Econ 3057, 4438, 8038: Industrial Organisation

Assignment 6 solution
Semester I 2020
Due: Friday May 29th at 5 pm
1. [30 points] Freezeme is the unique supplier of refrigerators in a market with two types
of consumers. Each consumer is interested in buying at most one unit. Refrigerators might come in different qualities. From any given quality level S, a consumer of type
1 derives a utility of
U1 = S ?? p;
and a consumer of type 2 gets utility
U2 = S ?? p;
where p is the price, and > 1 is a constant. If a consumer does not buy, his/her
utility is 0. Freezeme found out that there are 100 consumers of type 1 and 70 of type
2.
Freezeme has a marginal cost of production of 10 (regardless of quality) and the
(quantity-independent) cost of developing a product of quality S is S2
2 .
(a) Suppose Freezeme develop two refrigerators, one of quality S1, the other one of
quality S2, with S2 > S1. Freezeme.s product manager I.S. Cold claims that
their products can be considered as being vertically di¤erentiated. Is she right?
Explain your answer. [4 points]
(b) Suppose that Freezeme could distinguish between consumers of type 1 and con-
sumers of type 2. Freezeme wants to develop two di¤erent fridges to serve the two
di¤erent types of consumers. What would Freezeme.s optimal price and quality
for each group of consumers be? [For each given quality, the .rm uses uniform
1
pricing. That is, the .rm charges pi for product with quality Si, i = 1; 2.] Assume
that the .rm can prevent arbitrage. [8 points]
(c) Under which condition is the quality produced for type 2 consumers greater than
the quality for type 1 consumers? Explain why the .rm would ever want to o¤er
a product of lower quality to the higher valuation type consumers. [4 points]
Assume for the remainder of this problem that Freezeme is unable to distinguish
between consumers of type 1 and consumers of type 2. Also assume that the
condition you identi.ed in part (c) holds.
(d) Freezeme wants to serve the two types of consumers with two di¤erent qualities,
S1 and S2. The .rm wants to .nd the optimal pairs (S1; p1) and (S2; p2) that
maximize their pro.t. [(Si; pi) for type i of consumers.] In order to do so, they
need to separate the two types of consumers. Given a menu f(S1; p1); (S2; p2)g,
write down the two constraints such that both types of consumers purchase the
products. Write down the two constraints such that both types of consumers
prefer to purchase the quality price pair intended for them rather than the one
intended for the other type. [These constraints will be in terms (S1; p1) and
(S2; p2).] [4 points]
(e) Find the optimal pairs (S1; p1) and (S2; p2) that maximize Freezemen.s pro.t
assuming that the .rm wants to o¤er two di¤erent qualities S2 > S1. [Hint: Two
out of the four inequalities constraints will be binding.] [10 points]
2, Start a new post with the following information and give it an appropriate subject, like “Patton
Ch 1”:
a) From the appropriate chapter, select a question from the Questions for
Review from the end of the appropriate chapter in the e-book, (copy) the question in your
initial post (1 point).
b) Using your own words, correctly answer the selected question (2 points).
c) Read and reply to another classmate’s post (1 point).
d) Provide a thoughtful and correct reply (1 point).

1. Use the data in HAPPINESS.RAW for this question. See also Computer Exercise C15 in Chapter 13.
1. (i) Estimate a probit probability model relatingvhappytooccattendandregattend, and include a full set of year dummies. Find the average partial effects foroccat- tendandregattend. How do these compare with those from estimating a linear probability model?
2. (ii) Define a variable,highinc, equal to one if family income is above $25,000. Includehighinc,unem10,educ, andteensto the probit estimation in part (ii). Is the APE ofregattendaffected much? What about its statistical significance?
3. (iii) Discuss the APEs and statistical significance of the four new variables in part (ii). Do the estimates make sense?
4. (iv) Controlling for the factors in part (ii), do there appear to be differences in happi- ness by gender or race? Justify your answer.
Attachments:
1. How does the DD schedule shift if there is a decline in investment demand? 2. Suppose there is a permanent fall in private aggregate demand for a country’s output (a downward shift of the entire aggregate demand schedule). What is the effect on output? What government policy response would you recommend? 3. A new government is elected and announces that once it is inaugurated, it will increase the money supply. Use the DD-AA model to study the economy’s response to this announcement.
During the current COVID-19 pandemic many countries have imposed quarantine on their
populations in order to limit/ stop the spread of the disease and avoid overload on the health
system. While these measures are justified from the health perspective, they have major economic
consequences. In this assignment you are asked to analyse different economic aspects related to the
COVID-19 pandemic.
Part 1 (20 marks)
GDP and unemployment
a) Analyse the effects of quarantine on GDP, employment and the unemployment rate. Which
industries are likely to be most affected and which industries are likely to be least affected
by quarantine measures?
b) Choose any country that introduced quarantine as an example. What was its GDP growth
rate in 2018, 2019? (Indicate the source of information.) Is this country likely to be in
recession this year? Refer to two definitions of recession.
c) Are your answers consistent with (general) Okun’s law?
Part 2 (20 marks)
Inflation
a) What do you think would happen to inflation in your chosen country in the coming year?
Explain.

manager of a nightclub realizes that demand for drinks is more elastic among students and is trying to determine the optimal pricing schedule. Specifically, he estimates the following average demand for his customer types: Under 25: q^r=18-5p Over 25: q=10-2p The two age groups visit the nightclub in equal numbers on average. Assume that drinks cost the club $2 to make. If the manager cannot identify to which group his customers belong, what is the uniform monopoly price? If the manager can identify to which group his customers belong, what price will he charge each group. Assume the manager can only charge a single price to each group. If the manager can charge a separate entry fee and a price per drink for each group, what two-part price will the manager set for reach group. Now suppose that once again it is impossible to identify which group the customers belong. Suppose the manager lowers the price of drinks to equal to marginal cost and still wanted to attract both customers, what entry fee would the manager set?

A student has to decide whether to go to a party on the night before an exam. If they go to the
party, then they have the probability ? of writing a good exam and the probability 1 ? of writing
a bad exam. If they do not go to the party, then they have the probability > ? of writing a good
exam.
The student has the utility u = x1/2 + H if they go to the party and get the mark x on the exam.
But, if they do not go to the party they have the utility u = x1/2. The professor gets to choose xb
(the mark she gives to bad exams) and xg the mark she gives to good exams. Students also have
the option of going to the party and then quitting the course. This gives them the utility U + H
where U > 0.
(a) What is the student’s expected utility from going to the party and her expected utility from
not going to the party?
(b) Assuming students do not quit the course, what marks (xg, xb) can the professor set to stop
students partying? Draw a picture of this set of marks with yg = pxg on one axis and
yb = pxb on the other. Explain how this set changes as H and ? change.
(c) What marks can the professor set so the students prefer partying and taking the exam to
quitting the course? What marks can the professor set so the students prefer not partying and
taking the exam to quitting the course? Show these sets on a new picture.
(d) Suppose that the professor wants to promote equity and thus aims to make the di?erence
xg xb as small as possible while still stopping students from going to the party, but she
ignores the possibility that students will quit the course. What marks (xg, xb) should she set
to achieve her objective? Will this result in the outcome she planned?
(e) Suppose now the professor wants to minimise xg xb while still getting students to not party
and attend the course. Plot the contours of her objective function on your (yg, yb) picture.
What marks (xg, xb) should she set to achieve her objective now?
(f) The professor has other variables that she can control: she can make the exam harder, which
decreases and ?, and she can make the party fail by calling the campus authorities, which
decreases H. How does each of these variables a?ect her ability to achieve the objectives
described above?

Part 1 (20 marks)
GDP and unemployment
a) Analyse the effects of quarantine on GDP, employment and the unemployment rate. Which
industries are likely to be most affected and which industries are likely to be least affected
by quarantine measures?
b) Choose any country that introduced quarantine as an example. What was its GDP growth
rate in 2018, 2019? (Indicate the source of information.) Is this country likely to be in
recession this year? Refer to two definitions of recession.
c) Are your answers consistent with (general) Okun’s law?
Part 2 (20 marks)
Inflation
a) What do you think would happen to inflation in your chosen country in the coming year?
Explain.
Demand components: Consumption
b) What factors usually determine individual consumption? In light of these factors analyse
how the situation with the COVID-19 pandemic is likely to affect aggregate consumption.
Use the theory studied in the course in your answer. You may want to provide some
examples for your chosen country.
Part 3 (20 marks)
Demand components: Investment and net exports
Analyse the effects of the COVID-19 pandemic on investment and trade (exports and imports, in
particular). Refer to the theories studied in the course. Provide some examples from your chosen
country. Do you think investment and trade will also be affected after the pandemic is over?
Explain.
The tabulation of the incremental cash ?ows between alternatives A and B is shown on the next page. Alternative A has a 3-year life and alternative B a 6-year life. If neither alternative has a salvage value, what is ( a ) the ?rst cost of alternative A and ( b ) the ? rst cost of alternative B? Year Incremental Cash Flow (B – A), $ 0 –20,000 1 5,000 2 5,000 3 12,000 4 5,000 5 5,000 6 5,000

Based on consulting economist’s report, th total and marginal cost functions for Advanced Electronics, Inc. are
TC = 200 + 5Q – 0.04Q2 + 0.001Q3
MC = 5 – 0.08Q + 0.003Q2
The president of the company determines that knowing only these equations is inadequate for decision making. You have been directed to do the following:
1. Determine the level of fixed cost (if any) and equations for average total cost.
2. Determine the rate of output that results in minimum average variable cost
If fixed costs increase to $500, what output rate will result in minimum average variable cost

You are given the following model:
appr = b 0 + b1 loanprc + b 2atotinc +b 3 atotinc.^2sq. + b4obrat + b5pubrec + u,
4 5 2 b 0 b1 b 2 b 3 b b ,
in which:
– approve: =1 if loan is approved, and 0 if not.
– obrat: other obligations, % of total income
– pubrec: = 1 if filed for bankruptcy
– atotinc: Total monthly income
– loanprc: loan amount /purchase price
– atotinc.^2sq. = atotinc* atotinc
1. What sign would you expect from each partial slope coefficient in the model above? Justify your answers.
From the estimation of model above, one can obtain the following:
appr = 1.2-0.189loanprc +1.7e^-06atotinc-4.3e^-11atotinc^2-0.0054obrat-0.28 pubrec
(0.04) (0.038) (2.7e^ -06 ) (5.6e^ -11 ) (0.00088) (0.0358)
R^2= 0.1087 n =1989
1. Interpret the coefficients of pubrec, and of loanprc.
2. How do you explain the signs of atotinc and atotinc^2 ?

Assuming that global international trade sharply declines because of the “trade war” (in the forms
of increases in tariff and other trade barriers such as import quota and export subsidies on both
sides) between the U.S. and China, the U.S. and the European Union, and the U.S. and Japan.
Everything being equal, explain in 700-800 words the likely impact on the following:
• Global productivity, economic growth and inflation
• Australian consumers who buy goods imported from China, Japan and the United States.
• Australian producers who need to source from both China and the United States.
• Australian exporters such as a mining company who exports iron ore and coal to China and
Japan.

An economy produces three goods: houses, guns, and apples. The price of each is $1. For the purposes of this problem, assume that all exchange involving houses involves newly constructed houses.
(a) Households buy 10 houses and 90 apples, eating them. The government buys 10 guns. There is no other economic activity. What are the values of the different components of GDP (consumption, investment, government spending, exports/imports)?
(b) The next year, households buy 10 houses and 90 apples. The government buys 10 guns. Farmers take the seeds from 10 more apples and plant them. Households then sell 10 apples to France for $1 each and buy 10 bananas from Canada for $2 each, eating them too. What are the values of the components of GDP?
(c) Return to the economy in part 1a. The government notices that the two richest households consume 40 apples each, while the ten poorest consume one each. It levies a tax of 30 apples on each of the rich households, and gives 6 apples each to the 10 poorest households. All other purchases by households and the government are the same as in
(a). Calculate the components of GDP.
A company must purchase one reactor to be used in an overall operation. Four reactors have been designed, all of which are equally capable of giving the required service. The following data apply to the four designs:

Q1: Cost-saving proposals 600 words (max. 200 words per proposal)Recognising these cost elements of this business, or a typical business like this, propose ways it can cleverly save costs (be more cost-efficient) by: (i) reducing fixed cost (ii) reducing variable cost (iii) cost-shifting (passing on/sharing part of the costs onto customers, workers, the government, the public in general etc.) (iv) aiming to achieve better economies of scale ?Propose three cost-saving ideas using any of (i) to (iv). E.g.: two of (i) and one of (ii). ? Discuss them: why you proposed it, why it is a good idea, what challenges might there be to implement them (if any).
Q2: Competitive strategy proposals 600 words (max. 200 word per proposal) What competitive strategy can your chosen business use to gain an advantage in sales over its rivals? ? (i) the five generic competitive strategies (ii) the 4Cs (contrast, combination, constraint, context) (iii) the 4Qs (questions: 1. Is your business relevant? Can you make it more relevant/offer real or essential or higher consumer needs? 2. Are customers dependent on you or not? How to make them more dependent? 3. Do customers prefer us to our competitors? How to make them prefer us? 4. Are we excellent at something? How do we become excellent compared to rivals?)(iv) six ways to differentiate yourself (product, service, channel, relationship etc.) ?Propose three ideas using any of (i) to (iv). E.g.: (ii), (ii) again, and (iv). ? Discuss them: why you proposed it, why it is a good idea, what challenges might there be to implement them (if any)

In what follows, ignore the negative impact that social distancing has on household income. Assume that individuals’ income remains unchanged. The government would now like you to help them understand “hoarding” behaviour and its effect on the market. We will define

1. hoarding behaviour as the tendency to buy excessive amounts of a good, though individuals are not expected to usemore of the good. For example, the government sees that individuals are hoarding toilet paper—they are buying excessive amounts, though they are using a normal amount. (6 marks) a. You decide to describe individual hoarding behaviour using game theory. You model the behaviour using a simultaneous game between two players. Assume the actions that each player can choose are to “hoard” or “not hoard”. You are seeing that nearly everyone people in society is engaging in various types of hoarding behaviours, even though everyone would be better off without any hoarding. What type of game can best describe the decision to “hoard” versus “not hoard”? (1 marks)
2. Given your answer to part (a), assign a set of real payoffs to each action, drawthe normal form game and defineand describethe Nash Equilibrium. (3 marks)
3. Is the Nash Equilibrium socially efficient? If not, what types of policy might you recommend to encourage individuals to achieve an outcome that is efficient? (2 marks)
Find a real world example from 2019-2020 of a change in market conditions, for example an observed change in prices or the quantity of a good or service. Using theories of economics, such as the demand and supply model, explain the impact of changing market conditions on the price and quantity of goods or services traded. The real world example:
• will be sourced from newspapers or other media.
• be for a specific city, country or global and over some time period.
• The assignment must, as a minimum, include:
• an introduction;
• a description of the relevant market, including the product or service, location and degree of competitiveness;
• an analysis (including appropriate diagrams) of how changing market conditions are influencing or have influenced or may influence prices/quantities, and
• a conclusion.

1. In what follows, ignore the negative impact that social distancing has on individuals’ income. Assume that individuals’ income remains unchanged with and without social distancing. Now that people are “social distancing” and are on home quarantine they are spending significantly more time at home and have more free time since they do not need to commute to work. In part (a), (b) and (c), you need to discuss how the market moves (what happens to supply and demand) and thus what happens to the equilibrium price and quantity. (5 marks) a. Ceteris paribus, describe with graph and words what happens in the market for online moving streaming, e.g. Netflix. Assume there is only oneonline moving streaming service. You do not need to consider the market for other goods. (2 marks)
2. Given you answer to part 2a above, now consider the impact on the market for books, which is a perfectly competitive market (consider both digital and print books as a single category). Your answer should consider two key “facts” of the case: (1) people have more time at home and (2) people are watching more movies. (2 marks)
3. Given your answer to part 2a above, now consider the impact on the market for popcorn. You should assume that even in the time of the pandemic, people enjoy eating popcorn while watching a movie. (1 mark)

Using the principles of economics covered in learning materials from week 1 to week 10 inclusive,
students should apply their understanding to analyse the macroeconomic issues and the policy
responses. Students are expected to conduct some basic research and to reference journal articles,
professional websites and other sources in the process.
Required:
The due date for this group assignment is Week 10.
Total marks: 80
Based on the article above, you are required to complete the following questions:
1. Using a diagram, illustrate and describe Australia’s rate of inflation since 2000. (10 marks)
2. Describe the measures undertaken by the Reserve Bank of Australia in combating inflation while
maintaining low unemployment. Discuss whether they have been successful. (20 marks)
3. Discuss the impacts (both positive and negative) of inflation which have influenced the
macroeconomic variables of the real Gross Domestic Product and total employment of Australia.
(20 marks)
4. Describe the type(s) of unemployment Australia is currently facing? Analyse how these types of
unemployment affect the Australian economy. (20 marks)
5. Using examples from the article, explain the following microeconomic concepts. (10 marks)
i. Diseconomies of scale
ii. Negative externalities
6. i. Overall presentation/formatting of the group report. (5 marks)
ii. Referencing (formatting and accuracy). (5 marks)

Using the principles of economics covered in learning materials from week 1 to week 10 inclusive,
students should apply their understanding to analyse the macroeconomic issues and the policy
responses. Students are expected to conduct some basic research and to reference journal articles,
professional websites and other sources in the process.
Required:
The due date for this group assignment is Week 10.
Total marks: 80
Based on the article above, you are required to complete the following questions:
1. Using a diagram, illustrate and describe Australia’s rate of inflation since 2000. (10 marks)
2. Describe the measures undertaken by the Reserve Bank of Australia in combating inflation while
maintaining low unemployment. Discuss whether they have been successful. (20 marks)
3. Discuss the impacts (both positive and negative) of inflation which have influenced the
macroeconomic variables of the real Gross Domestic Product and total employment of Australia.
(20 marks)
4. Describe the type(s) of unemployment Australia is currently facing? Analyse how these types of
unemployment affect the Australian economy. (20 marks)
5. Using examples from the article, explain the following microeconomic concepts. (10 marks)
i. Diseconomies of scale
ii. Negative externalities
6. i. Overall presentation/formatting of the group report. (5 marks)
ii. Referencing (formatting and accuracy). (5 marks)