Assignment
Question 1
a) A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain
b) Kelly is a clerk and she earns $75,000 per annum. She thinks that her salary is too low,so she resigns and starts her own cake shop by using her savings of $100,000. The savings earninterest at 5%per annum. After one year, she earns an accounting profit of $80,000. What is Kelly's economic profit? Explain and show your calculation
c) Based on your answer in (b), is Kellybetter off after running her own shop? Briefly explain
d) Compared with perfect competition, quantity produced in monopolistic competition is inefficient asprice is higher than marginal cost (i.e. allocative inefficiency). Why do some economists argue that even if price is higher than marginal cost, it does not necessarily imply inefficiency
Question 2
De Beers is a monopolist which suppliesdiamonds with constant marginal cost and constant average total cost.
a) Draw the average cost, marginal cost, demand and marginal revenue curves. Show the price charged by De Beers without price discrimination.
b)Use the diagram drawn in (a), label the area of De Beers's profit with X, of consumer surplus with Y, and of deadweight loss with Z.
Question 3)
a) Apples are bought and sold in a competitive market.
i) Use a graph for the apple market and a graph for an individual firm to demonstrate that firms are earning economic profits.
ii) Explain, without using a diagram, whether thesituationin (a) can be maintained in the long run.
b) An student argues: ‘The economic model ofa perfectly competitive market is very unrealistic because it predicts that firms in a perfectly competitive market earn zero profits in the long run.However, in reality, no firm would stay in business if it earned noprofits.'
Do you agree or disagree? Explain.
c) CocaCola and Pepsi both advertise to capture each other's customers. Refer to the payoff matrixoverleaf. The first entry in the bracket is the payoffs (in $million) of CocaCola and the second entry is the payoffs of Pepsi. What is the dominant strategy of Coca Cola and Pepsi? Explain (Refer to Oiligopoly game theory).
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Pepsi
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Don't advertise
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Advertise
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Coca-Cola
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Don't advertise
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(700,700)
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(400.900)
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Advertise
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(900.400)
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(500,500)
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Question 4
a) Tamiflu, produced by Roche, has so far been the most effective medicine to tackle bird flu. Roche was granted a patent on the drug which enables the pharmaceutical firm to charge higher prices and earn higher profits. The government knows that the patent harms the benefits of consumers, so why is it still willing to grant such a patent to the firm?
b) Monopoly is inefficient as it charges prices higher than marginal costs. Is it feasible for the government to regulate a natural monopoly by setting prices equal to marginal costs?
c) Roche plans to sell Tamiflu at higher prices in Europe and North America and lower prices in developing countries. Why does Roche adopt this pricing strategy?
d) d Under what condition can Roche successfully implement the pricing strategy mentioned in (c)?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.