Due date: Wednesday 04-October by 6.00pm (.pdf file)

1000 words limit (does not include diagrams)

Submission:

-    you must submit your assignment via the LMS subject page before 6.00 pm, Wednesday 04-October, as a single .pdf file;

-    the subject has a “no-extension policy” ; thus, late submissions will not be accepted;

-    to double check that you uploaded the correct file and to confirm your submission’s   timestamp, you may want to either view or download it; for step-by-step instructions, please check out the “view a submitted assignment” subsection at

https://lms.unimelb.edu.au/students/student-guides/assignments

-    after you have submitted your assignment, please remember to also keep a local copy.

Logistics:

-    there is a maximum limit of 1000 words (not including equations, diagrams, or the text of the problem itself);

-    all problems are compulsory, and must be solved in the order in which they appear;

-    all answers must be clearly labelled (e.g., write “c)” before your third answer); you may (but don’t have to) copy the question before providing your answer to it

-    answers must be fully typed; diagrams may still be hand drawn, but please be sure to insert them in the right place in the file, as only one file may be submitted;

-    please be aware of the University policy on plagiarism and collusion

https://academicintegrity.unimelb.edu.au/#plagiarism-and-collusion

-    a maximum of 100 points are awarded according to the quality of the answers

Note: Quality answers are succinct and legible; points may be deducted for exceeding the word limit, or for not submitting a typed assignment. At the same time, quality answers will show any relevant intermediary equations and steps that are required to derive a result.

Due date: Wednesday 04-Oct by 6.00pm / 1000 words limit (does not include diagrams) // Good luck!

I. Consider the following simplified scenario. Suppose that the Australian Football League (for short, AFL) has exclusive rights to organize the AFL Grand Final, which determines the winners of the season. The AFL decides that the next Grand Final will be hosted at the Melbourne Cricket Ground stadium (MCG). The contractual agreements are such that the AFL has no fixed costs for organizing the game, but it must pay a marginal cost MC of $40  per seat to the owners of the MCG. Suppose that two types of tickets will be sold for the game: concession and full fare. Based on any official document that attests to their age, children and pensioners qualify to purchase concession tickets that offer a discounted price; everyone else pays the full fare. The demand for full-fare tickets is QF(P) = 160 – 2P. The demand for concession tickets is QC(P) = 140 – 2P.

1. The market for full fare tickets (F)       (35 points)

a)   Calculate the inverse demand, write the profit maximizing condition, compute the

profit maximizing price PF(M)and the number of tickets QF(M)  that the AFL will choose to  sell at full fare, as well as its profit πF(M) .               (5 points)

b)  Use a diagram to illustrate the marginal revenue MR, the producer surplus PSF that the AFL enjoys, the consumer surplus of the full fare paying customers CSF, and the deadweight loss DWLF in this market. Then, compute CSF and DWLF.         (6 points)

c)   Tax per unit (TU): The government decides to tax the AFL at $2 per ticket sold. Find

the new optimal price PTU(M)  and quantity QTU(M)  that the AFL chooses and compute its profit πTU(M) . Compute the government’s tax revenue TRTU.                (9 points)

d)  Lump sum tax (LS): Instead of a tax per unit, the government imposes a lump tax of

$75 on the AFL. Find the new optimal price PLS(M)  and quantity QLS(M)  that the AFL chooses and compute its profit πLS(M)  in this case.                (9 points)

e)   Suppose that the government is looking to tax the AFL to raise revenue for building

new sport facilities for kids and hires you to advise which one of the taxes above – a tax per unit or a lump sum – to implement. Which one of the two taxes would you recommend? Justify and explain why.                (6 points)

2. The market for concession tickets (C)                                                                   (20 points)

f)   Calculate the inverse demand, write the profit maximizing condition, compute the

profit maximizing price P'(M)and the number of concession tickets Q'(M)  that the AFL will choose to sell, as well as its profit π'(M) .              (5 points)

g)  Use a diagram to illustrate the marginal revenue MR, the producer surplus PSC that

the AFL enjoys, the consumer surplus for concession tickets customers CSC, and the    deadweight loss DWLC in this market. Then, compute CSC  and DWLC.         (6 points)

h)  Suppose that the government wants to encourage children and pensioners to attend

sport events. To do so, it is willing to give the AFL a subsidy of s per concession ticket sold, but the government wishes to calibrate this subsidy such that the AFL will sell the same number of concession tickets as in perfect competition. Assuming that the government knows the demand and the costs that the AFL has, compute how much the subsidy s should be.                    (9 points)

3. Combined/merged market (M)        (30 points)

i)   Suppose that the AFL becomes unable to verify the age of its customers; thus, the

formerly distinct full fare and concessional ticket markets must be combined/merged in one single market.  First, write the equation of the combined demand and show it

using a diagram. Then show and calculate the profit maximizing price PM(M)and number of tickets QM(M)  that the AFL will choose to sell, as well as its profit πM(M) .         (15 points)

j)   How is each category of customers (i.e., full fare vs. concessional ticket customers)

affected by the market merger? Do customers in each category benefit, or are they harmed by the merger? Justify and explain your answer.         (6 points)

k)  Given the choice, would a profit maximizing AFL prefer to operate distinct full fare and concession ticket markets, or just one single merged market? Justify your answer. (4 points)

l)   If the government (seeking to maximize social welfare) could mandate which type of market AFL should operate, should it opt for requiring distinct full fare and concession ticket markets, or just one single merged market? Justify your answer. (5 points)