# Economics excercises that need to be answered

Requirements

Nature: Individual assignment.

Format: Topic Specific exercises

Word length: No more than 3,000 words for individual assignments. That is no more than 1,000 words per case study. Diagrams are not part of the word count.

Topic Specific Exercises: There are 3 exercises set out below. Use diagrams wherever possible in your answers.

Assessment criteria

” Understanding of economic theory and principles, and the ability to use theoretical concepts to analyze and interpret the problem.

” Clarity of expression, including accuracy of terminology used

” Overall presentation of the assignments and communication of ideas

Resources needed for reference

” McTaggart D., Findlay C. and Parkin M., 2006, Economics, Updated 4th edn, Pearson-Addison Wesley

” Hatch J, Snelling J and Cowie J 2005, Reading Between the Lines, Frenchs Forest, NSW, Pearson Education Australia

Question 1

We have been given the following estimates of the values of the short-run cross-price and cross-time elasticities of demand for car travel:

” With respect to rail fares: 0.20

” With respect to bus fares: 0.01

” With respect to bus in-vehicle times: 0.30 (off-peak) and 0.40 (peak) This refers to the time spent on the actual bus trip. As it says in the question, The cross-time elasticities of demand for car travelThat is, the demand for car travel in response to changes in the amount of time spent on the bus trip.

a) Do these cross-price elasticity estimates imply that car and public transport travel are substitutes or complements? Explain by referring to the definition of the cross-price elasticity of demand.

b) The elasticity of the demand for car travel is very low with respect to changes in bus fares. Why might this be the case? (Note the period of time involved).

c) How would you interpret the cross-time elasticity of demand for car travel with respect to bus in-vehicle travel, why is it positive, and why is the elasticity higher for peak times compared to off-peak times? Does it surprise you that the responsiveness of the demand for car travel is greater with respect to bus in-vehicle time than to bus fares? Explain your answer.

d) Are bicycle and bus travel likely to be substitutes or complements? What would be the effect on demand for urban bus travel of construction of new bike paths to central city areas? What elasticity measures might be relevant when trying to measure the responsiveness of demand for bus travel to changes in these conditions for cyclists?

Question 2

Suppose that Telstra replaces human telephone operators with computers that lower the total cost but increase the fixed cost:

a) Sketch and compare the total cost curves for the original technology that uses human operators.

b) Sketch and compare the average cost curves for the original technology that uses human operators

c) Sketch and compare the marginal cost curves for the original technology that uses human operators

d) Sketch and compare the total cost curves for the new technology that uses computers

e) Sketch and compare the average cost curves for the new technology that uses computers

f) Sketch and compare the marginal cost curves for the new technology that uses computers

g) For a telephone company whose output is small, with which technology is it more likely to be efficient?

h) How would you advise a telephone company as to whether it should use human operators or computers?

Question 3

The Smith s Snackfood Company is owned by PepsiCo, makers of Pepsi cola. In the United States, Pepsi launched what is called  The Power of One strategy, which was designed to promote the joint sales of soft drink and snackfood. Pepsi, unlike Coke, owns companies which produce a range of both products. The strategy included locating Pepsi products adjacent to each other on supermarket shelves.

a) Do you agree that, from Pepsi s point of view,  The Power of One has advantages? Do you see evidence of this approach in Australia, either in the aisles of supermarkets or at the ends of aisles?

b) How would you expect Coke to respond to PepsiCo s initiative? What is likely to be the result of the interaction between the companies in relation to the marketing of complementary products?

c) Given your answers to parts (a) and (b), would you suggest that this approach is a good strategy for an oligopolist to apply?

d) If you were a supermarket owner, how would you respond to PepsiCo asking you to devote a lot of shelf space to a group of their products?