MA819/20 2 1. The supply and demand for bottles of Saucy Sauce are described using the following functions: Qs = 120P – 14,400 Qd = 18,900 – 60P where: Qs = Quantity supplied (1000s of bottles per year) Qd = Quantity demanded (1000s of bottles per year) P = price per bottle (pence) a) i) Determine the equilibrium price and quantity traded ii) Sketch the supply and demand functions, clearly labelling intercepts with the axes and the equilibrium output. [5 marks] b) The government decides to impose a quota of 6,000,000 bottles per year on the firm’s production in order to open up the market to other producers. i) Sketch the supply and demand functions if the quota is imposed. ii) Determine the new equilibrium price and quantity traded. iii) Explain your answer in part b)ii). [6 marks] c) In the sauce market, Saucy Sauce is one of several products consumers can choose from. Advertising, brand building and product differentiation are all carried out in this market. Discuss 3 areas of behavioural economics in the context of this market and the impact they would have on consumer decision making. [6 marks] [Total: 17 marks] 3 MA819/20 turn over 2. A monopolist in market X has the following total cost and total revenue functions: TC = 484 + 1.5Q2 – 45Q TRx = 65Qx – 3.5Qx2 where: TC = total costs of the firm Q = quantity sold by firm TRx = total revenue earned from selling in market X Qx = quantity of units purchased in market X a) i) Derive the average cost and marginal cost functions. ii) Derive the average revenue and marginal revenue functions for market X. iii) Determine the profit maximising output and price if the firm operates only in market X (so that Q = Qx), the total revenue generated at this output, and the maximum profit. [7 marks] b) The firm faces demand consistent with the TRx in market X, its current market. Management has identified a new market, Y, for its product with demand given by the function: Qy = 21 – Py where Qy = quantity of units purchased in market Y Py = price charged per unit in market Y. Assuming that the firm can charge a distinct price in each of the markets, and that the firm’s marginal costs are unaffected (so Q = Qx + Qy), determine the total output of the firm, the price charged in each of the markets and the total profit for the firm. [8 marks] c) Explain the conditions required to exercise price discrimination. [3 marks] [Total: 18 marks] MA819/20 4 3. Household expenditure on three goods in each of the last two years, along with household income (all in real terms, prices unchanged), is given in the following table (all values in $millions): 2018 2019 Expenditure on: Good A 800 1050 Good B 350 800 Good C 650 550 Total Income 1800 2400 a) Calculate the income elasticity of demand for each good using a startpoint method, explaining whether each good is a normal or inferior good, and also whether each good is a necessity or a luxury. [6 marks] b) Discuss the impact the results of part a) would have on the strategy of a firm producing each of the three goods if the government issues forecasts of an economic downturn. [3 marks] [Total: 9 marks] 4. Ian Vestor has determined his utility of wealth function to be as follows: U(w) = w2 – w a) Show, with explanation, whether Mr Vestor is risk-averse, and whether he prefers more to less. [3 marks] b) Mr Vestor is offered a gamble with the following characteristics: Original wealth: w0 = ￡130,000 In return for a payment of ￡100, Mr Vestor could receive: ￡1000 with probability 1/20 ￡120 with probability 5/12 ￡0 otherwise. i) Show whether or not this represents a fair gamble. ii) Explain what Mr Vestor’s attitude to risk tells us in terms of whether he would accept this gamble. iii) Using e
xpected utility, confirm whether Mr Vestor would accept the gamble. [6 marks] [Total: 9 marks] 5 MA819/20 turn over 5. a) Firm A operates in a duopoly with Firm B, which is well established and is assumed to produce a particular quantity of the product, which has been stable for many years. Assuming that the Cournot Model applies, describe, using diagrams if appropriate, how Firm A would make its price and output decisions. [5 marks] b) Firm C operates in a duopoly with Firm D, which is well established and has historically charged a set price for the product, which has been stable for many years. Assuming that the Bertrand model applies, discuss the strategies available to Firm C, assuming it wishes to maximise profits. [4 marks] [Total: 9 marks] 6. The Democratic Federation of Albany has, for many years, operated a closed economy, maintaining self-sufficiency and refusing to trade with other countries. Albany has a strong agricultural industry, limited manufacturing industry with outdated technology, potential natural gas reserves, and low wages relative to other countries. It is now deciding whether to open up trade to the rest of the world. Discuss briefly the potential benefits and costs to this country of International Trade. [Total: 6 marks] 7. The banking regulator requires banks to maintain a minimum liquidity ratio of 8%. The government spends $7 billion of money from its reserves held in the central bank on domestic infrastructure projects. a) Discuss the benefits of the government spending on infrastructure projects. [4 marks] b) i) Calculate the maximum increase in total deposits that would be generated by this new spending. ii) Explain why the actual rise in deposits may be less than the number calculated in part (i). [4 marks] [Total: 8 marks] MA819/20 6 8. A major investment fund is considering investing in financial instruments and capital projects in the newly open market of the Democratic Federation of Albany. Managers have asked you to summarise points international investors should consider in respect of the effectiveness of the financial system within an unfamiliar country. You do not need to consider currency and investment risks not related to the financial system. Outline the points you would make in your report; there are no marks for drafting but a clear and specific explanation is required. [Total: 8 marks] 9. Discuss clearly the strategies available to a government in using fiscal policy to address high inflation in the economy, and the effectiveness of this policy. [Total: 8 marks] 10. In the economy of Osterburg, consumption accounts for 75% of disposable income, with autonomous consumption (independent of income) of $30 billion. Annual investment is stable at $95 billion and government expenditure is planned at $170 billion. Incomes are taxed at an average rate of 24%. International trade is predicted to continue with exports and imports level at $52.8 billion and $42.5 billion respectively. a) Write down functions for the following quantities: – consumption – savings – domestic consumption – aggregate demand. [3 marks] b) i) Determine the equilibrium level of income for Osterburg. ii) Determine the government’s fiscal surplus or deficit. [2 marks] c) Consumer confidence declines and the marginal propensity to consumer goods and services out of disposable income reduces to 60%. In an attempt to compensate, the government is reducing the rate of taxation to an average of 15% of incomes and plans to adjust the level of government expenditure so that aggregate demand falls by no more than 5% from the level calculated in part b). Assuming that autonomous consumption, investment, exports and imports are unchanged, calculate the level of the government’s fiscal surplus or deficit in this case. [3 marks] [Total: 8 marks] END OF PAPER