econ2004 s1 2015 tutorial guide for students_updated

ECON2004 Tutorial Guide, Semester 1/Tri1A 2015

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ECON2004 S1/Tri1A 201 5 Tutorial Guide

Class Assignments (15%)

15% of your mark is allocated to the extent to which you: Participate in class activities, by raising questions, providing and individually presenting answers to specific questions listed in this guide, preparing for class, promoting positive group dynamics, and encouraging other students to participate. These activities collectively refer to the class assignments for this unit. You are expected to participate in each tutorial by reading all prescribed chapters and preparing answers to the assigned questions shown below.

The 15 marks awarded for this assessment are made up of 2 components, as summarised in Table 1 below:

Table 1. Marking Criteria for Class Assignments

Components: Marks Possible Score & Explanation

1. PRESENTATION

7

(out of 4) Introduction of Theory

(out of 1) Content from Sources

(out of 2) Applications and Evaluation of Issues

2.

PREPARATION

&

CONTRIBUTION

8

8 = Demonstrated preparation of all questions; Outstanding & Lively Contributions, Critical Comments, Lead Discussions, Very Enthusiastic and/or Highly Motivated.

6 = Demonstrated preparation of most questions; Good Contributions, and/or mostly Enthusiastic.

3 = Demonstrated preparation of few questions; Attended regularly, promoting some sociality and the odd comment.

0 = Weak participation, unenthusiastic, no or little preparation, or did not attend frequently.

1. PRESENTATION

Score is out of 7. Each student will do one 5-minute presentation and lead 5 minutes of class discussion relating to the presentation. The list of possible presentations is listed under PRESENTATION QUESTIONS (PQs) headings in the Tutorial Guide below. The presentations begin in Week 2. You select your topic in the first tutorial (in Week 1). The allocation of PQs will be done on a first--come--first--served basis in this tutorial. It is the responsibility of each student to know the week in which they are presenting therefore,


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missing your presentation will result in a score of 0. At the end of the presentation you are to hand the notes and slides that you used to your tutor.

2. PREPARATION & CONTRIBUTION

Score is out of 8. Your preparation and general class contribution will be assessed throughout the semester. You will be awarded marks according to the extent that you (a) demonstrate that you have attempted the tutorial questions; b) contribute constructively to other students presentations and to the class discussion of tutorial questions throughout the semester; and (c) contribute to a positive group environment in the tutorials. Your tutor will keep a general note of your preparation, how much you contribute to class discussions, and your contribution to the group environment.

**PLEASE NOTE: IN THIS GUIDE PARTS 1 & 2

(DEFINITIONS, DIAGRAMS & CONCEPTS) ARE PROVIDED

AS A GUIDE ON WHAT YOU MUST COVER IN YOUR

READING OUTSIDE OF CLASS TIME. THE TUTORIAL TIME

WILL BE LARGELY TAKEN UP BY PARTS 3 & 4.


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PERSONA L INFORMATION

Student Name:

_____________________________ __________________

Student ID:

_____________________________ __________________

Week __ & Topic of my presentation:

_____________________________ __________________

My Tutorial Time:

_____________________________ __________________

My Tutors Name:

_____________________________ __________________


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Program Calendar

Week Begin Date Lecture/

Seminar Pre-readings Tutorial/Other Assessment Due

1. 2 March Consumer Behaviour Part

1 Ch 3.1, 3.2

Introduction, Building; Rapport, Allocation of

Presentation Tasks

2. 9 March Consumer Behaviour Part

2 Ch 3.3, 3.5; 4.1,

4.2 Consumer Behaviour

Part 1 see Tutorial Guide

"week 2"

3. 16 March Consumer Behaviour &

Uncertainty Ch 5.1, 5.2, 5.6

Consumer Behaviour Part 2

see Tutorial Guide "week 3"

4. 23 March Production & Costs Ch 6, Ch 7.2 - 7.4 Choice Behaviour &

Uncertainty

see Tutorial Guide

"week 4"

5. 30 Mar Market Structure Part 1 Ch 8: pp. 279-88,

301303 Production & Costs


6. 6 April Tuition Free Week

7. 13 April Tuition Free Week

8. 20 April Semester Test Market Structure Part 1

Semester Test; for tutorial work also see Tutorial Guide

"week8"

9. 27 April Market Structure Part 2

Ch 10: pp. 357-61; 369-71; 375-81. Ch 11: pp.

399-410;

Recap on Semester Test

10. 4 May Game Theory Part 1 Ch 13 Market Structure Part 2 see Tutorial Guide

"week 10"

11. 11 May Game Theory Part 2 Ch 13 Game Theory Part 1 see Tutorial Guide

"week 11"

12. 18 May Factor Markets Ch 14 Game Theory Part 2

Essay due; for tutorial work also see Tutorial Guide

"week 12"

13. 25 May Asymmetric Information Ch 17 Factor Markets see Tutorial Guide

"week 13"

14. 1 June Revision Asymmetric Information


15. 8 June Study Week

16. 15 June Examinations

17 22 June Examinations


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WEEK 1: Introductions, Building Rapport, Allocation of

Presentations

The purpose of this tutorial is to meet your tutor and other class members, and to allocate

tutorial presentation topics.

Student Name:

_____________________________ __________________

Student ID:

_____________________________ __________________

Week __ & Topic of my presentation:

_____________________________ __________________

My Tutorial Time:

_____________________________ __________________

My Tutors Name:

_____________________________ _________________

**PLEASE NOTE Again: IN THE MODULES IN THE

REMAINDER OF THIS GUIDE PARTS 1 & 2 (DEFINITIONS,

DIAGRAMS & CONCEPTS) ARE PROVIDED AS A GUIDE ON

WHAT YOU MUST COVER IN YOUR READING OUTSIDE OF

CLASS TIME. THE TUTORIAL TIME WILL BE LARGELY

TAKEN UP BY PARTS 3 & 4.


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WEEK 2 Consumer Behaviour - Part 1

Text: Chapters 3.1 &3.2

Part 1 Definitions (defn) and Diagrams (Diag)

Budget constraint (defn + formula + Diag); indifference and indifference curve (Diag),

indifference maps for typical goods, bads and neutral goods (Diag); transitive

preferences; utility/satisfaction; Marginal Rate of Substitution (MRS) (defn + Diag),

diminishing MRS, perfect substitutes (defn + Diag), perfect complements (defn + Di

ag).

Part 2 Key Concepts

According to the theory, what criteria do consumers use to rank alternative

baskets of goods?

Distinguish between an indifference curve and a demand curve (include Diag).

What happens to the budget line with (a) changes in income? (b) changes in

prices?

Explain the link between the price ratios of two goods, the slope of the budget

line and indifference curve.

Part 3 Tutorial Questions

1. Textbook Review Question Ch 3 p. 106: Q4;

2. Bobby is a college student who has $500 of income to spend each semester on books and pizzas. The price of a pizza is $10 and the price of a book is $50. Diagram Bobby's

budget constraint. Now, suppose Bobby's parents buy him a $300 gift certificate each

semester that can only be used to buy books.

Diagram Bobby's budget constraint when he has the gift certificate in addition to his

$500 income. Is Bobby better-off with the gift certificates?

Part 4 Presentation Questions

1. Using some original (i.e. non textbook) examples, identify some situations where companies might use indifference curves and budget lines in their decision- making

(Hint: see example 3.3 in the text). Identify some of the difficulties that might be

associated with using the approach.

2. Money can buy you happiness! Discuss with reference to the theory and some empirical evidence on the issue.


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WEEK 3 Consumer Behaviour-Part 2

Text: Chapters 3.3&3.5, 4.1&4.2

Part 1 Definitions and Diagrams

Marginal utility, point of maximum utility, price consumption curve (Diag), income

consumption curve, Engel curve (Diag), income and substitution effects (as a result of a

price change) (Diag), inferior good.

Part 2 Key Concepts

Explain how a consumers MRS and her budget line are relevant to consumption choice (Diag).

The effects of price changes (both rises and falls) on consumer choice (Diags).

The effect of income changes (both rises and falls) on consumer choice (Diags).

How are inferior goods different from normal goods when income changes? (Diags)

With the use of diagrams explain the income and substitution effects that occur when the price of a good changes (show both price rise and price fall).

o How does this effect differ if the good is an inferior good? (Diags)


1. Lisa's budget line and her satisfact ion maximizing market basket A are shown in the diagram below.

a. Suppose that Lisa is given $50 worth of coupons that must be spent on food. How will the coupons alter Lisa's budget line?

b. Suppose that Lisa is given $50 in cash instead of $50 in coupons. How will this alter Lisa's budget line?

c. Is Lisa indifferent between the food coupon and cash program, or does she prefer

one program over the other? Draw an indifference curve to illustrate your answer.


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2. Margaret's optimal consumption is shown in the diagram below for two different prices of Hy-Vee Cola. Decompose the change in Hy-Vee Cola consumption into

income and substitution effects. Do the effects work in opposite directions? Is the

cola a normal good?

3. Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given

as follows:

MUc = Qd MUd = Qc

Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.

a) What is Daniel's budget constraint? b) What quantity Qc will maximize Daniel's utility given the information above?

c) Holding Daniel's income and Pd constant at $240 and $3 respectively, what is Daniel's demand curve for cake?


1. Using theory and some data, discuss the possible income and substitution effects of a rise in household electricity prices. How might these effects be relevant to attempts to

reduce carbon emissions?

2. Using theory and some data, discuss the possible effects of a reduction in government subsidies for medical consultations. [Hint, in Australia, the government is currently

proposing the introduction of a co-payment scheme; see http://theconversation.com/six-

dollar-co-payment-to-see-a- doctor-a-gps-view-21915].


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WEEK 4 Consumer Behaviour & Uncertainty

Text: Chapters 5.1 - 5.2, 5.6


Expected payoff value (formula), Expected utility (formula), risk variability, variance and

standard deviation, risk preference (Diags), risk premium (Diags), risk aversion strategies

(examples), Traditional Economics, Behavioural Economics [e.g. reference points,

adaption, fairness, probability] (examples).

Part 2 Key Concepts

Calculate: payoff value from given data

Calculate: expected utility from given data

Calculate: variance and standard deviation from given data

What is the link between risk and variance?

How does attitude to risk affect choices in labour and financial markets?

Compare the main ways in which behavioural economics is different from traditional economics.


1. Textbook Exercise Questions Ch 5 p. 198: Ex1.



1. A recent Cambridge University-led study found that high levels of stress cause people to become more risk averse: (http://theconversation.com/high-stressed-traders-more-

risk-averse-study-finds-23302). Summarise the findings from the study and explain

the implications of the findings for share markets and the economy.

2. Example 5.10 in the text (p. 196) outlines some evidence on how taxicab drivers decide their hours of work. Summarise this evidence and discuss the relevant concepts

from behavioural economics.


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WEEK 5 Production and Costs

Text: Chapters 6 & 7.2 7.4


Inputs, production function (mathematical formula), cost constraint, isoquant and isoquant

map (Diags), Marginal rate of Technical Substitution (MRTS) (graph, formula +calculation),

Diminishing MRTS, Marginal productivity of capital, Marginal productivity of labour (short

run and long run) (Diag), perfect substitute inputs (Diag), perfect complement inputs (Diag),

Returns to Scale (3 Diags), isocost line (Diag, formula + calculation), Long run and short run

expansion paths (Diags).

Part 2 Key Concepts

Calculate output using the production function.

What is the link between the MRTS and the shape of an isoquant?

With the use of a formula, explain the link between the price of inputs, their MRTS, and cost minimisation.

Explain the link between the relative cost of inputs and an isocost line.

With the use of Diagrams show how a change in the cost of an input affects isocosts when: a) there is no input substitution; and b) input substitution is possible.

With the use of a Diagram show how isocosts and isoquants can be used to determine the cost minimising output.

Using both a Diagram and the correct formula, show the link between the price of inputs and cost minimisation where: a) there is no input substitution; and b) input

substitution is possible.


1. You are given the following table for a production process which has two variable outputs.

a. Sketch the isoquants corresponding to the following output levels: 60, 70, 85, 95, 105, and 115. What returns to scale does the production function exhibit? What can be said

of the MRTS?

b. Analyze the marginal productivity of labor and capital for the production function.


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3. Textbook Review Questions Ch 7 p. 270: Q5.


1. Using theory and some data, discuss the possible effects of a carbon tax on companies use of different sources of energy. How might these effects be relevant to attempts to reduce carbon emissions?

2. Collect some evidence on recent changes in productivity in Australia, and contribute some ideas about the sources of these changes.


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WEEK 6 Tuition Free Week

WEEK 7 Tuition Free Week


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WEEK 8 Market Structures - Part 1

Note: The Semester Test will be held in the usual lecture

venue during the usual lecture time .

Text : Chapter 8: pp. 279 288, 301 303


Perfectly competitive market, profit maximisation (Diags: TR and TC, MR and MC,

Short run losses and Shut down)

Part 2 Key Concepts

What are the key assumptions of a perfectly competitive market?

According to the theory why can perfectly competitive firms make no economic profit in the long run?


1. The table below lists the short-run costs for One Guy's Pizza. If One Guy's can sell all the output they produce for $12 per unit, how much should One Guy's produce to

maximize profits? Does One Guy's Pizza earn an economic profit in the short-run?

Will this profit be greater or less than Guys accounting profit? Will he remain in the market?

Q TFC TVC ATC AVC MC Profits

58 100 336.4

59 100 348.1

60 100 360

61 100 372.1

2. Assume the market for tortillas is perfectly competitive. The market supply and demand curves for tortillas are given as follows:

Supply curve: P = .000002Q

Demand curve: P = 11 - .00002Q

The short run marginal cost curve for a typical tortilla factory is: MC =0.1 +0.0009Q

a. Determine the equilibrium price for tortillas.

b. Determine the profit maximizing short run equilibrium level of output for a tortilla factory.

c. Assuming that all of the tortilla factories are identical, how many tortilla


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factories are producing tortillas?

d. Sketch relevant market and firm diagrams for this scenario


1. Can you identify any markets that are perfectly competitive? If yes, provide details and justification. If no, explain/justify your conclusion. Discuss the usefulness of this

theory.

2. Using the theory of perfect competition to describe changes in prices, output and profits in a market of your choice.


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WEEK 9 Recap on Semester Test

The test questions and results will be reviewed in this tutorial


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WEEK 10 Market Structures - Part 2

Text:

Chapter 10: pp. 357 361, 369 371, 375 381; Chapter 11: pp. 395 - 405


Monopoly, Profit maximisation under monopoly (Diag), monopoly power, Deadweight

Loss, Price Regulation, Natural Monopoly, First-Degree Price Discrimination, Second

Degree Price Discrimination.

Part 2 Key Concepts

What are the key assumptions of a monopoly?

How do monopolies compare to perfect competition?

According to the theory, why are monopolies inefficient?

How does price discrimination enable monopolies to increase profits? Can this benefit consumers?


1. A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the

two markets are:

P1 15 Q1 MR1 15 2Q1

P2 25 2Q2 MR2 25 4Q2

The monopolists total cost is C=5+3(Q1 +Q2). Hence MC=3.

a. What are price, output, & profits if the monopolist can price discriminate?

b. If the law prohibits charging different prices in the two regions what is likely to happen to prices, output and profits?

2. The figure below illustrates the situation facing the only coffee shop in an isolated community:

a. On the graph, draw the coffee shops marginal revenue curve.


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b. What is the number of cups of coffee that will maximise the coffee shops profit?

c. What price will the coffee shop charge?

d. What is the coffee shops daily total revenue?

e. At the price charged for a cup of coffee, is the demand elastic or inelastic? Why?

f. Might the coffee shop try to price discriminate? Explain why or why not.


1. Using some original examples, describe and discuss price discrimination.

2. Using theory and examples, discuss the proposition that monopolies are always bad.


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WEEK 11 Game Theory - Part 1

Text: Chapter 13


Game, strategy, payoffs, Cooperative vs. non-cooperative game, possible decision tree

(Diag), Dominant strategy, Maximin strategy, Nash equilibrium.

Part 2 Key Concepts

Use numeric examples to show when a firm DOES have a dominant strategy and one where it DOES NOT have a dominant strategy.

Use a numeric example to show a maximin strategy and explain why a firm might choose to use this type of strategy.

Use a numeric example to show where a Nash equilibrium would apply, another to show where it would not apply and another to show a case where there are 2 Nash

equilibriums.

Compare the differences for a firm between a dominant equilibrium and a Nash equilibrium.

With the use of a numeric example explain The Prisoners Dilemma and use this to compare the 3 possible equilibriums.


1. Textbook Exercise Questions Ch 13 p. 525: Ex3a

2. Textbook Exercise Questions Ch 13 p. 526: Ex5a

3. Textbook Exercise Questions Ch 13 p. 526: Ex5b


1. Describe and discuss the prisoner dilemma game.

2. Using some evidence, discuss the relevance of the prisoner dilemma concept to business decision-making in oligopolistic markets (other than retail grocery).


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WEEK 12 Game Theory - Part 2

Text: Chapter 13


Tit-for-Tat strategy (in theory and in the real world), Cooperative outcome vs.

Cooperative game, sequential games with a first mover advantage, pure vs. mixed

strategies, strategic advantage, strategic actions.

Part 2 Key Concepts

Use a numerical example to show the outcomes of a sequential game with a first mover advantage.

Use a numerical example to compare how pure and mixed strategies might apply.

Explain what is meant by a strategic advantage and outline the 4 main strategies to gain such an advantage.

Use a range of examples to show how a firm might apply strategic actions to gain a strategic advantage.


1. Textbook Exercise Questions Ch 13 p. 526: Ex3b

2. Textbook Exercise Questions Ch 13 p. 526: Ex3c

3. Textbook Exercise Questions Ch 13 p. 526: Ex5c

4. Textbook Exercise Questions Ch 13 p. 526: Ex5d


1. Discuss how Jim and Joan are likely to find a solution to the battle of the sexes game (textbook, p. 497).

2. Using theory and some evidence, discuss the types of strategic actions taken by companies in the airline industry.


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WEEK 13 Factor Markets

Text: Chapter 14


Factor markets, Marginal Revenue Product (MRPL) (include formula), Competitive

factor market vs. Monopsonistic buyer of factor, income leisure choice model (Diag that

includes indifference curves), backward bending labour supply curve (Diag).

Part 2 Key Concepts

When hiring labour what is the link between marginal expenditure (ME) and MRP?

Explain a firms short run demand for labour (include a Diag), and explain what factors might lead to a change in that demand.

Compare the short run and long run demand for labour for a firm (include a Diag).

Make a comparison about a firms demand for labour for the following three scenarios: (i) factor market is competitive; (iii) when the factor market is a

monopolistic seller. (Include Diagrams in your comparisons.) [Hint make a point-by-point comparison, not just separate lists of characteristics of each scenario.]

Use the income leisure choice model to show the income and substitution effects of a wage rise and a wage fall (include Diags).

How is the effect different if the labour supply is backward bending?


1. Textbook Exercise Questions Ch 14 p. 556: Ex 1

2. Textbook Exercise Questions Ch 14 p. 556: Ex 2


1. Using theory and some evidence, discuss the possible effects of a reduction in penalty rates* on labour demand.

2. Using theory and some evidence, discuss the possible effects of a reduction in penalty rates* on labour supply.

*Penalty rates are higher rates of pay for working at night or on weekends. In Australia,

some people are proposing that the rates should be abolished. For a discussion, see, for

example: http://theconversation.com/viewpoints-should-penalty-rates-be-abolished-

22819


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WEEK 14 Asymmetric Information

Text: Chapter 17


Asymmetric information, adverse selection, moral hazard (Di a g ), Principal- agent

problem, market signaling.

Part 2 Key Concepts

Explain the lemons problem with reference to purchasing used cars (include Di a g ).

How does adverse selection potentially create problems for the insurance industry?

How can a company bring about a reduction in a) adverse selection and b) moral hazard?

What might give rise to a Principal-Agent problem and with the use of a diagram show how can this problem be minimised?

Outline the value of market signalling to: a) buyers of products; b) employers; and c) students.


1. Textbook Review Questions Ch 17 p. 657: Q6

2. Textbook Exercise Questions Ch 17 p. 657: Ex3

3. Textbook Exercise Questions Ch 17 p. 658: Ex8


1. Explain and discuss the proposition that education does nothing to increase ones productivity; its only value is as a signal (see textbook, p. 640).

2. Discuss the relevance of the theory of asymmetric information to understanding financial markets.

econ2004 s1 2015 tutorial guide for students_updated

Documents

econ2004 tutorial guide

tutorial questions b

tutorial time

class discussions

class activities

demonstrated preparation

presentation score

general class contribution