Microeconomics

COVER PAGE FOR FINAL ASSIGNMENT

Name of Subject: Introduction to Microeconomics
Module Code: ECON 1543
Weight: 60% of total assessment
Length: 2000 words
Fill your student Number:
Instructions:
Submission deadline for the assignment is May 26, 2020 (by 12.00 noon).
This assignment is worth a total award of 60 points by completing all 5 questions. You do not have any alternative questions except for Question 2. For Question 2, we have two sets and you can choose one.
This is an individual assignment. Always explain your answer. If you only give an answer without explanation, no points are awarded! As an economics students, you are expected to draw relevant diagrams and curves, even if the questions do not specify them.
Your assignment must be typed in a word document in .doc or .docx format – no pdf or .pages. Assignments submitted in any format other than word will not be marked.
For questions which require calculations, please display all workings.
Wherever required, you can draw your diagrams by hand; then scan (or take a picture) and insert your drawings into your word document. You can also draw your diagram by using computer.
Please notice that the assignment needs to be handed through Turnitin (see link on blackboard). The online submission point of your completed assignment can be found under ‘Assessment’ tab, Final Assignment folder, in the course website.

Question 1 (12 marks)
a) How does the recent novel Coronavirus (Covid-19) affect the circular flow of goods and incomes. Explain your answer. (2 points)
b) Is there any relationship between short-run average cost curve and long-run average cost curve? Explain your answer. (2 points)
c) Delta Ltd. is a business firm which produces hand liquid soap. The following diagram shows the cost and revenue curves of Delta.

Under what kind of competition is Delta ltd operating its business? Explain your answer (1 point)
What is the Profit maximize output for Delta? Shade in the amount of profit it makes in the diagram. (2 points)
At what price and output does the firm break-even and why? (1 point)

d) Adam, a first-year degree student, wants to improve his immunity system during this Coronavirus epidemic. He has planned to spend his money on purchasing fruits: mango and orange. He wrote down two sets with his preferences between various combinations of mango and orange. Each set should denote combinations in between he is indifferent.
Set 1 Mango
Orange 18
2 14
4 12
8 8
12 6
16 2
20
Set 2 Mango
Orange 16
2 12
4 10
8 8
12 6
14 2
16

What is Adam’s marginal rate of substitution of mango for orange in set 2 for 4th orange? (1 point)
What is Adam’s marginal rate of substitution of mango for orange in set 1 for 8th orange? (1 point)
Explain why it cannot be true that both sets are indifferent curves (2 points)

Question 2 (12 Marks): Choose one question (either Set A or Set B)

Set A
Let the price on the market be given by
p=18-q_1-q_2
Suppose there is only one firm in the market with marginal cost equal to 10.
Calculate the resulting quantity for the monopolist when this firm wishes to maximise profit. (4 points)
Suppose there are two firms on the market with marginal costs 6 and 9. Both firms are profit-maximising players on the market.
Calculate the resulting quantities if the firms compete under Cournot (6 points).
Calculate the resulting quantities if the firms compete under Bertrand (2 points)
Set B
Explain the characteristics monopoly, oligopoly, monopolistic and perfect competition markets (3 points)
Imagine that Sunflower, a private company, recycles bottles and supplies to beverage companies. The following table shows the company’s private marginal costs and external benefits to the society from the company’s recycling (5 points).
Output
(‘000’) Price (£) Marginal (private) costs (£) Marginal external benefit (£) Marginal social cost (£)
1 80 64 20
2 80 60 20
3 80 60 16
4 80 64 12
5 80 68 8
6 80 72 8
7 80 80 8
8 80 88 8
9 80 96 8
10 80 112 4

Please explain the definition of Marginal Social Cost. Calculate the column for marginal social cost in the above table? (1 mark)
Assuming no government intervention, how much will the firm produce to maximise profits and why? (1 mark)
What is the socially optimum level of output and why? (2 marks)
What subsidy per (‘000’) would the government have to pay the company to encourage it to produce this level of output? (1 mark)

Do you think that government should give subsidy for environmentally friendly products? Please explain your answer with proper reasons (4 points)

Question 3 (12 points)

The difference between rich and poor is becoming more extreme, and as income inequality widens the wealth gap in major nations, education, health and social mobility are all threatened — Helene D. Gayle
As an economist, how do we measure income inequality of a country? Explain your answer? (3 points)
Analyse the income inequality in the UK in last 50 years (5 points)
“The Coronavirus will be a catastrophe for the Poor. Economic activity has ground to a halt as borders shut, cities lock down, and people retreat behind closed doors to stem the spread of COVID-19. Workers are being laid off by the millions.”
What measures should the UK government undertake to reduce income inequality during this coronavirus crisis? (4 points)

Question 4 (12 points)
Suppose you are CEO (Chief executive officer) of Delta Ltd which produces hand liquid soap. Would you follow traditional theory of the firm: profit maximization? Or would you think alternative theories? Explain your answer with proper reasons. (4 points)
Read the following case and answer the following relevant questions (8 points)

Identify three notable cross-border mergers which happened recently? Do you think they are realistic? (3 points)
“The motives for merger are likely to be different in a recession from those in a period of rapid economic growth”
Considering the current coronavirus (COVID-19) pandemic, what would you predict about the pattern of mergers over the next few years. (5 points)
Question 5 (12 marks)
“The accumulation of greenhouse gases (GHGs) in the earth’s surface is now adversely affecting the nations across the world, both developing and developed, irrespective of who is responsible for such accumulation. The bushfire in Australia, the outburst of flood in Bangladesh, the earthquake in Haiti, and the tsunami in Japan are some of the major catastrophes observed in the recent past which may be the consequences of environmental degradation”
Will the market lead to Pareto optimality if there are negative externalities like greenhouse gas emissions? (4 points)
Let us assume a market where the marginal social benefit curve lies above the marginal private benefit curve. Does this lead to an external cost of production, external cost of consumption, external benefit of production or an external benefit of consumption? Explain your answer and give a real-life example where such a situation can arise. (4 points)

Consider the following cooperative game:
S {1} {2} {3} {1, 2} {1, 3} {2, 3} N
v(S) 6 2 6 5 14 8 16