THE AUSTRALIAN NATIONAL UNIVERSITY Semester Two, 2022: Final Examination (Group 1) – 9 November 2022 Microeconomic Analysis ECON7073 Reading Time: Fifteen Minutes. Writing Time: Three Hours. Scanning and Submission Time: Thirty Minutes. Permitted Materials: This is an “open book” exam. There are no restrictions on the materials that may be used while undertaking this exam.. Page 1 of 11 – Microeconomic Analysis (ECON7073) Instructions 1. This exam is worth sixty percent of your raw overall mark for this course. 2. The exam consists of four questions, each of which is worth twenty-five marks. As such, there are a total of one-hundred marks available on this exam. 3. An indication of the allocation of marks within each question is provided within the exam. 4. Note that, in general, most of the marks for any part of any question will be allocated to the quality, relevance, and accuracy of the supporting explanation and analysis that you provide in your answer, rather than to the accuracy of the precise answer itself. (One implication of this is that a correct final answer that is accompanied by insufficient supporting material might receive a very low mark.) This will be the case regardless of whether or not it is explicitly indicated within the question itself. 5. You have three hours and forty-five minutes in which to complete this exam and submit it, unless the University has approved an alternative arrangement. This consists of fifteen minutes of reading time, three hours of writing time, and thirty minutes of “document scanning and submission” time. Please note that writing is not permitted during both the reading time and the “document scanning and submission” time. Writing is only permitted during the writing time. 6. Your answers must be handwritten. They must not be typed. You are free to use either “paper and pen (or pencil)”, “tablet and stylus”, or any other technology that allows you to handwrite your solutions. 7. Please attempt as many questions as you can in the allotted time for this exam. 8. Please start your answer to each question on a new page and indicate which question is being answered at the top of the page. Where relevant, please indicate the part of a question that is being answered within your answer to each question. 9. Please sort all of your answers into the same order as the corresponding questions appear on the exam question paper. Where relevant, please sort all of your answers to parts of a question into the same order as the corresponding parts appear within that question on the exam question paper. 10. Please submit a digital file containing a copy of your answers to the exam before the expiration of the allotted three hours and forty-five minutes for this exam. The exam must be submitted no later than 6:15 pm on Wednesday 9 November 2022 (Canberra, ACT, Australia Time) unless an alternative arrangement has been approved by the University. No late exams will be accepted. This applies even if the exam answers are submitted only a tiny bit late. 11. Please submit your answers to the exam by using either the Turnitin link provided on the Wattle site for this course or, if you are unwilling or unable to use Turnitin, Page 2 of 11 – Microeconomic Analysis (ECON7073) by email to [email protected]. Any exam that is not submitted using at least one of these two methods might well be missed and, as a result, be considered not to have been submitted. In particular, please do not submit your exam to any email address other that the one provided above. 12. Please note that if you are unwilling or unable to use Turnitin, you must provide copies of all reference material that you use during the exam if you are requested to do so before the release of final results for this course. 13. Please note that this exam will be invigilated over Zoom. You must enter the Zoom meeting for this exam before accessing the exam question paper. You must remain in the Zoom meeting for this exam from the point at which you enter it until some point in time after you have submitted your exam answers. You must be visible on a web-camera for the entire time that you are in the Zoom meeting for the exam. No exam answers that are submitted after you leave the Zoom meeting for the exam will be accepted. 14. A link for the Zoom meeting for this exam will be provided in the “Assessment Items 3: Final Exam” block on the Wattle site for this course. The exam Zoom meeting will open no later than 2:25 pm on the day of the exam, in order to allow you to join it before the start of the exam. This is five minutes before the exam questions paper will become available (at 2:30 pm on the day of the exam). 15. The exam questions paper and the Turnitin submission link for the exam will also be provided in the “Assessment Items 3: Final Exam” block on the Wattle site for this course. 16. The timing for the components of the exam is as follows. The exam Zoom meeting will open no later that 2:25 pm on the day of the exam. The exam questions paper will become available, and reading time will commence, at 2:30 pm on the day of the exam. Reading time will end and writing time will commence at 2:45 pm on the day of the exam. Writing time will end and “document scanning and submission” time will begin at 5:45 pm on the day of the exam. Document scanning and submission time, and the exam Zoom meeting, will not end before the earlier of 6:15 pm on the day of the exam and the time at which the last of the students that attempt the exam leaves the exam Zoom meeting. Document scanning and submission time will end no later than 6:15 pm on the day of the exam. Hopefully, the exam Zoom meeting will end no later than 6:20 pm on the day of the exam. 17. Good luck! Page 3 of 11 – Microeconomic Analysis (ECON7073) Question 1 (25 marks) 1. Consider a perfectly competitive industry that is initially in a position of long-run competitive equilibrium. All of the firms in this industry are identical, and each of them produces exactly seven units of output in the initial long-run competitive equilibrium. Suppose that this this industry is hit with a demand shock. Assume that the industry as a whole is a constant cost industry, both before and after the shock.1 Some points on the short-run total cost schedule facing one of the firms in this industry immediately after the demand shock has occurred is provided in the table below. Quantity (Number of Units) Total Cost ($) Total Fixed Cost ($) Total Variable Cost ($) Average Fixed Cost ($) Average Variable Cost ($) Average Total Cost ($) Marginal Cost ($) 0 50 1 100 2 140 3 170 4 190 5 210 6 230 7 260 8 300 9 350 10 410 (a) Reproduce the above table in your exam answers document and fill in the blank cells. Provide an explanation of the process that you used to calculate the blank cells in each of the relevant columns in the table. (10 marks.) (b) Suppose that, immediately following the shock, the output price is $35 per unit. How many units of output would this firm produce in the short-run If 1An entire industry is referred to as a constant cost industry if sufficiently small changes in the demand for inputs by that industry as a whole will have a negligible impact on the prices of those inputs. Page 4 of 11 – Microeconomic Analysis (ECON7073) the price remained at this level indefinitely, how many units would this firm produce in the long-run (5 marks.) (c) Suppose that, immediately following the shock, the output price is $25 per unit. How many units of output would this firm produce in the short-run If the price remained at this level indefinitely, how many units would this firm produce in the long-run (5 marks.) 2. Consider a single-product, price-taking firm. Denote the output level at which the firm’s long-run average cost curve is tangent to the firm’s short-run average cost curve by Q0. Suppose that the firm’s long-run average cost curve is falling when output is in the vicinity of Q0. Describe the positions and behaviour of the firm’s long-run marginal cost curve, short-run marginal cost curve, and short-run average cost curve when output is in the vicinity of Q0. (5 marks.) Page 5 of 11 – Microeconomic Analysis (ECON7073) Question 2 (25 marks) 1. Consider a perfectly competitive industry in a completely closed economy that con- sists of ten single-product, price-taking firms. The marginal cost function for each of these ten firms is MC (q) = 40 12q + q2. Average total cost for each of these ten firms is minimised when the firm in question produces q = 12 units. Average variable cost for each of these ten firms is minimised when the firm in question produces q = 9 units. The market demand curve facing this industry is QD (P ) = 160 P , where QD (P ) denotes the the total market demand for the product that is produced by the firms in this industry when the price per unit of that product is P dollars. (a) Is this industry in a position of long-run competitive equilibrium Justify your answer. (8 marks.) (b) Suppose that foreign producers will soon be allowed to enter this market. The price (in domestic currency units), at which these foreign sellers would be prepared to provide any desired amount of the product to the domestic market for this country is twenty dollars per unit. Analyse the short-run and long-run impacts of the opening up of this market to foreign producers. (9 marks.) 2. Consider a single-product monopolist that can completely segregate its consumers into two distinct markets, between which resale cannot occur. The monopolist can charge a different price in each of these two markets, but cannot price discriminate within either of the markets. The market demand curve that faces the monopolist in one of these markets (call it “market one”) is QD1 (P1) = 18 2P1, where P1 is the price per unit that the monopolist per unit charges in market one. The market demand curve that faces the monopolist in the other market (call it “market two”) is QD2 (P2) = 10 P2, where P2 is the price per unit that the monopolist per unit charges in market two. Let Q = Q1+Q2 denote the total output of this monopolist, where Q1 is the amount of output that it provides in market one and Q2 is the amount of output that it provides in market two. Suppose that the profit maximising level of total output for the monopolist occurs when MC (Q) = $6. (Assume that the monopolist’s average variable cost function is not a decreasing function of output in the vicinity of the total output level at which MC (Q) = $6.) What level of output would be provided to market one, and what price would be charged in market one, by a profit- maximising monopolist What level of output would be provided to market two, and what price would be charged in market two, by a profit-maximising monopolist (8 marks.) Page 6 of 11 – Microeconomic Analysis (ECON7073) Question 3 (25 marks) Suppose that Minilandia is a “small” player in the world market for widgets. This means that Minilandia, even when acting as a single entity, does not have the ability to influ- ence the world widget price. The inverse market demand curve for widgets in Minilandia (PD (Q)) is downward sloping and has a reservation price of PD (0). The domestic inverse market supply curve for widgets in Minilandia (P S (Q)) is upward sloping and has a reser- vation price of P S (0). The foreign supply curve for widgets (to Minilandia) is perfectly elastic at the world widget price of PW . There are no transport costs for widgets. Neither the inverse market demand curve for widgets in Minilandia nor the domestic inverse mar- ket supply curve for widgets in Minilandia are affected by the quantity of widgets that are imported. Denote the autarky price of widgets in Minilandia by PA. (The autarky price of widgets in Minilandia is the price that would clear the widget market in Minilandia if international trade in widgets was not allowed by Minilandia.) You should assume that 0 < P S (0) < PW < PA < PD (0) <∞. 1. Suppose that the Minilandia widget market is completely free of any polic
y inter- ventions. Use an appropriate diagram to illustrate this situation for the widget market in Minilandia. Identify the equilibrium quantity of widgets purchased by consumers in Minilandia, the equilibrium quantity of widgets sold by domestic wid- get producers in Minilandia, the equilibrium quantity of widgets that are imported into Minilandia, the equilibrium price per widget that is paid by widget consumers in Miniilandia, the equilibrium price per widget that is received by domestic widget producers in Minilandia, the equilibrium price that is received by foreign suppliers of widgets imports by Minilandia, the consumer surplus received by widget consumers in Minilandia, and the producer surplus received by domestic widget producers in Minilandia, and the net Minilandia government revenue from the widget market (that is “tax receipts from the widget market minus subsidy expenses in the widget market”). What is the total surplus achieved by domestic participants (including consumers, producers, and the government) in this market (5 marks.) 2. Suppose that the government of Minilandia decides to implement a specific (that is, per-unit) domestic production subsidy for widgets at the rate of s per unit, where 0 < s < PA PW . This subsidy is only paid for widgets that are produced by domestic widget producers in Minilandia. Use an appropriate diagram to illustrate this situation for the widget market in Minilandia. Identify the equilibrium quan- tity of widgets purchased by consumers in Minilandia, the equilibrium quantity of widgets sold by domestic widget producers in Minilandia, the equilibrium quantity of widgets that are imported into Minilandia, the equilibrium price per widget that is paid by widget consumers in Miniilandia, the equilibrium price per widget that is received by domestic widget producers in Minilandia, and the equilibrium price that is received by foreign suppliers of widgets imports by Minilandia What is the the impact of this policy on the consumer surplus received by widget consumers in Minilandia, and the producer surplus received by domestic widget producers in Minilandia, and the net Minilandia government revenue from the widget market (that is “tax receipts from the widget market minus subsidy expenses in the widget Page 7 of 11 – Microeconomic Analysis (ECON7073) market”), and the total surplus achieved by domestic (Minilandian) participants (including consumers, producers, and the government) in this market (5 marks.) 3. Suppose that the government of Minilandia decides to implement a specific (that is, per-unit) consumption tax for widgets at the rate of t per unit, where 0 < t < PA PW . Use an appropriate diagram to illustrate this situation for the widget market in Minilandia. Identify the equilibrium quantity of widgets purchased by consumers in Minilandia, the equilibrium quantity of widgets sold by domestic wid- get producers in Minilandia, the equilibrium quantity of widgets that are imported into Minilandia, the equilibrium price per widget that is paid by widget consumers in Miniilandia, the equilibrium price per widget that is received by domestic widget producers in Minilandia, and the equilibrium price that is received by foreign suppli- ers of widgets imports by Minilandia What is the the impact of this policy on the consumer surplus received by widget consumers in Minilandia, and the producer surplus received by domestic widget producers in Minilandia, and the net Mini- landia government revenue from the widget market (that is “tax receipts from the widget market minus subsidy expenses in the widget market”), and the total surplus achieved by domestic (Minilandian) participants (including consumers, producers, and the government) in this market (5 marks.) 4. Suppose that the government of Minilandia decides to simultaneously implement both a specific (that is, per-unit) consumption tax for widgets at the rate of t per unit and a specific (that is, per-unit) domestic production subsidy for widgets at the (same) rate of t per unit, where 0 < t < PA PW . The subsidy is only paid for widgets that are produced by domestic widget producers in Minilandia. Use an appropriate diagram to illustrate this situation for the widget market in Minilandia. Identify the equilibrium quantity of widgets purchased by consumers in Minilandia, the equilibrium quantity of widgets sold by domestic widget producers in Mini- landia, the equilibrium quantity of widgets that are imported into Minilandia, the equilibrium price per widget that is paid by widget consumers in Miniilandia, the equilibrium price per widget that is received by domestic widget producers in Mini- landia, and the equilibrium price that is received by foreign suppliers of widgets imports by Minilandia What is the the impact of this policy on the consumer sur- plus received by widget consumers in Minilandia, and the producer surplus received by domestic widget producers in Minilandia, and the net Minilandia government rev- enue from the widget market (that is “tax receipts from the widget market minus subsidy expenses in the widget market”), and the total surplus achieved by domestic (Minilandian) participants (including consumers, producers, and the government) in this market (5 marks.) 5. Compare and contrast the impact of the combined “specific tax and specific do- mestic production subsidy (at the same rate)” policy that was described in Part 4 of this question with the impact of a specific tariff that is set at the same rate as the combined “specific tax and specific domestic production subsidy”. You should assume that the tariff is levied instead of the “specific tax and specific domestic production subsidy” policy, rather than in addition to it. (Hint: A tariff is a tax that is levied only on imports.) (5 marks.) Page 8 of 11 – Microeconomic Analysis (ECON7073) Question 4 (25 marks) Consider a purely private commodity that is desired by exactly two people (person A and person B). The commodity is infinitely divisible, and there is a total stock of 100 units of this commodity that is available to be allocated between person A and person B. Person A’s marginal benefit schedule for this commodity is given by MBA (QA) = 800 3QA, where QA denotes the quantity of the commodity that is consumed by person A and the marginal benefit is measured in dollars. Person B’s marginal benefit schedule for this commodity is given by MBB (QB) = 225 2QB, where QB denotes the quantity of the commodity that is consumed by person B and the marginal benefit is measured in dollars. Note that neither of these marginal benefit schedules display wealth (or income) effects. 1. Suppose that trade between person A and person B is not possible. (a) Assume that the entire stock of the commodity is initially allocated to person A. What is the total surplus (that is, the sum of the surplus received by person A and the surplus received by person B) that results from this initial allocation Use an appropriate diagram to illustrate this situation. (1 mark.) (b) Assume that the entire stock of the commodity is initially allocated to person A. What is the total surplus (that is, the sum of the surplus received by person A and the surplus received by person B) that results from this initial allocation Use an appropriate diagram to illustrate this situation. (1 mark.) 2. Suppose that trade between person A and person B is possible, and that there are no transaction costs whatsoever. (a) Assume that the entire stock of the commodity is initially allocated to person A. What amount of the commodity is consumed by person A What amount of the commodity is consumed by person B What is the total surplus achieved from this “market” given this initial allocation Are there potential gains from allowing trade in this situation If so, what is the size of any such gains (in terms of additional “total surplus”) Use an appropriate diagram to illustrate this situation. (2 marks.) (b) Assume that the entire stock of the commodity is initially allocated to person B. What amount of the commodity is consumed by person A What amount of the commodity is consumed by person B What is the total surplus achieved from this “market” given this initial allocation Are there potential gains from allowing trade in this situation If so, what is the size of any such gains (in terms of additional “total surplus”) Use an appropriate diagram to illustrate this situation. (2 marks.) Page 9 of 11 – Microeconomic Analysis (ECON7073) 3. Suppose that trade between person A and person B is possible, and that there is a specific transaction cost of t = $10 per unit of the commodity that is traded. (a) Assume that the entire stock of the commodity is initially allocated to person A. What amount of the commodity is consumed by person A What amount of the commodity is consumed by person B What is the total surplus achieved from this “market” given this initial allocation Are there potential gains from allowing trade in this situation If so, what is the size of any such gains (in terms of additional “total surplus”) Use an appropriate diagram to illustrate this situation. (3 marks.) (b) Assume that the entire stock of the commodity is initially allocated to person B. What amount of the commodity is consumed by person A What amount of the commodity is consumed by person B What is the total surplus achieved from this “market” given this initial allocation Are there potential gains from allowing trade in this situation If so, what is the size of any such gains (in terms of additional “total surplus”) Use an appropriate diagram to illustrate this situation. (3 marks.) 4. Suppose that trade between person A and person B is possible, and that there is a single lump-sum transaction cost of F dollars that must be incurred if the commodity is traded between person A and person B. (Note that this transaction cost does not vary with the quantity of the commodity that is traded, but is only incurred if the traded quantity exceeds zero.) (a) Assume that the entire stock of the commodity is initially allocated to person A. What is the largest size of the lump-sum transaction cost (call it FmaxA ) that would be consistent with any trade taking place Suppose that the actual transaction cost is less than or equal to FmaxA . What amount of the commodity is consumed by person A What amount of the commodity is consumed by person B What is the total surplus achieved from this “market” given this initial allocation Are there potential gains from allowing trade in this situ- ation If so, what is the size of any such gains (in terms of additional “total surplus”) Use an appropriate diagram to illustrate this situation. (3 marks.) (b) Assume that the entire stock of the commodity is initially allocated to person B. What is the largest size of the lump-sum transaction cost (call it FmaxB ) that would be consistent with any trade taking place Suppose that the actual transaction cost is less than or equal to FmaxB . What amount of the commodity is consumed by person A What amount of the commodity is consumed by person B What is the total surplus achieved from this “market” given this initial allocation Are there potential gains from allowing trade in this situ- ation If so, what is the size of any such gains (in terms of additional “total surplus”) Use an appropriate diagram to illustrate this situation. (3 marks.) 5. How might the answers for the previous part of this question be affected if either or both of the marginal benefit schedules were nonlinear functions of the relevant person’s consumption of the commodity in question You should continue to assume Page 10 of 11 – Microeconomic Analysis (ECON7073) that both of them are decreasing functions of the relevant person’s consumption of the commodity in question, and that neither of them display wealth (or income) effects. (2 marks.) 6. Discuss the implications of the answers to the previous parts of this question for the Coase Theorem. (5 marks.) ——— End of Examination ——— ——————————————— ———————————— Page 11 of 11 – Microeconomic Analysis (ECON7073)