ECON 152 Principles of Economics SUMMER SEMESTER 2023
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ECON 152
SUMMER SEMESTER 2023
ECONOMICS
Principles of Economics
1 Q uestion 1
[10 marks - 30 minutes] Consumer Preference
You have allocated $150 to treat yourself after the exhausting but enjoyable summer semester this year. You want to allocate the budget to buy delicious food and watch movies in the cinema. The price of delicious food is $30 per plate and the price of cinema ticket is $15 per movie.
(a) [2 marks] Formulate your budget constraint equation.
(b) [3 marks] Starving after exam , your marginal rate of substitution between food and movies is 
What is your optimal consumption bundle?
(c) [3 marks] If the price of food falls to $25, what is your new consumption bundle?
(d) [2 marks] How would you illustrate (a), (b), and (c) in a graph, with food on the x- axis? How would you illustrate the income, substitution and total effects of the price change on the consumption of food in your graph?
Note: You do not have to draw the graph, but you must elaborate in detail how you would do it if you were to draw one. This applies to all questions in this exam asking you to illustrate your answer in graphs . For the question above, for example, you must identify the intercepts of each budget line and explain what characterises the optimal consumption bundle in each scenario, before and after the price change.
2 Q uestion 2
[5 marks - 15 minutes] Market Structure
Contrast the outcomes of the following market structures:
(a) [1 marks] Perfect competition
(b) [2 marks] Monopoly (setting a single price for all consumers)
(c) [2 marks] Monopolistic competition (setting a single price for all consumers) both in the short and the long run
Hint: For each of the market structure, comment on how to determine the equilibrium price, quantity, firms’ profits , and the market’s efficiency (producer surplus , consumer surplus , and deadweight loss).
3 Q uestion 3
[20 marks + 2 bonus marks - 60 minutes] Firm Theory
The market demand for thermal blankets in Oymyakon village is given by P=125-3Q . The total cost of producing thermal blankets is TC=5Q .
(a) [2 marks] What is the Marginal Revenue (MR) associated with the demand function above?
(b) [2 marks] What is the Marginal Cost of producing every blanket?
(c) [4 marks] If a monopoly firm is to serve the entire market in the village, how many blankets will it produce and how much will it charge for every blanket? How much profit does it make?
(d) [2 marks] Describe how you would illustrate part (c) above in a graph. Note: You must identify the intercepts of the demand function, the marginal revenue curve, and the marginal cost curve, and explain what characterises the optimal quantity and price. Explain what the monopolist's profit looks like if it was to be depicted in a graph.
(e) [4 marks] Now the monopoly firm chooses a different pricing strategy and sells their product based on the Perfect Price Discrimination strategy. With the Perfect Price Discrimination strategy now how is the Monopoly firm's prices set? Briefly discuss the expected effect of the strategy the firms' optimum quantity of output and prices charged.
(f) [2 marks] Describe how you would illustrate part (e) above in a graph. Note: You must identify the intercepts of the relevant curves , and explain what the monopolist's profit looks like if it was to be depicted in a graph.
(g) [2 marks] If competitive firms are to serve the market, how many blankets will each firm produce and how much will it charge for every blanket? How much profit does every firm make?
(h) [2 marks] Describe how you would illustrate part (g) above in a graph. Note: You must identify the intercepts of the relevant curves , characterise the conditions to obtain the equilibrium price and quantity, and explain what the firms' profits look like if they were to be depicted in a graph.
(i) [2 bonus marks] Bonus point: Explain the efficiency outcomes of (c), (e), and (g). Hint: In each case, calculate the producer surplus , consumer surplus , and deadweight loss , if any.
4 Q uestion 4
[10 marks - 30 minutes] Game Theory
Two firms , firm A and firm B, produce identical goods and decide one of two markets to sell their products , either in Auckland or in Rotorua. The firms make simultaneous decision when choosing their market. The market in Auckland is larger than that in Rotorua, hence, if they both choose Auckland, each will make a profit of $200, while if they both choose Rotorua, each will make $100. If they sell in different markets , the firm selling in Auckland earns $350, while the rival who sells in Rotorua earns $150.
(a) [3 marks] Draw the payoff matrix for the game. Hint: Use the "Insert table feature" in upper menu of the textbox to insert a table, choosing a table with 4 columns and 4 rows . If you cannot find the "Insert table feature", you can also just manually create a borderless table on the textbox or, alternatively, describe in words how the payoff matrix for the game looks like.
(b) [2 marks] Are there any dominant strategies for the firms? If yes , what are they? If no, explain briefly.
(c) [2 marks] What is the Nash equilibrium of the game?
(d) [3 marks] Consider a variation of the game in which the payoffs are as follows: if they both choose Auckland, each will make a profit of $200, while if they both choose Rotorua, each will make $100. If they sell in different markets , the firm selling in Auckland earns $350, while the rival who sells in Rotorua earns $250. How do your answers to (b), and (c) change?
5 Q uestion 5
[15 marks - 45 minutes] Labor Markets
Petra works at Boston Consulting G roup office. She has a wage rate of $120 per hour, and she supplies 14 hours of labour per day. When her wage increases to $160 per hour, she supplies 12 hours of labour daily. Petra has a total of 24 hours available per day.
(a) [4 marks] If you had to draw a diagram to illustrate her budget constraints , and stylised indifference curves , how would you draw it? O n this diagram , where would you find Petra's utility maximising choices of Income and Leisure when her wage rate is alternatively $120 and $160 per hour? Note: Mention how you would label the axes , identify the intercept values of the budget constraints , characterise the conditions to obtain the optimal bundles , and explain how the optimal bundles are located with respect to each other!
(b) [3 marks] How would you draw the Labour supply curve for Petra for the wage rate range of $120 - $160 per hour? Note: Mention how you would label the axes and explain what the labor supply curve looks like, i.e., whether it is upward or downward sloping, or whether it changes slope.
(c) [4 marks] Explain why in your supply of labour diagram in Part (b), Petra's labour supply curve is shaped the way it is for the wage range $120 - $160. Be sure to explain whether in this case, the income effect or the substitution effect of the wage increase dominates the outcome of the wage increase; and what the income and the substitution effects generally measure when it comes to the effect of a wage increase. Discuss in a few sentences .
(d) [4 marks] Employees like Petra who live in New Zealand, generally earn higher hourly wage rates than their counterparts who live in less-developed countries . Use the Value of the Marginal Product (VMP) of Labour explanation for the market demand for labour, to explain why wages in industrialised countries (e.g. New Zealand) are generally higher than in less-developed countries . Consider in your discussion, the nature of demand for labour and the impacts of economic growth on wages . Discuss .
2023-06-19