to analyse the example and relate it to the theory exposited in the first part? How interesting from a business perspective are the implications and conclusions? 

Exposition: Is the work well-structured, concise and well-written?