Task 2: Elasticity

1. Consider hotel accommodation in Cairns in the off-season with accommodation in the peak season. Which season would have a higher price elasticity of supply in absolute value? Explain your answer including identifying the determinant of elasticity. – Word count 60

In the following graph, the demand for tyres has shifted to the left because the price of cars has increased from, on average $20,000 to $35,000 per car. Use the graph to answer question 2.

2. Calculate the cross-price elasticity of demand between tyres and cars. Show your calculations and explain your answer in words. – Word count 80 + calculation

3. Suppose you own a bookstore. You believe that you can sell 40 copies per day of the latest John Grisham novel when the price is $35. You consider lowering the price to $25 and believe this will increase the quantity sold to 50 books per day. Compute the price elasticity of demand using the midpoint formula and these data. What are the implications for revenue based on your calculation of elasticity and why? Show all working.

Task 3: Costs of Production

Explain whether the following events in questions 1 and 2 will affect fixed costs or variable costs (make sure you justify your answer):

1. The federal government applies a once off fee on every airplane used for domestic flights in Australia of 100,000 AUD to cover inspection costs. Word count 40

2. Samsung spends an additional $50 million US on research and development for the next generation of its mobile phone. Word count 40

3. Using the cost diagrams, including drawing a graph, explain, what is happening to costs of the firm. Identify any relevant information provided in the article. What solution would you recommend to the government to address any equity concerns where poorer households experiencing high water prices (noting that clean water is an important commodity)? Explain your solution carefully. Word count 350.

Task 4: Market Power

1. Strong demand and accompanying higher prices will result in higher profits. However, eventually the high prices will bring an end to existing companies increased prosperity in a market with lower barriers to entry. Explain, using appropriate diagrams (hint: use the perfectly competitive market framework to analysis this question). – Word count 200

2. What is a network externality? How does a network externality serve as a barrier to entry? Is this barrier surmountable? Provide one example. Make sure you carefully explain your answer. – Maximum number of words 120

Task 5: Business Strategy and Market Failure

Melbourne Limousine Company (MLC) and Airport Connections (AC) are the only two airport limousine rental service companies. Each firm must decide whether to increase its advertising spending to compete for customers. The following figure shows the payoff matrix for this advertising game.

1. Define dominant strategy. Does MLC have a dominant strategy? Explain. – Maximum number of words 130

2. What would happen if AC increases their advertising budget but MLC does not? Explain. – Maximum number of words 100

3. What is (are) the Nash equilibrium(s) in this game. Explain. Why are the alternative scenarios from the payoff matrix not Nash? Explain. – Word count 150