ECON8069 Assignment 2
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ECON8069 Assignment 2
Due 17 Aug 2023
1. (Short-answer question) There are two types of high-capacity external storage for personal computers, traditional hard drives (HDD) and solid-state drives (SSD). We focus on HDDs in this question. Note that external HDDs come with different capacities from 1TB to 5TB.
(a) [10 marks]Bob argues that all HDDs can be treated as the same good and the capacity a consumer buys is treated as quantity. Ann argues that a market can only contain HDDs of a specific capacity. Evaluate their approaches. (Limited to 50 words.)
(b) [20 marks]Due to technological innovations, the cost of producing SSDs drops significantly, while the cost of producing HDDs remains the same. Explain how the supply and demand curves of HDDs (either all of them or 2TB depending on your answer to the previous part) responds to the technological innovation. The markets of HDDs and SSDs are assumed to perfectly competitive. (Limited to 200 words. You may draw a diagram if you want, but you must explain your answer in English.)
2. We focus on the market of a particular good in Country A. Back in 2019, there were many (domestic) suppliers from Country A and many (foreign) suppliers from Country B all serving consumers in Country A. We ignore consumers of this good in any country other than Country A. The market is assumed to be perfectly competitive. Due to a trade war, all foreign suppliers from Country B disappeared. Consequently, the market supply was halvedafter the trade war at every possible market price.
(a) [15 marks]Comparing the competitive equilibria before and after the trade war, do you think the quantity in the new equilibrium is higher than, equal to, or lower than half the quantity in the old equilibrium? Explain your reasoning. Your answer should not be specific to any particular demand and supply curves. (Limited to 100 words.)
(b) [20 marks]For the rest of the question, assume that the market demand curve is 4 = 21 − 3p and the market supply curve before the trade war is 4 = 4p. Hence, the market supply curve after the trade war is 4 = 2p.
Find the competitive equilibria before and after the trade war.
(c) [15 marks]Compute the change of consumer surplus due to the trade war.
3. Elizabeth and Fred are two producers in the same market. We focus on their short-run decisions. Elizabeth’s cost function is CE (q) and Fred’s cost function is CF (q). It is known that CE (q) < CF(q) for every q > 0.
(a) [10 marks]Consultant David argues that since Fred is less efficient, he should not be producing anything in a competitive equilibrium. Explain why this argument is faulty. (Limited to 200 words.)
(b) [10 marks]Is it possible that Fred produces more than Elizabeth in a competitive equilibrium? Explain your reasoning. (Limited to 100 words.)
2023-08-17