ECON8069-Introduction to Economics Study Notes & Practice | The Australian National University | AskSia

Business Economics (ECON 8069) Mid-Semester Examination Summary - April 2023

This document summarizes the key concepts and questions from the Australian National University's Business Economics (ECON 8069) Mid-Semester Examination in April 2023.

---

Section 1: Externalities and Market Interventions (17 Marks)

This section focuses on understanding and addressing positive externalities in markets.

• a) Positive Externalities:

  • Definition: A situation where the social marginal benefit (SMB) of a good or service differs from the private marginal benefit (PMB).
  • Example: Any situation where consuming a good provides benefits to third parties not directly involved in the transaction. This phenomenon is called a positive externality.

• b) Types of Marginal External Benefit:

  • Constant Marginal External Benefit (Figure 2a): The difference between the demand curve (PMB) and the sMB curve remains constant as the quantity increases.
  • Increasing Marginal External Benefit (Figure 2b): The gap between the demand curve (PMB) and the sMB curve widens as the quantity increases.

• c) Price Controls and Total Surplus (Figure 2a):

  • Price Floor: Cannot increase total surplus. It sets a minimum price, which disincentivizes consumption and reduces trade. Since markets with positive externalities are already under-consuming relative to the social optimum, a price floor exacerbates this issue, decreasing total surplus.
  • Price Ceiling: Cannot increase total surplus. It sets a maximum price, which disincentivizes production and reduces trade. Similar to a price floor, this further reduces trade below the socially optimal level, decreasing total surplus.
  • Note: Graphs are highly recommended for illustrating these points.

• d) Taxes and Subsidies for Total Surplus (Figure 2a):

  • Per-unit Tax: Cannot increase total surplus. Taxes increase the price for buyers and decrease the price for sellers, disincentivizing both consumption and production, thus reducing trade and total surplus.
  • Per-unit Subsidy: Can increase total surplus. Subsidies lower the price for buyers and increase the price for sellers, incentivizing consumption and production. This can help move the market towards the socially optimal quantity, increasing total surplus.
  • Caveat: An excessively large subsidy could potentially reduce total surplus.
  • Note: Graphs are highly recommended for illustrating these points.

• e) Pigouvian Taxes/Subsidies and Different MEB:

  • A Pigouvian subsidy is set equal to the Marginal External Benefit (MEB) at the socially optimal quantity to maximize total surplus.
  • Application in Figure 2(a) (Constant MEB): A subsidy of size m* (equal to the constant MEB) will fully internalize the externality and achieve the social optimum.
  • Application in Figure 2(b) (Increasing MEB): Applying a subsidy of size m* (calculated for constant MEB) to a market with increasing MEB will:
    • Reduce the price buyers pay and increase the price sellers receive.
    • Increase the quantity traded.
    • Increase Consumer Surplus (CS) and Producer Surplus (PS).
    • Increase Total Surplus.
    • Shrink the Deadweight Loss (DWL), but DWL will remain greater than zero because m* is insufficient to reach the social optimum quantity. A larger subsidy would be needed.

• f) Alternative Methods to Increase Total Surplus:

  • Coase-style Negotiation: Involves private parties (affected third parties, buyers, sellers) negotiating side-payments to reach a mutually beneficial outcome, often increasing production.
  • Government Mandates: Direct government orders or regulations to influence behavior.

---

Section 2: Market Structures and Shocks (12 Marks)

This section analyzes the impact of a demand shock on mask prices and quantities under different market structures.

• a) Increased Demand for Masks during Pandemic:

  • The pandemic caused an increase in demand for masks due to an increasing marginal benefit of wearing them (i.e., increased perceived protection).

• b) Perfectly Competitive Market Analysis (Masks):

  • Short-Run:
    • An increase in demand (shift right) leads to higher market prices and quantities.
    • Prices rise above the minimum Average Total Cost (ATC), allowing firms to earn positive economic profits.
  • Long-Run:
    • Positive profits attract new firms to enter the market.
    • Entry shifts the market supply curve to the right, driving down prices.
    • This process continues until prices return to the minimum ATC, eliminating economic profits.
    • The final outcome is the original price but a significantly higher quantity traded.
  • Real-world Accord: This model's predictions align well with the observed dynamics of the mask market during the pandemic.
  • Note: Requires both market-level and firm-level diagrams.

• c) Characteristics of Perfect Competition in the Mask Market:

  • The mask market exhibits characteristics of perfect competition:
    • Many producers.
    • Relatively identical goods (though some variation exists).
    • Firms and consumers are largely price-takers.
    • Relatively free entry and exit.
  • The market closely approximates perfect competition, though not perfectly due to product differentiation.

• d) Monopoly Market Analysis (Masks):

  • Short-Run:
    • An increase in demand (shift right) increases Marginal Revenue (MR).
    • Monopoly quantity increases.
    • If Marginal Cost (MC) is constant, the monopoly price may not change. If MC is increasing, the price will increase.
    • Monopoly profits increase.
  • Long-Run:
    • No further changes occur as the monopolist maintains its market power.
  • Real-world Accord: This analysis does not align well with the observed real-world dynamics of the mask market, which showed significant price adjustments and increased competition.
  • Note: Requires a monopoly graph.

• e) Characteristics of Monopoly in the Mask Market:

  • The mask market does not exhibit characteristics of a monopoly:
    • Not a single firm.
    • Significant barriers to entry are absent.
    • Firms are not price-makers in the same way a monopolist is.

---

Section 3: Monopoly Break-up and Social Welfare (6 Marks)

• Circumstances where breaking up monopolies may not increase social welfare:
  • This occurs in the case of natural monopolies.
  • Definition: A natural monopoly exists when fixed costs are extremely high relative to the market size, making it most efficient for a single firm to produce the entire output.
  • Breaking up a natural monopoly would lead to higher average costs for multiple smaller firms, potentially reducing overall social welfare.
  • Note: Requires explanation and an appropriate graph.

---

Section 4: Game Theory - Nash Equilibrium (4 Marks)

• Strategic Interaction: Two firms compete with strategies: Aggressive (Agg) or Passive (Pass).
• Payoff Matrix (Table 1):
  • (Agg, Agg): Both firms receive $10M.
  • (Agg, Pass): Firm 1 (Agg) gets $5M, Firm 2 (Pass) loses $5M.
  • (Pass, Agg): Firm 1 (Pass) loses $5M, Firm 2 (Agg) gets $5M.
  • (Pass, Pass): Both firms receive $0M.
• Nash Equilibria:
  • There are two Nash Equilibria:
    1. (Aggressive, Passive)
    2. (Passive, Aggressive)
  • Explanation: In each of these scenarios, neither firm has an incentive to unilaterally change its strategy, given the other firm's strategy. For example, if Firm 1 is Aggressive and Firm 2 is Passive, Firm 1 gets $5M. If Firm 1 switched to Passive, it would get $0M. If Firm 2 is Aggressive and Firm 1 is Passive, Firm 2 gets $5M. If Firm 2 switched to Passive, it would get $0M.
  • Other strategy profiles are not Nash Equilibria because at least one firm would benefit from deviating.

---

Section 5: Positive vs. Normative Economics in Policy (6 Marks)

• Claim: Economics provides insight into policy outcomes but does not recommend one policy over another.
• Discussion:
  • Positive Economics: Focuses on objective analysis – "what is" or "what will be." It describes the likely consequences of different policies.
  • Normative Economics: Involves value judgments – "what ought to be." It makes recommendations based on desired outcomes.
  • Reconciling the Claim:
    • Strictly positive economics would indeed only describe outcomes.
    • However, normative economics does recommend policies.
    • An economist can recommend a policy within a positive framework if the goals of the policy are clearly defined and accepted. For example, if the government's goal is to minimize deadweight loss from a negative externality, an economist could positively recommend a tax over a subsidy because the tax is the more effective tool to achieve that specific, stated goal. The recommendation is based on the efficiency of achieving a pre-defined objective.

Economics: Key Concepts and Market Analysis

This summary covers fundamental economic principles, market structures, and government interventions, drawing from various sections of the provided material.

1. Core Economic Principles

• Positive vs. Normative Economics:
  • Positive economics describes and explains economic phenomena objectively, without value judgments (e.g., "Wage subsidies reduce unemployment").
  • Normative economics makes recommendations based on value judgments (e.g., "The government should provide wage subsidies").
• Economic Models:
  • Abstract, simplified representations of the economy used to understand complex phenomena.
  • Models are useful tools, not necessarily "correct" in every detail.
• Opportunity Cost:
  • The value of the next best alternative foregone due to scarcity.
  • Optimal choices are made when the benefit of an action exceeds its opportunity cost.
• Scarcity and Choice:
  • The fundamental economic problem of having unlimited wants with limited resources, forcing choices and trade-offs.

2. Consumer Behavior

• Budget Constraint:
  • Represents all possible combinations of goods a consumer can purchase given their income and the prices of goods.
  • Consumers aim to spend all their income to maximize utility.
• Maximizing Utility:
  • Consumers maximize total utility when the marginal utility per dollar spent is equal across all goods.
  • Marginal Utility (MU): The additional satisfaction gained from consuming one more unit of a good.
• Income and Substitution Effects:
  • Substitution Effect: When the price of a good changes, consumers substitute towards relatively cheaper goods.
  • Income Effect: When the price of a good changes, it affects the consumer's real income, influencing their purchasing power.
  • For normal goods, both effects work in the same direction (decrease consumption when price rises).
  • For inferior goods, the effects work in opposite directions. The law of demand holds if the substitution effect is stronger.

3. Market Structures and Firm Behavior

• Perfect Competition:
  • Characteristics: Many buyers and sellers, homogeneous products, free entry and exit, perfect information. Firms are price-takers.
  • Short-Run (SR) Profit: Firms enter if Price > minimum Average Total Cost (ATC). Firms exit if Price < minimum ATC.
  • Long-Run (LR) Equilibrium: Achieved when Price = minimum ATC (LR). Firms have no incentive to enter or exit. This leads to:
    • Production at the lowest possible cost (minimized LR ATC).
    • Efficient capital allocation.
  • Comparative Statics:
    • Increase in Demand: SR price rises, leading to SR profits, firm entry, increased supply, and price falling back to LR equilibrium. Market output increases, but individual firm output and profits return to normal.
    • Decrease in Demand: SR price falls, leading to SR losses, firm exit, decreased supply, and price rising back to LR equilibrium. Market output decreases, but individual firm output and profits return to normal.
• Monopoly:
  • Characteristics: Single seller, unique product with no close substitutes, significant barriers to entry. Firm is a price-maker.
  • Profit Maximization: Monopolists produce where Marginal Revenue (MR) = Marginal Cost (MC). Price is set above MR and MC.
  • Regulation:
    • Marginal Cost Pricing (P=MC): Eliminates deadweight loss but can lead to firm losses and exit.
    • Average Total Cost Pricing (P=ATC): Reduces deadweight loss, ensures zero economic profit, but may reduce incentives for cost reduction.
• Monopolistic Competition:
  • Characteristics: Many firms, differentiated products, free entry and exit. Firms face a downward-sloping demand curve (P > MR).
  • Long-Run Equilibrium: Similar to perfect competition, free entry drives profits to zero (P = ATC). However, P > MC, indicating some inefficiency.

4. Market Interventions and Externalities

• Government Solutions to Externalities:
  • Command-and-Control: Direct regulation (e.g., mandating technology).
  • Market-Based Approaches: Incentives to internalize externalities.
    • Pigouvian Tax: A per-unit tax equal to the Marginal External Cost (MEC) at the socially optimal output, used for negative externalities.
    • Pigouvian Subsidy: A per-unit subsidy equal to the Marginal External Benefit (MEB) at the socially optimal output, used for positive externalities.
• Price Controls:
  • Price Ceiling: A maximum legal price. Binding if set below equilibrium price, leading to shortages.
  • Price Floor: A minimum legal price. Binding if set above equilibrium price, leading to surpluses.
  • Both price ceilings and floors cause distortions and reduce Total Surplus.
• Taxes and Subsidies:
  • Excise Taxes: Levied on goods/services, creating a gap between the price buyers pay ($P_b$) and sellers receive ($P_s$). Taxes reduce quantity traded and create deadweight loss.
  • Subsidies: Financial support, effectively reversing the tax gap ($P_b < P_s$). Subsidies encourage consumption/production but also create deadweight loss due to over-consumption/production.
  • Tax Incidence: The burden of a tax is shared by buyers and sellers. The side of the market with the less elastic curve (more price-insensitive) bears a larger portion of the tax burden.
  • Deadweight Loss (DWL): Minimized by taxing goods with low price sensitivity (inelastic demand/supply) and subsidizing goods with low price sensitivity.
• Externalities:
  • Negative Externality: An activity with harmful spillover effects (e.g., pollution). Market outcome ($P=MB=MC$) is inefficient; socially optimal quantity occurs where $MB = SMC$ ($SMC = PMC + MEC$).
  • Positive Externality: An activity with beneficial spillover effects (e.g., education). Market outcome ($P=MB=MC$) is inefficient; socially optimal quantity occurs where $MC = SMB$ ($SMB = PMB + MEB$).

5. Welfare Analysis

• Consumer Surplus (CS): The difference between the total benefit consumers receive and the total cost they pay. Graphically, the area below the demand curve and above the price.
• Producer Surplus (PS): The difference between the total revenue producers receive and their variable costs. Graphically, the area below the price and above the supply curve.
• Total Surplus: The sum of Consumer Surplus, Producer Surplus, and any government tax receipts or externalities. Maximized in competitive markets without externalities.
• Deadweight Loss (DWL): A loss of total surplus resulting from market distortions (e.g., taxes, price controls, externalities).

6. Game Theory

• Nash Equilibrium: A state where no player can improve their outcome by unilaterally changing their strategy, given the other players' strategies.
• Dominant Strategy: A strategy that yields the best outcome for a player regardless of the other players' strategies.
• Prisoner's Dilemma: A scenario where individual rational choices lead to a collectively suboptimal outcome.

This summary provides a foundational overview of key economic concepts, market dynamics, and policy implications discussed in the provided text.

---

---

---

Summary of Economics Concepts: Monopolies, Regulation, and Market Structures

This document outlines key concepts in microeconomics, focusing on monopolies, their inefficiencies, regulation strategies, and a comparison with monopolistically competitive firms. It also touches upon game theory and strategic interactions between firms.

1. Monopolies: Definition and Characteristics

• Definition: A market is a monopoly if there is only one producer or seller. This single entity is called a monopolist.
• Price-Maker: Unlike firms in perfectly competitive markets who are price-takers, monopolists are price-makers. They have complete market power and can choose the price to charge, as they face no direct competitors or close substitutes.
• Demand Curve:
  • A perfectly competitive firm faces a horizontally sloped, perfectly elastic demand curve.
  • A monopolist faces the market demand curve, which is downward-sloping. They must lower their price to sell more units.
• Marginal Revenue (MR) vs. Price (P):
  • For a monopolist, Marginal Revenue is less than Price (MR < P).
  • This is because to sell an additional unit, the monopolist must lower the price not only on that unit but also on all previous units sold.
  • MR can even be negative.
  • The Marginal Revenue curve is twice as steep as the demand curve.
  • Average Revenue (AR) equals Price (AR = P).
• Profit Maximization:
  • A profit-maximizing monopolist produces the quantity where Marginal Revenue equals Marginal Cost (MR = MC).
  • The price is then determined by the demand curve at that quantity.
  • Profit is calculated as (Price × Quantity) - (Average Total Cost × Quantity).

2. Monopoly Inefficiency and Welfare Analysis

• Underproduction: Monopolists produce less output than is socially optimal.
  • They produce where MR = MC.
  • However, Price (P) is greater than MR (P > MR).
  • Consumers consume where Marginal Benefit (MB) equals Price (MB = P).
  • Therefore, at the monopolist's output level, Marginal Benefit to Consumers exceeds Marginal Cost to Producers (MB > MC). Society would benefit from increased production.
• Deadweight Loss: This underproduction leads to a deadweight loss, representing a loss of potential economic surplus for society.

3. Price Elasticity and Total Revenue for Monopolies

• The relationship between price elasticity of demand ($\epsilon_d$) and total revenue is crucial for a monopolist's output decision.
  • If $\epsilon_d \ge 1$ (demand is elastic or unit elastic), Marginal Revenue (MR) is positive (MR > 0), and increasing production increases total revenue.
  • If $\epsilon_d = 1$ (unit elastic), MR is zero.
  • If $\epsilon_d < 1$ (demand is inelastic), MR is negative, and increasing production decreases total revenue.
• Profit-Maximizing Range: A profit-maximizing monopolist will always choose a production level where demand is price elastic ($\epsilon_d \ge 1$) and MR is non-negative. They will not produce in the range where demand is inelastic.
• Total Revenue Decline: Total revenue will decline if the price rises and the demand curve has unit price elasticity or is price inelastic. Conversely, total revenue will decline if the price falls and demand is price elastic.

4. Types of Monopolies and Regulation

• Natural Monopolies:
  • Occur when a single firm can produce goods or services at the lowest cost due to large economies of scale. The Average Total Cost (ATC) curve is downward sloping for all relevant production levels.
  • Examples: Electricity, water supply.
  • These markets are best served by a monopoly.
• Non-natural Monopolies:
  • Occur when firms wield market power despite having upward-sloping ATC curves.
  • These arise due to barriers to entry, such as patents, copyrights, government licenses, or exclusive access to resources.
  • Markets without natural monopolies are best served by competition.
• Regulation Strategies for Natural Monopolies:
  • Marginal Cost Pricing (P = MC):
    • Pros: Eliminates deadweight loss in the short run.
    • Cons: Leads to negative profits, causing the firm to go out of business in the long run.
  • Average Total Cost Pricing (P = ATC):
    • Pros: Firm makes zero economic profit (breaks even), preventing bankruptcy. Reduces deadweight loss compared to no regulation.
    • Cons: Still results in some deadweight loss. The firm has no incentive to reduce costs.
  • Incentivised Average Total Cost Pricing:
    • The price is set equal to current ATC and fixed for a period.
    • Pros: Gives the firm an incentive to reduce costs, as lower costs lead to higher profits.
    • Cons: Still faces issues like regulatory capture and asymmetric information (government may not know the firm's true costs).

5. Monopolistically Competitive Firms

• Characteristics:
  • Many firms compete, but each faces a downward-sloping residual demand curve (similar to a monopoly).
  • Products are differentiated.
  • Price is greater than Marginal Revenue (P > MR) for each firm.
  • Free entry and exit push long-run profits to zero.
  • In the long run, Price equals Average Total Cost (P = ATC), similar to competitive markets.
• Market Dynamics:
  • If firms are profitable in the short run, new firms enter.
  • Entry makes the demand curve for each existing firm more price-sensitive (pivots inward).
  • This process continues until firms earn zero economic profit, which occurs when the demand curve is tangent to the ATC curve.
• Comparison: Monopolistically competitive markets have greater competition and less market power than monopolies, making them closer to perfectly competitive markets.

6. Game Theory and Strategic Interaction

• Oligopoly/Duopoly: This section introduces scenarios where firms' decisions directly impact each other (strategic interaction), unlike perfect competition or monopoly.
• Nash Equilibrium: A state where each player (firm) is maximizing their profit given the strategies of all other players. No player has an incentive to unilaterally change their strategy.
• Prisoner's Dilemma: A classic game theory example illustrating how individual rational choices can lead to a collectively suboptimal outcome. The payoff matrix shows the outcomes for each player based on their choices (e.g., confess or remain silent).

下面是《ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf》每一道题目对应的讲解总结。所有分析均依据官方答案说明和评分标准：

---

第1题：外部性与政府干预（共17分）

a) 正外部性定义与例子

• 解释： 当社会的边际效用（社会边际效益，sMB）与个体的边际效用（私人边际效益，PMB）不同，而且sMB > PMB时，就是“正外部性”。常见例子：疫苗接种、教育等。
• 关键词： 正外部性（positive externality）[5]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus.。

b) 图像含义

• (a) 图： 描绘的是恒定的边际外部效益，即需求曲线（PMB）和社会边际效益曲线（sMB）之间的差额为常数。
• (b) 图： 边际外部效益随着数量增加而递增，即sMB和PMB间的空间增大[5]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus.。

c) 价格限制和总剩余分析

• (i) 价格下限（Price floor）： 无法提高总剩余。下限减少消费，进一步拉大与社会最优的距离[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ]。
• (ii) 价格上限（Price ceiling）： 也无法提高总剩余。上限抑制生产，同样导致产量更低[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ]。
• 图示/论证： 清晰有力的经济学分析和/或图形均能得分。

d) 税收、补贴对总剩余的影响

• 税（Tax）： 不能提高总剩余，因为税收会让生产和消费减少，使交易量低于社会最优[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ]。
• 补贴（Subsidy）： 可以提高总剩余，政府补贴鼓励消费和生产，使产量更接近社会最优[18]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf(ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ] $ $ S S sMB m* m . *。
• 补充说明： 如果补贴过大反而可能降低总剩余。

e) Pigouvian税/补贴在不同外部效益下的作用

• 恒定MEB情况（图a）： 用m*大小的补贴，能最大化总剩余。
• 递增MEB情况（图b）： 相同m*的补贴下，产量提升、买家付出的价格下降、卖家收到的价格上升，CS和PS都提升，总剩余增加，但还未达到社会最优，死重损失仍然存在[19]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfof the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero. Each of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly.。

f) 其他提高总剩余的方法

• Coase协商： 利益相关第三方可和买家/卖家协商付款，通过合同方式提高产量[14]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close.。
• 政府强制命令: 只要有充分论证也可得分。

---

第2题：疫情口罩市场分析（共12分）

a) 需求上升原因

• 疫情提升了人们对口罩的“边际效用”，带来了需求曲线的右移[13]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069)。

b) 完全竞争市场中需求冲击的短期和长期分析

• 短期: 市场价格与数量齐升，超额利润出现[13]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069)。
• 长期: 新企业进入，供给右移，最终价格降回原始水平，产量则高于疫情前，利润归零。与真实数据吻合[13]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069)[19]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfof the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero. Each of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly.。
• 图像: 必须要有市场和企业层面图形。

c) 口罩市场是否完全竞争

• 市场特征：价格接受者、同质产品、参与者多、进出自由，和经典模型很吻合[13]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069)[17]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why).。

d) 垄断市场下的需求冲击

• 短期: 需求右移，MR提升，产量增加，MC恒定时价格不变，MC递增时价格上涨，利润提升。
• 长期: 市场无进一步变化（因为垄断）。
• 现实: 不符真实世界数据[12]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2[17]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why).。
• 图像: 必须配垄断图形。

e) 口罩市场是否为垄断市场

• 垄断需要：单一卖家、定价权、进入壁垒。事实上口罩市场没有这些特征[12]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2[17]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why).。

---

第3题：垄断拆分（共6分）

• 自然垄断说明: 当市场规模有限且固定成本极高时，强行拆分只会导致成本升高、福利反降，因此不能提高社会福利[16]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfBreak-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2 Aggressive Passive -10 -5 Aggressive -10 Firm 1 Passive[12]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2。
• 必要点: 解释“自然垄断”原理并通过图像加以说明。

---

第4题：博弈论纳什均衡（共4分）

• 分析模型： 两企业，选择“强势竞争”或“温和竞争”，矩阵给出各自收益。
• 纳什均衡： (Agg, Pass) 与 (Pass, Agg) 是唯一的两个纳什均衡。因为每家企业的最佳反应是选择与对方不同的策略[15]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf-5 Table 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero.[3]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023 Business Economics ECON 8069。
• 解释: 其他策略组合不成立，因为总有人有动力偏离。

---

第5题：经济学的规范性与实证性（共6分）

• 知识点： 经济学作为“实证科学”只说明政策结果，“规范性经济学”才做价值判断。
• 例子/对策： 若目标已知——如政府要最小化死重损失，经济学家就能“推荐”最有效政策[15]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf-5 Table 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero.[3]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023 Business Economics ECON 8069。

---

如需详细某一道题的满分范文、推导过程，或想看具体图形参考，请随时告知！

Below is a detailed English explanation for each exam question in the file ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf with key economic reasoning, logic, and typical answer structure as provided by the marking guide.

---

Question 1: Social Marginal Benefit, Positive Externality, and Policy Tools

a) Example and Concept of Social Benefit ≠ Private Benefit

• Key concept: Sometimes, when a person consumes or produces a good, the benefit (or cost) to society is not the same as the benefit (or cost) to the individual.
• Example: Getting vaccinated against a contagious disease.
  • Private marginal benefit: Only considers the person vaccinated (e.g., avoids sickness).
  • Social marginal benefit: Also includes benefits to others (e.g., lowered spread), which creates a positive externality.
• Definition: This phenomenon is called a positive externality[3]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfsMB D. D q q (a) Constant MEB (b) Increasing MEB Figure 1: Marginal External Benefits a) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine.[4]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfD. D q q (a) Constant MEB (b) Increasing MEB Figure 1: Marginal External Benefits a) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases.[9]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus..

---

b) Constant vs Increasing Marginal External Benefit (MEB) in Graphs

• Figure 2(a): Constant MEB. The vertical distance between the demand curve (private marginal benefit) and the social marginal benefit is always the same, no matter the quantity.
• Figure 2(b): Increasing MEB. The vertical distance increases as quantity increases; that is, the external benefit to society gets bigger the more is consumed[4]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfD. D q q (a) Constant MEB (b) Increasing MEB Figure 1: Marginal External Benefits a) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases.[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument.[9]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus..

---

c) Effect of Price Controls on Total Surplus (Analyzing Figure 2a)

• (i) Price Floor:

  • A price floor sets a minimum price above equilibrium.
  • This causes less of the good to be traded, reducing total surplus.
  • In markets with positive externalities (which already have too little traded), this makes things worse, not better[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument.[9]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus..

• (ii) Price Ceiling:

  • A price ceiling sets a maximum price, discouraging production.
  • Again, this reduces the quantity, further decreasing total surplus.

• Conclusion: Neither tool can increase total surplus because both reduce the number of trades below even the already suboptimal market level[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument.[9]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus..

---

d) Can Taxes or Subsidies Increase Total Surplus?

• (i) Tax:

  • A per-unit tax raises the price for buyers and lowers it for sellers, discouraging consumption and production.
  • This makes the under-consumption caused by positive externality even worse; thus, taxes reduce total surplus[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument.[9]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus..

• (ii) Subsidy:

  • A per-unit subsidy lowers the price buyers pay (increases what sellers receive).
  • This encourages more transactions and moves the outcome closer to the social optimum, thus increasing total surplus.
  • Exception: If subsidy is too large, could cause overconsumption and reduce total surplus.

• Graphs: Including good diagrams can strengthen your answer, but a very clear written explanation can also earn full marks[6]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument..

---

e) Pigovian Subsidy and When It Fully/Partially Solves the Problem

• Constant MEB:
  • A Pigovian subsidy set exactly equal to the Marginal External Benefit (MEB) at the social optimum fully corrects the market failure—no deadweight loss.
• Increasing MEB:
  • Applying the same subsidy (as if MEB were constant) will help, but won't get you all the way to the social optimum.
  • You'll get more consumption and higher total surplus, but still some deadweight loss, because the subsidy isn't large enough at higher quantities[12]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfq q (a) Constant MEB (b) Increasing MEB Figure 2: Marginal External Benefits The Pigouvian subsidy fully internalises the positive externality by providing a per-unit subsidy equal to the MEB at the socially optimal quantity. The size Page 3 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero. Each of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets.[13]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfsMB D D q q (a) Constant MEB (b) Increasing MEB Figure 2: Marginal External Benefits The Pigouvian subsidy fully internalises the positive externality by providing a per-unit subsidy equal to the MEB at the socially optimal quantity. The size Page 3 of 6 - Business Economics (ECON 8069).

---

f) Alternative Methods to Increase Total Surplus

• Standard answer: Coase-style negotiation:
  • External beneficiaries (third parties) pay the consumer/producer to encourage more production/consumption.
  • This works well if transaction costs are low.
• Alternative: Direct government mandates (e.g., require people to get vaccinated) can also increase total surplus if properly justified[18]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.[19]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close..

---

Question 2: Mask Market During the Pandemic (Perfect Competition & Monopoly)

a) Why Did the Pandemic Increase Demand for Masks?

• Concept: The perceived benefit (“marginal benefit”) of wearing masks increased dramatically—greater demand due to higher value placed on the good[18]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.[19]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close..

---

b) Short-run and Long-run Impact under Perfect Competition

• Short-run: Demand (and thus price) jumps up; firms make supernormal profits.
• Long-run: New firms enter, supply increases, price is pushed down again to the minimum average total cost (minATC), eliminating profits, but total market quantity remains higher than before.
• Match to Real World: This perfectly matches what was observed in real markets[18]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.[19]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close..

---

c) Does the Mask Market Resemble Perfect Competition?

• Characteristics: Many sellers, identical (or similar) goods, no entry barriers, and all are price takers.
• Evaluation: Most masks are very similar and entry is easy, so the real market closely fits the perfectly competitive model[11]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why).[17]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCharacteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks.[19]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close..

---

d) Effect of Demand Shock under Monopoly, and Model vs Reality

• Short-run: The monopoly increases quantity (possibly price if MC is rising), and profits go up.
• Long-run: No further change, unlike the competitive case.
• Model vs Reality: Real-world mask markets did not match monopoly predictions—actual behavior was closer to perfect competition (many entrants, falling price after initial spike)[14]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2[17]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCharacteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks..

---

e) Does the Mask Market Resemble Monopoly?

• Monopoly features: One supplier, price makers, high barriers to entry.
• Evaluation: Mask market has none of these features—no monopoly[14]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2[17]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCharacteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks..

---

f) When Would Breaking Up Monopolies Not Improve Welfare?

• Key insight: For a natural monopoly (very high fixed costs, one supplier is most efficient), breaking up into competing firms raises costs, decreasing welfare.
• Example: Utilities like water or electricity, where splitting into several suppliers would just mean duplicated costly infrastructure[14]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2[17]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCharacteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks..

---

Question 3: Game Theory—Nash Equilibrium

• Situation: Two firms; each can be aggressive or passive.
• Payoff Matrix: Aggressive vs Passive leads to big payoffs/losses for each.
• Nash Equilibrium reasoning: For each player, the best move is the opposite of what the other does; you get two Nash equilibria: (Aggressive, Passive) and (Passive, Aggressive).
• Why Not Others: Any other combination allows at least one firm to profit by switching strategies[1]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023 Business Economics ECON 8069[2]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfFind all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069)[8]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfTable 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023.

---

Question 4: Positive vs Normative Economics (Policy Recommendation)

• Positive Economics: Describes “what is”—predicts the effects of policies, but doesn’t make value judgments.
• Normative Economics: Recommends policies, based on value judgments (“what ought to be").
• Key example: If a government goal is given (e.g., minimize deadweight loss), then economists can recommend which policy will best achieve that objective—even within a positive framework[1]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023 Business Economics ECON 8069[2]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfFind all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069)[8]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfTable 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023.

---

If you’d like even more step-by-step sample answers, in-text diagrams, or want to focus on a single question, just let me know!

Certainly! Here is a detailed and fully English explanation and guidance for each main question of the 2023 ECON8069 Mid-Semester Exam, based strictly on the exam marking guide and teaching slides (including all core theory and logic, with clear, step-by-step reasoning and the required economic diagrams).

---

Question 1: Positive Externalities, Policy Analysis, and Pigovian Subsidy

a) Example where Social Marginal Benefit ≠ Private Marginal Benefit [2 marks]

• Key Concept:
  When an individual consumes a good, sometimes the benefit to society is greater than the benefit to just the individual (“private marginal benefit” vs “social marginal benefit”).
• Example:
  Vaccination: The vaccinated individual gets private protection (private benefit), but others in the community also benefit from reduced chances of getting sick (external benefit)—this is a positive externality[76]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus..

---

b) Graphical Interpretation: Constant vs. Increasing Marginal External Benefit [1 mark]

• Constant MEB (Figure 2a):
  The distance (vertical gap) between the demand curve (private marginal benefit) and sMB (social marginal benefit) is the same for all quantities.
• Increasing MEB (Figure 2b):
  The gap is wider at larger quantities—as production/consumption increases, the external benefit also increases[76]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus.,[72]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument..

---

c) Price Controls and Total Surplus [3 marks]

• Price Floors:
  Cannot increase total surplus. A price floor sets a minimum price, causing even less of the good to be consumed in a market already suffering from under-consumption. This makes the deadweight loss even larger[77]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ],[72]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument..
• Price Ceilings:
  Also cannot increase total surplus. A price ceiling sets a maximum price, discouraging production. It makes the supply-side even weaker, resulting in a lower quantity produced than the social optimum[77]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ],[72]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument..
• Summary:
  Neither price floor nor price ceiling can increase total surplus when positive externalities exist.

---

d) Taxes/Subsidies and Total Surplus [4 marks]

• Tax:
  Will reduce total surplus further because it decreases consumption and production, deepening the underprovision problem[77]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ],[72]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument..
• Subsidy:
  Can increase total surplus because it increases the quantity traded/consumed, moving closer to the social optimum.
  Caveat: An oversized subsidy could, in extreme cases, create overprovision and thus new deadweight loss.
• Graph:
  A clear graph is helpful but not strictly required if your written answer is very precise[79]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf(ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ] $ $ S S sMB m* m . *.

---

e) Pigovian Subsidy in Markets with Different MEB Forms [5 marks]

• Pigovian Subsidy:
  This is set equal to the marginal external benefit ($ MEB $) at the socially optimal quantity[$ m^* $].
• Figure 2(a) (Constant MEB):
  A subsidy of size $ m^* $ achieves the social optimum and fully corrects the market failure.
• Figure 2(b) (Increasing MEB):
  Applying a constant subsidy of $ m^* $ increases quantity, consumer and producer surplus, and total surplus. However, it does not fully close the deadweight loss because the external benefit grows with output; a larger subsidy would be needed at higher output for true optimization[74]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfof the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero. Each of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly.,[80]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfq q (a) Constant MEB (b) Increasing MEB Figure 2: Marginal External Benefits The Pigouvian subsidy fully internalises the positive externality by providing a per-unit subsidy equal to the MEB at the socially optimal quantity. The size Page 3 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero. Each of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets..

---

f) Alternative Method for Total Surplus Increase [2 marks]

• Coase Bargaining:
  The affected third party (those who gain from the external benefits) can negotiate directly with buyers or sellers, offering payment to encourage them to increase production.
• Government Mandates:
  As an alternative, regulations may require or incentivize people to consume/produce more of the good, properly explained[67]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.,[68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069),[71]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close..

---

Question 2: Mask Market, Demand Shock, Perfect Competition & Monopoly

a) Why did Demand for Masks Rise? [1 mark]

• The pandemic increased the marginal benefit of wearing a mask, shifting the demand curve right[68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069),[71]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close..

---

b) Competitive Market: Short-run and Long-run Impact [4 marks]

• Short-run:
  Sudden increase in demand pushes equilibrium price and quantity up. Firms earn profits as price rises above $ minATC $.
• Long-run:
  New entrants are attracted by profits, supply increases, price falls back to $ minATC $, and profit returns to zero. Quantity traded remains higher than pre-shock.
  This matches actual real-world dynamics.
• Diagrams:
  Marking guide insists on: (1) market-level supply-demand, and (2) firm-level cost/revenue curves[68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069),[71]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close..

---

c) Is the Mask Market Perfectly Competitive? [2 marks]

• Characteristics to consider: Many firms, identical/similar goods, free entry/exit, price-taking behaviors.
• Mask market fits these well: many competitors, little product differentiation, and mostly price-taking. [Comment: Small differences due to mask type quality do exist but not enough to break the basic model validity][68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069).

---

d) Monopoly Mask Market (Short/Long-Run and Reality Check) [4 marks]

• Short-run:
  Demand shock increases marginal revenue and output, possibly price (if MC rising). Profits go up for the monopolist.
• Long-run:
  No further change—monopoly persists, unlike in perfect competition.
• Evaluation:
  This scenario does not fit the actual pandemic mask market, which instead saw prices fall as competitors entered[65]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M.,[70]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2.

---

e) Is the Mask Market a Monopoly? [1 mark]

• Monopoly features: One firm, price-maker, high entry barriers.
• Reality: The mask market does not have these. Many suppliers, easy entry, not a monopoly[65]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M.,[70]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfd) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2.

---

Question 3: When Monopoly Break-up Won’t Improve Welfare [6 marks]

• Key Concept:
  If the monopoly is a natural monopoly—with very high fixed costs and large economies of scale—splitting into smaller competing firms raises average cost and reduces efficiency.
• Graph Required:
  Draw ATC curve declining over entire market, showing one firm is most efficient (lowest cost per unit).
• Explanation:
  “Natural monopoly” is most efficient when one supplier serves the market. Breaking up would duplicate fixed costs, reducing social welfare[73]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfBreak-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M. Firm 2 Aggressive Passive -10 -5 Aggressive -10 Firm 1 Passive.

---

Question 4: Strategic Interaction—Nash Equilibrium [4 marks]

• Payoff matrix:
  • If both firms play aggressively, both earn $-10M$.
  • If one is aggressive, other passive: aggressive wins $5M$, passive loses $5M$.
• Best responses:
  Each firm's best strategy is always to do the opposite of the other firm.
• Result:
  TWO Nash equilibria: (Aggressive, Passive) and (Passive, Aggressive).
• No other Nash exists because any other pairing has at least one player who wants to deviate[69]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfTable 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023,[75]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf-5 Table 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero.,[78]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfAggressive Passive -10 -5 Aggressive -10 Firm 1 Passive -5 Table 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069).

---

Question 5: Positive vs Normative Economics (Policy Advice) [6 marks]

• Positive Economics:
  Describes factual consequences, i.e., “what will happen if...”
• Normative Economics:
  Involves value judgments, i.e., “what ought to be done.”
• Synthesis for exam:
  Economics can recommend policy only if the societal goals are stated (for example, minimizing deadweight loss). Then, demonstrating which approach achieves that aim best is still a positive analysis—but the value (goal) comes from society’s preferences[66]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfFind all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069),[75]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf-5 Table 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero..

---

Graphs and clear logical steps are essential for top marks—especially for questions involving market diagrams, cost curves, and game matrices. If you need example diagrams or want to see “model answers” for any specific question with all working, tell me which parts you'd like in more detail!

根据你的四个文档及期中考试官方评分指南，这里给出2023年ECON8069期中考试主观题全套详细中文讲解与作答思路，涵盖所有核心概念、逻辑推导和答题细节，每个步骤都清晰解释：

---

第一题：正外部性、政策分析与庇古补贴

a) 举例解释社会边际收益不等于私人边际收益的情形（2分）

• 核心概念：
  某些商品或服务的消费，不仅对个人有好处，还能让其他人受益，即社会边际收益（sMB）高于私人边际收益（pMB）。
• 例子：
  疫苗接种。个人接种疫苗后，自己获得免疫（私人收益），同时也减少传染他人的风险，间接让社会其他成员受益（社会收益）——这叫做正外部性[76]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfD. D q q (a) Constant MEB (b) Increasing MEB Figure 1: Marginal External Benefits a) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases.。

---

b) 图形解释：恒定与递增边际外部收益（1分）

• 恒定MEB（图a）：
  需求曲线（pMB）与社会边际收益曲线（sMB）之间的垂直距离在所有产量上保持不变。
• 递增MEB（图b）：
  随着产量的提升，两者间的垂直距离不断扩大，即外部性效益随消费量增加而上升[76]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfD. D q q (a) Constant MEB (b) Increasing MEB Figure 1: Marginal External Benefits a) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases., [67]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfb) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument.。

---

c) 价格管制对总剩余的影响（3分）

• 价格下限（Price Floor）：
  设定最低价导致有效交易量下降，本来就存在交易量不足的问题会变得更严重，使总剩余减少[73]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfa) [2 marks] Give a brief example of an instance where the marginal benefit to society (the social marginal benefit) may be different from the private marginal benefit (the benefit the accrues to the person consuming the good or service). What do we call this phenomenon? This is a positive externality. Any example is fine. b) [1 mark] Explain why Figure 2(a) is illustrating constant marginal external benefit, while Figure 2(b) is showing increasing marginal external benefit. Marginal external benefit is the gap between Demand (private marginal ben- efit) and sMB (scoial marginal benefit). In Figure 1(a), this gap is constant, while in Figure 1(b) the gap is increasing as quantity increases. c) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus., [75]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ]。
• 价格上限（Price Ceiling）：
  设定最高价会减少生产激励，也导致交易量降低，使总剩余减少。
• 总结：
  不论是上限还是下限，都会降低总剩余，为错误政策。[75]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ], [20]Source: ECON8069期中复习课-2.pdfPrice Ceiling Demand 1 Shortage Qo QD Quantity Examples: Masks, prescription drugs. The price-ceiling diverts the quantity from the efficient outcome. Text books Price Surplus Supply Price Floor Po Demand Quantity QD Q0 Qs Examples: Minimum wage, European wheat price, Chinese rice price. The price-floor distorts the quantity from the efficient outcome HD Education付费资料,仅供本人使用,禁止外传,侵权必究。 47bu5f63a31461b951e c246796 Q HD. EDUCATION 5. 1. Price Ceilings & Price Floors Welfare analysis In every case, the Total Surplus will necessarily fall. Before With Ceiling Change

---

d) 税/补贴与总剩余（4分）

• 征税：
  进一步减少交易量，只会加剧正外部性产品的供给不足，总剩余下降[75]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ]。
• 补贴：
  可以提升交易量，使经济运行更接近社会最优点，总剩余提高（但补贴过大则可能造成另一个“过度”问题）。
• 建议：
  作答时如能加上规范的供给需求图，分数更高[75]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfc) [3 marks] In an attempt to increase Total Surplus in this market, the govern- ment is considering implementing price controls. For this question, focus your analysis on Figure 2(a). (i) Can a price floor be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a price ceiling be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a price floor cannot increase total surplus in this market. A price floor introduces a minimum price that can be charged in a market. This disincen- tivises consumption of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) No, a price ceiling cannot increase total surplus in this market. A price ceiling introduces a maximum price that can be charged in a market. This disincentivises production of the good, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underproduction relative to the social optimum, reducing production will only decrease total surplus. Page 2 of 6 - Business Economics (ECON 8069) In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. d) [4 marks] Suppose instead the government wants to increase total surplus by implementing a tax or subsidy. For this question, focus your analysis on Figure 2(a). (i) Can a per-unit tax be used to increase total surplus? If it can, show how; if not, explain why not. (ii) Can a per-unit subsidy be used to increase total surplus? If it can, show how; if not, explain why not. (i) No, a tax cannot be used to increase total surplus. A tax reduces the price paid to sellers, and increases the price paid by buyers, and so disincentivises consumption and production, and so reduces overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is under- consumption relative to the social optimum, reducing consumption will only decrease total surplus. (ii) Yes (finally), a subsidy can be used to increase total surplus. A subsidy reduces the price paid by buyers, and increases the price paid to sellers, and so incentivises consumption and production, and so increases overall trade in the good. As the market-equilibrium outcome of a good with a positive externality is underconsumption relative to the social optimum, increasing consumption may increase total surplus. [Remark: A very large subsidy may still reduce total surplus if the subsidy is truly massive. ] In both cases a graph is helpful, but not strictly required. To achieve full marks without a graph would require an extremely clear and detailed argument. e) [5 marks] A Pigouvian tax/subsidy is the tax/subsidy which maximises Total Surplus. Let m* be the size of the Pigouvian tax/subsidy in the market shown in Figure 2(a). What happens if a tax/subsidy of size m* is applied in the market shown in Figure 2(b)? [Assume both graphs are to scale. Your analysis should discuss any changes to prices and quantities, Consumer, Producer, and Total Surplus, any remaining DWL if any. ], [79]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M.。

---

e) 庇古补贴对不同外部性的作用（5分）

• 恒定MEB场景：
  给每单位产品的补贴等于最优产量下的边际外部效益（m*），即可完全矫正外部性，实现社会最优。
• 递增MEB场景：
  此时同样的补贴金额（m*）会比原先更接近社会最优，但由于外部性随数量递增，依然还有死重损失，完全纠正需要更高补贴。相比市场均衡，价格下跌、交易量增多，消费者与生产者剩余都上升，但仍达不到最优[77]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfq q (a) Constant MEB (b) Increasing MEB Figure 2: Marginal External Benefits The Pigouvian subsidy fully internalises the positive externality by providing a per-unit subsidy equal to the MEB at the socially optimal quantity. The size Page 3 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero. Each of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets., [78]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfof the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero. Each of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly.。

---

f) 提高总剩余的其他方法（2分）

• 科斯协商：
  通过受益第三方直接支付补偿，激励生产者提供更高数量；前提是交易成本低。
• 强制要求：
  政府强制权力下令要求/鼓励更多生产或消费，只要论证充分也可得分[68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close., [66]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfCoase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close. Page 4 of 6 - Business Economics (ECON 8069), [71]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.。

---

第二题：口罩市场—需求冲击、完全竞争与垄断对比

a) 疫情为什么提高口罩需求？（1分）

• 答案：
  疫情让人们对佩戴口罩的边际效用显著上升，带动需求曲线整体右移[68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close., [71]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.。

---

b) 完全竞争市场的短期/长期冲击分析（4分）

• 短期：
  需求激增推高价格和交易量，企业获得超额利润（P > minATC）。
• 长期：
  新企业进入，行业供给右移，价格再次下降回minATC，市场交易量高于疫情前，超额利润归零。
  该动态完全符合现实口罩市场情况。
• 必须画图：
  答案一定要画“市场”和“企业”两个图，分别展现实物品价格变化与企业利润变化[68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close., [71]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.。

---

c) 口罩市场是否贴合完全竞争特征？（2分）

• 分析思路：
  1. 多个生产者，商品同质且可自由进出；2. 企业与消费者为价格接受者
     结论：
     口罩市场极度吻合完全竞争的基本特征——竞争充分，有少量品质差别但整体不影响模型推断[68]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdff) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market. Characteristics of a perfectly competitive market are price-taking firms and consumers, identical goods, many producers, and free entry and exit of firms. This matches the mask market quite well. There are lots of firms, which end up selling for about the same price - there is some variation between masks, so it's not exactly right, but is pretty close., [71]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfEach of these should be shown on the graph for market (b). f) [2 marks] Briefly discuss an alternative method which may increase total surplus in these markets. Coase-style negotiation is the standard answer here. The effected third-party can negotiate with the buyers and/or sellers to make side-payments to convince them to increase production. Government Mandates is also an acceptable answer is properly explained. 2. [12 marks] Over the course of the pandemic, mask prices (and quantities sold in Australia have followed a pattern of (i) Pre-Pandemic - low prices and low quantity, (ii) Early Pandemic - high prices and low-moderate quantity, and (iii) Late Pandemic - low prices and high quantity. (We are now in an 'endemic' stage for Covid, you do not need to consider this stage in your answers. ) a) [1 mark] Explain why the pandemic caused an increase in demand for masks. Increasing marginal benefit (for obvious reasons). b) [4 marks] Assume the mask market is a perfectly competitive market, and that the market was hit by the initial shock as in part (a). Perform a short- run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real-world observations. GRAPHS are absolutely required here. Students must provide a market-level and a firm-level diagram to be investigate the effects of the shock. The ef- fects of the shock are: Short-Run: Demand pushes up/right, market price and quantity increase, price is pushed above minATC, and firms make positive profit. Long-Run: Positive profit drives firm entry, firm entry pushes Supply to the right, driving down price, this process continues until price returns to mi- nATC; ultimately price returns to original price, but at much higher quantity, and profit returns to zero. This follows the dynamics seen in the real-world exactly. c) [2 marks] In your opinion, to what extent does the market for masks have the characteristics of a perfectly competitive market.。

---

d) 垄断市场下的需求冲击及与现实的对比（4分）

• 短期：
  需求曲线右移，MR提升，产量增加，若MC递增则价格也会上升，垄断利润增加。
• 长期：
  市场无进一步变化（没有新企业进入），和完全竞争不同。
• 对比现实：
  实际上疫情期间口罩市场并非垄断，价格最终回落，新企业大量进入[79]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M., [70]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfWriting Time: TWO Hours, 15 Minutes Permitted Materials: Non-programmable Calculator Answer all questions using pen (or pencil) and paper. Answers written on a tablet or computer will not be marked. Answers are expected to be succinct but complete. Answers that are too long or irrelevant will be penalized. All answers must be explained, even if this is not explicitly requested. Diagrams are often useful to illustrate your solutions, even if they are not explicitly requested. Questions are not worth equal marks. Page 1 of 6 - Business Economics (ECON 8069) 1. [17 marks] Consider the graphs in Figure 2 below. On these graphs D is a demand curve, S is a supply curve, and sMB is a Social Marginal Benefit curve. $ $ < S S sMB。
• 必须画垄断图形！

---

e) 口罩市场是否属于垄断？（1分）

• 答案：
  显然不是。完全不存在“唯一卖家、定价权、高进入壁垒”等垄断要素，实际是高度竞争市场[79]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M.。

---

第三题：何时拆分垄断不提高福利？（6分）

• 核心概念：
  当垄断属于自然垄断（巨额固定成本，规模经济显著），拆分会使所有企业单位成本提高，反而削弱运作效率。
• 标准作答结构：
  1. 画出平均总成本（ATC）曲线随产量递减的典型图像
  2. 解释为什么全市场只由一家企业生产能使成本最小，拆分后每家企业规模变小、平均成本上升，社会福利下降[79]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 4 of 6 - Business Economics (ECON 8069) d) [4 marks] Assume now that the market for masks is a monopoly, and that the market was hit by the initial shock as in part (a). Perform a short-run and long-run analysis of the effect of this shock on the market for masks. Evaluate to what extent the predictions of the model accord with the real- world observations. GRAPH is absolutely required here. Students must provide a monopoly graph - ideally with the monopolist being profit-making prior to the shock. Most student will have constant MC; this is easiest and fine to assume, but also fine to not assume. The effects of the shock are: Short-Run: Demand pushes up/right, this in- creases Marginal Revenue, monopoly quantity increases; with constant MC, the monopoly price does not actually change, but with increasing MC the monopoly price increases; monopoly profits increase. Long-Run: No further change. This does not at all match the dynamics observed in the real world. e) [1 mark] In your opinion, to what extent does the market for masks have the characteristics of a monopoly. Characteristics of a monopoly market are price-making firms, price-taking con- sumers, one firm, and significant barriers to entry. I would argue that the mask market has none of these features. 3. [6 marks] The early 20th Century saw a substantial push from governments to break-up monopolies into smaller entities which then compete with each other. De- scribe circumstances where this break-up would not lead to increased social welfare (and why). Break-up of monopolies will not lead to improved welfare outcomes when monopolies are natural monopolies. This can happen when fixed costs are very high relative to the total market size. Students will need to explain this carefully, and provide an appropriate graph to obtain full marks. 4. [4 marks] Two firms are competing in a market (strategically). Each firm can either compete aggressively, or can compete passively. The payoffs (in millions of dollars) for each firm for each of the possibilities are given in Table 1. For example, if Firm 1 is Passive, and Firm 2 is Aggressive, then Firm 1 loses $5M, and Firm 2 gains $5M.。

---

第四题：博弈论—纳什均衡（4分）

• 题设：
  两企业，各自可选择“强硬竞争”或“温和竞争”；表格给出不同策略组合下的收益。
• 做法：
  很明显每家企业的最优对策就是做和对方相反的选择。
• 结论：
  唯一纳什均衡就二个：(Aggressive, Passive) 和 (Passive, Aggressive)
  其余组合都有人有动力改变自己策略。
• 评分标准：
  指出最佳反应，证明为何其他不是纳什[61]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023 Business Economics ECON 8069, [63]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfFind all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069), [64]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfTable 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023, [80]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf-5 Table 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero.。

---

第五题：正/规范性经济学与政策建议（6分）

• 正向经济学：
  研究“政策会带来什么后果”，不涉及价值判断。
• 规范性经济学：
  基于价值判断（比如应该做什么），直接推荐政策。
• 标准答法：
  如果政府目标已给定（如想最小化死重损失），经济学家就可以通过正向分析判断哪种工具更达目标（比如对付负外部性时建议征税而非补贴），推荐具体政策。否则，仅仅描述不同选择的后果[61]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfPage 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023 Business Economics ECON 8069, [63]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfFind all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069), [64]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdfTable 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) Australian National University Mid-Semester Examination, Short Answer Section - April 2023, [80]Source: ECON8069 Mid-Semester Exam 2023 Marking Guide.pdf-5 Table 1: Payoff Matrix Page 5 of 6 - Business Economics (ECON 8069) Find all Nash Equilibria of this strategic interaction. [In your answer, you will need to explain how you found these, and why no other strategy profile is a Nash Equilibrium. ] From the payoff table, we have that the best response for each player is to play the opposite of what their opponent does. Each player should be aggressive if their opponent is passive and passive if their opponent is aggressive. This results in TWO Nash Equilibria, at (Agg, Pass), and (Pass, Agg). Other strategy profiles are not Nash Equilibria as firms have an incentive to deviate. 5. [6 marks] Discuss the following claim: Given two public policy options, economics can give us insight into what will happen under each policy, but does not recommend one policy over the other. Students should discuss Positive vs Normative economics; full mark anwers will typically include a simple example. Strict positive economics would only discuss 'what would happen', but normative economics is happy to recommend one policy over another. In addition, if there is a background idea of what the policies are trying to achieve, then it may be possible to recommend policies even in a Positive framework. E. g. If facing a negative externality, and knowing that the government ants to minimise the DWL of this externality, an economist might recommend a tax rather than a subsidy (because one will achieve the governments stated goals). Page 6 of 6 - Business Economics (ECON 8069) of the Pigouvian subsidy in market (a) is shown in Figure 2(a). As Market (b) has an increasing MEB, it would require a larger subsidy than m* to obtain the social optimum quantity. The effect of an application of a subsidy of size m* is shown in Figure 2(b). Relative to the market-equilibrium, the price buyer's pay has fellen, the price seller's receive has increased, quantity traded has increased, CS, and PS have increased, Total Surplus has increased, Deadeight Loss has shrunk, but remains greater than zero.。

---

如需要每道主观题的示范满分作答，推导公式，详解图形，请细化说明题号，我可以帮你一题一题地写出更详细解答和标准作业范文。