University of Southern Queensland ECO5000 Assignment 2: Solutions

This document provides comprehensive solutions to the ECO5000 Assignment 2, a microeconomics assignment from the University of Southern Queensland. The assignment covers several key concepts, including price discrimination strategies employed by a cinema, and the determination of profit maximization. It also delves into elasticity of demand, examining how governments can use taxation to influence consumption patterns of goods like cigarettes, alcohol, and sugary drinks. The analysis extends to market equilibrium, illustrating supply and demand dynamics in the ice cream market and the impact of external factors like weather. Furthermore, the assignment explores the effects of a weak Australian dollar on tourism, and the benefits of mergers and acquisitions, using game theory to analyze advertising strategies, and addressing asymmetric information in markets such as insurance and used cars. References to relevant economic literature are included.

Answer 1
Part a
The cinema can engage in price discrimination which means the seller can sell the same
product at various prices to different buyers for maximising sales and profits. Price
discrimination is a strategy of selling goods where the sellers are known to charge customers
various prices for the similar products. In this case, the cinema can engage in price
discrimination. It can sell the tickets at a higher price to the adult buyers and can give
concession to the students. The students however needs to show identity card for buying the
tickets. Therefore, in this way the ticket seller can maximize its profit and maximize its
revenue by charging high from the adult buyers and given concessions to the students.
Part b
Adult Buyers
Price
Quantit
y
Demand
ed TR TC Profit
20 0 0 0 0
18 2 36 12 24
16 4 64 24 40
14 6 84 36 48
12 8 96 48 48
10 10 100 60 40
8 12 96 72 24
From the above table it have been found out that the maximum profit is 48 which took place
when the price is either 12 or 14. As profit is calculated by differencing the total revenue and
total cost, it can be said that the maximum profit took place when the price is either 12 or 14.

Part c
Pric
e
Quantity
Demande
d
Total
revenu
e
total
cost profit
12 0 0 0 0
10 1 10 6 4
8 2 16 12 4
6 3 18 18 0
4 4 16 24 -8
2 5 10 30 -20
From the above table as the maximum profit is 4, the seller should be charging 10 in order to
achieve maximum profit.
Answer 2
Good Own Price Elasticity of Demand
Cigarettes -0.40
Alcohol -1.00
Sugary Drinks -1.30
Part a
In order to increase tax revenue, the government should be taxing cigarettes since it has the
negative price elasticity. The negative price elasticity states that people will be buying similar
quantity of products whether price increases or decreases. Therefore, when the government
will be imposing taxes on cigarettes, the price will rice but the demand will not reduce which
will increase the revenue.
Part b

Alcohol has the elastic demand since its own price elasticity is -1.00.
Part c
When the government wants to decrease the consumption by 10 percent, he should be
imposing 25 percent tax
Part d
The government should be imposing 35 percent tax in order to decrease the consumption by
30 percent.
Part e
In order to reduce the consumption of sugary drinks, the government should be imposing a
tax of 15 percent.
Answer 3
Part a
The below diagram shows the market equilibrium for ice cream. The demand curve is shown
by D and the supply curve is shown by S. The equilibrium point is E which is at the point of
intersection of the demand curve and supply curve. The price of ice cream is marked at P and
the quantity is marked at Q.
Part b

When the weather became suddenly hot, the demand for ice cream will suddenly increase. As
the demand for ice cream increases due to rise in temperature, the price also increases. On the
other hand, the cost of producing ice cream have increased, for this reason, the supply of ice
cream will decrease. As the supply of ice cream will decrease, the supply curve will move
back to S1 from S. Demand increases from D to D1 due to rise in temperature. The
equilibrium quantity of ice cream might not change, but the price will increase from P to P1.
Answer 4
The weak Aussie dollar positively affects the Australian tourism industry. Therefore, weaker
currency is Australia’s one of the big tourist attraction. When the Australian currency
becomes weak, the tourist fined it cheaper to travel Australia. Therefore, as the currency
becomes weak compared to the other countries, tourists will have more money in hand to
spend. So a weak assize dollar will be attracting more tourist and positively affect the
Australian tourism industry. On the other hand, when the currency of Australia decreases, it
will negatively affect the Australian people will go to the foreign industries. As their dollar
have decreased, the Australian people will find it quite expensive for travelling out.
The weak Aussie dollar will attract more foreign students. As the dollar have fallen, the
students will find it cheaper to get admission in Australian schools and universities. Because
of the weal Aussie dollar, more amount of foreign students will get admitted to Australian
schools and universities. On the other hand, the weak dollar will be negatively affecting for
those Australian students who want to pursue their studies abroad. Therefore, a weak Aussie
dollar will be having a positive impact on the higher education sector since it will attract the
foreign students.
Answer 5

This particular mechanism suggests that the merger will be creating added value when the
two large wine distribution will be merging their business. The merged firm will be bringing
in some economies of scope from selling the two customer types. Although many of the two
customers will be purchasing the same wines. There will be presence of economies of scale
in case of warehousing, wine label and storing. Therefore these economies of scale will be
reduce the cost of production of the wines. Merger takes place when two of the firms will be
joining together in order to form one firm. When the firm merges, it leads to economies of
scale, they can compete more and they will produce goods more efficiently.
Answer 6
Part a
Firm B
Firm A
Advertising ($
billion)
Not advertising ($
billion )
Advertising 4, 4 10, -1
Not Advertising -1, 10 5,5
Part b
Firm B should be advertising. The reason is that 4 is greater than -1, therefore it dominates
the not advertising one. Both 4, 4 are greater than -1. For this reason, firm B should be
advertising.
Part c
It can be predicted that both the firms A and B will be advertising since 4 will be the
dominant strategy.

Part d
When the firms will not advertise, they will be better off. The firms cannot able to achieve its
outcome because of prisoner’s dilemma. The dominant strategy is advertisement but when
one of the firm will able to know by having full information that the other is not advertising,
then that frim will also not advertise. Therefore when the firms will be having full
information or will collude they can optimize fully without advertising.
Answer 7
Part a
Asymmetric information is also termed as the information failure in the market. It takes place
when one party possess greater knowledge than the other party. In case of insurance market,
the insurance provider will be having more information comparatively than the customer
which will create moral hazard. In this case thy buyer will be having less information than the
seller and he can be easily fooled.
Part b
In the market of the used card, the sellers typically have more information than the buyers
and the seller will know whether the car is defective or not. The buyer however will be at
disadvantage due to asymmetric information. Therefore, the seller can easily fool the buyer.
As the seller have more information than the buyer, the asymmetric information will be
hurting the buyer.

Reference list
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Iossa, E. and Martimort, D., 2015. The simple microeconomics of public‐private partnerships.
Journal of Public Economic Theory, 17(1), pp.4-48.
Tahir, S., Ghazali, A. and Agil, S.O.S. eds., 2017. Readings in Microeconomics: An Islamic
Perspective. In The Name of Allah, The most Beneficent, The most Merciful, p.104.