In Young Suh

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ECON1101 Hand-In Assignment 3 (due Week 12)
Q1a.
Answer:
(d)

Deadweight loss due to imposed tax will increase when supply becomes more price elastic

Q1b.
Answer:
(a)

Tariff is a tax on imports

Q2a.
Answer:
(b)

Deadweight loss arises due to the market being prevented from reaching its equilibrium price
and quantity

Q2b.
Answer:
(c)

Natural monopoly occurs due to economies of scale, whereby cost per unit output decreases
with increasing scale

In Young Suh
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Q3.
a) If a $6/unit tax is imposed on the sellers, this tax will be reflected by an increase in the marginal
cost for the sellers, thus shifting the supply curve up by the tax amount of $6/unit. This increase
will cause the equilibrium point to shift to the left and up, causing the price per unit good to
increase and thus decreasing the quantity demanded/supplied at equilibrium. The diagram below
shows how this imposed tax affects the equilibrium price and quantity. The equilibrium price will
increase from a previous $8/unit to $10/unit (increase of $2/unit) and the equilibrium quantity will
decrease from 2 to 1 (decrease of 1 unit). Though the sellers will now receive $10/unit, due to the
$6/unit tax imposed, the overall producer surplus will decrease.

b) After tax, new equilibrium point at (Q*, P*) = (1, 10)

0.5 ( 1210 ) 1=$ 1

Consumer surplus =

Producer surplus =

Tax revenue =

Total economic surplus =

c) Dead weight loss =

0.5 4 1=$ 2

6 1=$ 6
CS+ PS+T =1+2+6=$ 9

0.5 6 1=$ 3

In Young Suh
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Q4.
Monopolists have market power, allowing them to set prices to a certain degree (unless otherwise
regulated by the government). Since a monopoly is a market structure where there is only one firm
operating in the market, the monopolists supply curve represents the market supply curve. Also since
monopolists exist in an imperfectly competitive market, the demand curve for the monopolist (being
the same as the demand curve for the market) is unlikely horizontal. This signifies a decreasing
demand curve and the monopolist will need to reduce the price in order to increase the quantity sold
(decreasing marginal revenue for increasing quantity sold). Since the monopolist has market power
(market being imperfectly competitive in that the monopolist is no longer a price taker and the
entry/exit costs exists) and would like to maximise their profits, the monopolist will sell at a quantity
such that the marginal revenue equals to the marginal cost. This will set a smaller output produced by
the monopolist and the price will be higher.
Within a perfectly competitive market, the invisible hand principle applies in that the attempts of the
consumers and producers each trying to maximise their gains/benefits will shift the price to an
equilibrium. However since monopolists exist in an imperfectly competitive market, a monopolists
method of maximising their benefit will not necessarily maximise the benefit of the society, thus the
invisible hand principle does not apply.

Q5.
a) A dominant strategy represents a strategy that is preferred by a player irrespective of the strategy
selected by the other player.
Dominant strategy for Bugle Cut price
Obtains the highest payoff regardless of the strategy selected by Clarion
o Bugle obtains $30 000 more by cutting price if Clarion maintains price compared
to if Bugle decides to maintain price ($96 000 vs $66 000)
o Bugle obtains $18 000 more by cutting price if Clarion cuts price compared to if
Bugle decides to maintain price ($54 000 vs $36 000)
Dominant strategy for Clarion Cut price
Obtains the highest payoff regardless of the strategy selected by Bugle
o Clarion obtains $18 000 more by cutting price if Bugle maintains price compared
to if Clarion decides to maintain price ($90 000 vs $72 000)
o Clarion obtains $12 000 more by cutting price if Bugle cuts price compared to if
Clarion decides to maintain price ($42 000 vs $30 000)

b) Nash Equilibrium is a strategy profile whereby no player will benefit from a unilateral change in
their strategy.
Nash equilibrium Bugle and Clarion both choose to cut price
Bugle
o If Clarion decides to cut price (Clarions dominant strategy), Bugle will decide to
cut price to maximise profit
Clarion
o If Bugle decides to cut price (Bugles dominant strategy), Clarion will decide to cut
price in order to maximise profit
If for some reason, both Bugle and Clarion decide to maintain price, Bugle OR Clarion
can change their strategy to maximise profits, leading to the Nash equilibrium of both
cutting prices (Bugle earns $54 000 and Clarion earns $42 000)