Economics Assignment - Analyzing Market Dynamics and Costs

This economics assignment presents a comprehensive analysis of key economic principles. It begins with an examination of elasticity, differentiating between price elasticities for various goods and services such as 3D televisions, prescription medications, coffee, and electricity, and calculating cross-price elasticity. The assignment then delves into costs of production, distinguishing between fixed and variable costs in scenarios involving television networks and power boards. Furthermore, the assignment explores market structures, contrasting monopoly and perfect competition, and analyzing scenarios involving Adidas and cattle farms. Finally, the assignment concludes with a discussion of game theory, analyzing dominant strategies and Nash equilibrium using a payoff matrix involving Jim’s Coffee and Stars and Coffee. The assignment provides detailed explanations and calculations to support the answers.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author Note

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Table of Contents
Task 2.........................................................................................................................................2
Question 1..............................................................................................................................2
Question 2..............................................................................................................................2
Question 3..............................................................................................................................2
Task 3.........................................................................................................................................3
Question 1..............................................................................................................................3
Question 2..............................................................................................................................3
Question 3..............................................................................................................................3
Task 4.........................................................................................................................................5
Question 1..............................................................................................................................5
Question 2..............................................................................................................................6
Task 5.........................................................................................................................................6
Question 1..............................................................................................................................6
Question 2..............................................................................................................................6
Question 3..............................................................................................................................7
Question 4..............................................................................................................................7
Question 5..............................................................................................................................8
References..................................................................................................................................9

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Task 2
Question 1
Prescription medication is a necessary product. For necessary product price is
inelastic if there is no close substitute. In this case, prescription medication cannot have
substitutes because only prescribed medicines must be consumed, hence price is inelastic. 3D
television is costly product and its change in price changes demand significantly making it
highly elastic. Therefore, 3D television is more elastic.
Question 2
Coffee sold in a café belongs to normal good category and it does have substitutes
like tea. Hence, change in its price will definitely change its demand as consumers have other
choice to opt for (Colchero et al. 2015). However, in the case of electricity, there is no
substitute and it belongs to necessary good and is inelastic. Thus, coffee is more elastic in this
case.
Question 3
Cross Price Elastcity= Percentage change∈quantity demanded of tyres
Percentage chnage∈price of cars
¿
21000−25000
25000 ×100
35000−25000
25000 ×100
¿ −16
40
¿−0.4
Tyres and cars are complementary products. Therefore, increase in price of cars will
adversely affect car sales number and thereby demand for tyres will decrease. However, the

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price of tyres has not increased but it is facing decreased sales value (Berry et al. 2014). Tyre
sellers will lower the price to regain some of its market as a result the sale value will increase
but not regain its previous market as number of cars has decreased. Hence, cross price
elasticity is negative in this case. The computed value of cross price elasticity of demand is -
0.4. This implies, if price of cars increases by 1 percent then demand of tyres decreases by
0.4 percent.
Task 3
Question 1
Licence fee charged by government on every television network is a mandatory cost
to be in the business. Every television network pays this fee while entering the market ad it is
non-refundable and unavoidable. Thus, it is a fixed cost.
Question 2
The price of power boards that Samsung use in its television changed for the new
contract it signed. It will influence the production cost of television. However, it may change
in future as price of power boards can fluctuate, thereby making it a variable cost.
Question 3

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Figure 1: Average cost curve in the long run
A380 (Airbus) is the world’s largest civilian airplane. Its passenger carrying capacity
is double that of Dreamliner. However, Dreamliner is more economical in fuel efficiency
than that of A380 (Popular Mechanics 2019). The cost of running Airbus would be much
costlier because it is the most expensive airplane and thus its depreciation cost and cost of
opportunity is high. In the long run, it is necessary to decide which plane to run depending on
the conditions of the market. It is also necessary to minimize cost of the airplane company.
The choice of planes can be made using the concept of Long Run Average Total Cost (LAC).
LAC is formed of the minimum short run average cost curves as shown in the above figure.
Dreamliner being the primary airplane of the airliner gives the maximum passenger capacity
of the airliner it can serve at minimum cost, which is given as Q* (full capacity). Thus, during
the off-season when the number of passengers travelling is less, the airliner should use
Dreamliner because the cost would be minimum as the number of passengers is less than the
number of passengers the airline can serve at full capacity (Kalecki 2013). However, during
peak season when the number of passengers would be so high that it exceeds the capacity of
the Dreamliner, then Airbus should be used to serve passengers beyond full capacity and to
minimize the cost of the airline. Therefore, from the above discussion it is found that
Dreamliner should be used when number of passenger is lower than full capacity and Airbus
should be used when number of passenger is greater than the full capacity.

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Task 4
Question 1
Figure 2: Adidas is the only seller (Monopoly)
Assuming Adidas as the only seller in Australia that sells exercise running shoes
makes it monopoly player. The profit maximizing condition for Adidas in this situation is
when marginal revenue (MR), marginal cost (MC) and average total cost (ATC) has the same
value. However, market demand curve is at higher position and Adidas has the opportunity to
charge higher price where price meets the market demand and appropriate the extra profit
(Askar 2013). This extra profit is due to the monopoly power it has in the market.
Figure 3: Market condition with many brand selling similar product

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In contrary, when many other companies enter the market offering similar products,
then the market becomes perfect competition. In this situation, the price falls from the
monopoly value perfectly competitive value, which is at MR=MC=AR.
Question 2
Cattle farms in this case is not a single brand or company. All the farms that are into
cattle rearing have been considered. Hence, it is a perfectly competitive market, where profit
is maximized at MR=MC and the demand curve is horizontal. The notion behind horizontal
demand curve is that the number of firms are so large that entry and exit of firms does not
influence the price as it remains unaffected by the decrease or increase in supply making the
demand curve perfectly elastic (Pindyck and Rubinfeld 2014). However, the case is different
for McDonalds because it is a single brand operating all over the world via local branches. It
operates in a monopolistically competitive market, as the consumers of its products are
numerous (Alcacer, Dezso and Zhao 2013). Therefore, the demand curve of McDonalds is
downward sloping. Now, if there is two McDonalds in the same location then the demand
curve of both the shop will shift to the left and sales quantity will reduce as the price is fixed
for all location.
Task 5
Question 1
A strategy is considered to be dominant if regardless of strategy chosen by opponent
player, the strategy yields a larger pay-off. In other words, a dominant strategy is always
better than other available strategy (Dixit and Skeath 2015).
Question 2
From the pay-off matrix it is evident that if Jim’s Coffee enter the market it will earn
2 million profit if Stars and Coffee set a high price and 1 million profit if Stars and Coffee

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sets a low price. In the other hand, if Jim’s Coffee do not enter then they will earn zero profit.
Thus, entering the market is the dominant strategy for Jim’s Coffee no matter what Stars and
Coffee does.
Question 3
It is clear from the pay-off matrix that if Stars and Coffee sets low price then it will
earn 1 million profit if Jim’s Coffee enter and 2 million if Jim’s Coffee do not enter.
However, if Stars and Coffee sets high rice then it will earn 3 million if Jim’s and Coffee
enter and 7 million if Jim’s and Coffee do not enter the market. Therefore, setting high price
is the dominant strategy for Stars and Coffee.
Question 4
Nash equilibrium known by the name of American Economist John Nash refers to a
solution to the non-cooperative game in which players knowing the strategies of opponent
players have no incentive to alter their strategy (Dresher, Shapley and Tucker 2016). After
reaching the Nash equilibrium, by changing strategies players are worse off.
Considering the case of Jim’s Coffee in the given pay-off matrix, it can be said that by
not entering the market Jim’s Coffee will have no Nash equilibrium (Fearnley et al. 2015).
However, if it enters and given that Stars and Coffee set the prices at high then both the firms
will better off, Jim’s Coffee will earn 2 million and Stars and Coffee will earn 3 million. In
the other hand if Stars and Coffee declares that it will set price at high and given that, Jim’s
Coffee enters the market then the profit earned by the coffee shops will be same as in the
earlier case (Jena and Sarmah 2014). Hence, Jim’s Coffee entering the market and Stars and
Coffee setting high price is Nash equilibrium in this case.

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Question 5
Jim’s Coffee should not believe Stars and Coffee’s threat because from the pay-off
matrix it is clearly visible that if Stars and Coffee set low price then it will earn profit of 1
million given Jim’s Coffee enters and 2 million if Stars Coffee do not enter. In the other
hand, setting high price would fetch more profit for Stars and Coffee that low price
irrespective of Jim’s Coffee’s decision of entry. Hence, Stars and Coffee would set high price
to maximize its profit. Therefore, Jim’s Coffee should not believe Stars and Coffee threat
(Telser 2017).

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References
Alcacer, J., Dezso, C.L. and Zhao, M., 2013. Firm rivalry, knowledge accumulation, and
MNE location choices. Journal of International Business Studies, 44(5), pp.504-520.
Askar, S.S., 2013. On complex dynamics of monopoly market. Economic Modelling, 31,
pp.586-589.
Berry, S., Khwaja, A., Kumar, V., Musalem, A., Wilbur, K.C., Allenby, G., Anand, B.,
Chintagunta, P., Hanemann, W.M., Jeziorski, P. and Mele, A., 2014. Structural models of
complementary choices. Marketing Letters, 25(3), pp.245-256.
Colchero, M.A., Salgado, J.C., Unar-Munguía, M., Hernandez-Avila, M. and Rivera-
Dommarco, J.A., 2015. Price elasticity of the demand for sugar sweetened beverages and soft
drinks in Mexico. Economics & Human Biology, 19, pp.129-137.
Dixit, A.K. and Skeath, S., 2015. Games of Strategy: Fourth International Student Edition.
WW Norton & Company.
Dresher, M., Shapley, L.S. and Tucker, A.W. eds., 2016. Advances in Game Theory.(AM-
52) (Vol. 52). Princeton University Press.
Fearnley, J., Gairing, M., Goldberg, P.W. and Savani, R., 2015. Learning equilibria of games
via payoff queries. The Journal of Machine Learning Research, 16(1), pp.1305-1344.
Jena, S.K. and Sarmah, S.P., 2014. Price competition and co-operation in a duopoly closed-
loop supply chain. International Journal of Production Economics, 156, pp.346-360.
Kalecki, M., 2013. Theory of economic dynamics. Routledge.
Pindyck, R. and Rubinfeld, D., 2014. Microeconomics GE. Pearson Australia Pty Limited.

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Popular Mechanics (2019). Airbus or Dreamliner: Which Passenger Plane Will You Fly?.
[online] Popular Mechanics. Available at:
https://www.popularmechanics.com/flight/a5819/airbus-vs-boeing-battle-for-air-space/
[Accessed 3 May 2019].
Telser, L.G., 2017. Competition, collusion, and game theory. Routledge.