Question

Answer any FOUR of the following questions. Each question is worth a total of 12.5 marks. If more than four questions are answered, marks will be awarded for the first four answers only.

Question 1

Nataliya is a fan of soy yoghurts, but recently she has noticed less soy yoghurts on supermarket shelves, with new alternative products such as almond milk yoghurt appearing in their place. What effect does the entrance of new firms have on the market for almond milk yoghurt? What effect does this have on the market for soy yoghurt? What does this tell us about the cross-price elasticity of demand for soy yoghurts? Do you think soy yoghurt and almond milk yoghurt are substitutes or complements in consumption and why? What effect do the new products have on the own-price elasticity of demand for soy yoghurts?

12.5 marks

Question 2

Sahar is a lecturer of a large class of economics students. Sahar can’t stand being ill and so decides to get a flu vaccination. On the other hand, some of Sahar’s colleagues decide to skip their vaccinations because they are too busy. Do the lecturers’ decisions on whether or not to get vaccinated affect their students and if so how? Describe any market failures that arise from this situation. Describe how the government can address any of these market failures. What are some of the potential downsides to government intervention in this case?

12.5 marks

Question 3

Nick runs a small business conducting online economics tutorials. He has recently noticed a large influx of competitors to this market. There are now over 50 companies conducting online economics tutorials in Melbourne alone, each with their own technology and style of teaching. What kind of market structure is this? Make sure you examine each of the characteristics of market structure in your answer. Explain whether the government should be worried about any aspects of this market structure. How can the government address these concerns?

12.5 marks

Question 4

Jo was in the market for a used car when she first moved to Melbourne. She spent many hours walking around at Car City looking for one. She found that the salespeople were overly friendly and asked her lots of questions about her life, which frankly, were none of their business. Why were the salespeople doing this? How do you think this information affected the price of the car? Jo had a budget in mind and ended up paying her top price for a car. What does this mean? How does this outcome affect producer and consumer surplus? What about society as a whole?

12.5 marks

Question 5

The Australian Government monitors the behaviour of oligopolies to ensure firms are not behaving anti-competitively. One behaviour they are concerned about is collusion. Design and analyse a payoff matrix to explain collusion. Do you think rational firms would collude? Why or why not? Explain the Nash equilibrium and resulting payoffs. Can the firms do better? Does behaviour in real-life differ from the theoretical prediction? What can be used to sustain collusion in the real world?

Feel free to copy/paste the below and fill in the blanks with example numbers:

Firm 1	Firm 2
		Collude	Compete
	Collude	( , )	( , )
	Compete	( , )	( , )

12.5 marks

Answer 1

Question 1

Soy yoghurt and almond milk yoghurt are substitutes because both items fall under the same category called yoghurt and they both serve the same purpose in the market. Getting more of one yoghurt allows a consumer to demand less of the other yoghurt. It means that on arrival of almond milk yoghurt in the market, the market share of soy yoghurt will decrease due to competition. on the other hand, almond milk oughurt have to be competent enough and will gain market share gradually.

If the price of Soy yoghurt increases, demand for Almond milk yoghurt will increase as Soy yoghurt and almond milk yoghurt are substitute goods. Hence, when the price of Soy yoghurt increases, consumers will spend more on almond milk yoghurt and thus the demand for Soy yoghurt will fall.

The cross elasticity of demand for substitute goods is always positive

Question 2

Lecturers’ decisions on whether or not to get vaccinated will definitely affect their students as it possess a risk of market failure i.e. if the teahcers are not vaccinated and if any one of them is affected by flu, it may spread to other students as well and this would create an entire market failure and disruption in teaching. If Government intervention will be made to enhance the awareness program and other steps are taken, then following may be the downsides:

• Government provision may reduce the choice of individuals , lack of freedom for those who prefer to choose their private insurers and doctor.
• Lack of incentives.
• Services may be limited by tax revenue.
• The private sector may have profit incentives to cut costs and offer innovative new treatments that would be desired.
• Government health care will require higher tax. Higher income tax may lead to lower incentives