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ECON10004: INTRODUCTORY MICROECONOMICS

Question 1
Read attachment 1. The attachment describes a novel method of grading assignments automatically using computers, as compared to the traditional method where teachers/professors grade each student’s essay by hand.
a) What do you think would be the main inputs used in each method of grading essays? (1 mark)
b) What is the relative importance of fixed costs and variable costs associated with each method of grading essays? How is the marginal cost likely to vary with the number of essays graded in each method of grading essays? (2 mark)
c) Draw a graph showing how you think the short-run average total cost will vary with the number of essays graded in each method. (1 mark)
d) According to the article, aside from costs, what are some arguments in favour or against the two methods of grading essays? (1 mark)
Question 2
Read attachment 2.
a) Consider a firm which is deciding between sending its employees to business schools for training and providing the training in-house. How do you think the short-run average total cost of training employees compare between the two approaches? (2 marks)
b) Suppose you are the manager of a firm and your primary concern is to reduce costs for your firm. What approach would you take if you are intending to train a small number of employees? What approach would you take if you are intending to train a large number of employees? Draw a diagram showing how your decision depends on the number of employees you have working in your firm. (1 mark)
c) According to the article, what are some other considerations for a firm that is deciding between providing the training of its staff in-house and sending its employees to business schools? (1 mark)
Question 3
Read attachment 3a and 3b.
a) Consider attachment 3a. Explain why intervention by WHO (World Health Organization) is necessary to solve the problem identified in this article. What is the market failure discussed in the article? (1 mark)
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b) Consider attachment 3b. What is the external effect associated with a passenger’s reclining of his/her seat? Is there a market failure in this example? If so, what is the market failure? (1 mark)
c) What is the solution suggested in the article for this market failure? In your opinion, how likely is this solution to work in reality? (2 marks)
d) Does the solution suggested in the article depend on who owns the ‘reclining rights’? Explain. (1 mark)
Question 4
Read attachment 4. Assume that the market for hawker food is perfectly competitive.
a) Consider the case without any government subsidies and suppose the market is initially in a long-run equilibrium. Illustrate the long-run equilibrium using diagrams. (1 mark)
b) Suppose that the government decides to provide a subsidy to all firms on their monthly rent. Firms sign an annual contract for the rent they pay. How does the subsidy affect the fixed and variable costs of the firms? What is the impact of the subsidy on the firms in this market and on the price of hawker food in the short run and in the long run? Illustrate your answer using diagrams. (3 marks)
c) Suppose now that there are two types of producers in the market for hawker food: those that pay the government-subsidized rent rates and those that do not. Assume that these two groups of producers face the same costs otherwise. Moreover, assume that there is a high demand for hawker food and the equilibrium is such that both types of firms participate in the market. How much profit will the firms be making in the long-run equilibrium? Illustrate using diagrams. (2 marks)
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ATTACHMENTS
Attachment 1
‘Imagine taking a college exam, and, instead of handing in a blue book and getting a grade from a professor a few weeks later, clicking the “send” button when you are done and receiving a grade back instantly, your essay scored by a software program …. The software uses artificial intelligence to grade student essays and short written answers, freeing professors for other tasks…. Anant Agarwal, an electrical engineer who is president of EdX, … said the technology would offer distinct advantages over the traditional classroom system, where students often wait days or weeks for grades…. But skeptics say the automated system is no match for live teachers…. Computers cannot ‘read.’ They cannot measure the essentials of effective written communication: accuracy, reasoning, adequacy of evidence, good sense, ethical stance, convincing argument, meaningful organization, clarity, and veracity, among others…. The EdX assessment tool requires human teachers, or graders, to first grade 100 essays or essay questions. The system then uses a variety of machine-learning techniques to train itself to be able to grade any number of essays or answers automatically and almost instantaneously. The software will assign a grade depending on the scoring system created by the teacher, whether it is a letter grade or numerical rank. It will also provide general feedback, like telling a student whether an answer was on topic or not….’
(‘Essay-grading software offers professors a break’, The New York Times, 4 April 2013)
Attachment 2
‘Firms looking to put their managers through development programmes are increasingly creating their own, rather than relying on business schools, consulting firms and the like. Companies are not only spending more of their training budgets in-house but are setting up their own “corporate universities”. The idea is not new. General Electric is considered to have opened the first corporate university, in 1956. Perhaps the most famous is McDonald’s “Hamburger University”…. Unlike conventional universities, they tend to focus more on practice than theory, and they rarely hand out degrees…. Corporate universities have two distinguishing features: the first is a dedicated facility, whether built of bricks or housed online; the second is a curriculum tailored to the company’s overarching strategy…. Having training and development under the auspice of a central, in-house facility makes it easier to focus on its distinct needs. Business schools … can be too standardised…. Although there are many good reasons for firms to invest in corporate universities, they have their limitations…. Managers who go to a university business school are exposed to ideas from peers in other companies…. And students can safely ask awkward questions without the risk of this affecting their careers….’
(‘Keeping it on the company campus’, The Economist, 16 May 2015)
Attachment 3a
‘The problem is global and affects common infections and many antibiotics…. Antibiotic resistance could set medicine back a century, to a time when infections often led to amputations, says Carmem Pessoa da Silva, a doctor involved with the WHO report…. A fast rate of reproduction, and the ability to pass genes among themselves, mean bacteria evolve quickly. Misuse of antibiotics is speeding things up further. Patients often fail to take their full treatment course. That makes it less likely that their infections are completely cleared, which leaves alive the bacteria with greater resistance…. Overuse of antibiotics—patients taking them for illnesses where they are ineffective, and farmers feeding them to animals to promote growth—increases the pool of resistant bacteria even more. A recent move to cut farmers’ use of antibiotics in America, where as much as four-fifths of all antibiotics (by
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weight) are fed to animals, should help—though exempting use for veterinary purposes leaves a loophole. And member states are expected to ask the WHO to develop a global plan to tackle antibiotic resistance at its annual meeting in May. If such a plan is to work, it will have to monitor health systems in developing countries, where antibiotics are also commonly misused….’
(‘The drugs don’t work’, The Economist, 3 May 2014)
Attachment 3b
‘When you buy an airline ticket, one of the things you’re buying is the right to use your seat’s reclining function. If this passenger so badly wanted the passenger in front of him not to recline, he should have paid her to give up that right…. That is, I own the right to recline, and if my reclining bothers you, you can pay me to stop. We could (but don’t) have an alternative system in which the passenger sitting behind me owns the reclining rights. In that circumstance, if I really care about being allowed to recline, I could pay him to let me….’
(‘Don’t want me to recline my airline seat? You can pay me’, The New York Times, 27 August 2014)
Attachment 4
‘The main problem is that Singaporeans have grown used to paying prices that the market can no longer bear. When the government moved the first generation of hawkers off the streets and into fixed locations with electricity, clean running water and regular hygiene inspections, it kept rents artificially low as an incentive. Roughly half of the 6,258 government-managed stalls pay rents as low as S$160 ($120.80) a month. The other half, however, must pay market rates, which can exceed S$4,100 a month. These stallholders must compete with each other…. But with the first generation of hawkers retiring and their replacements paying market rents, food prices will certainly rise….’
(‘How much longer can they satay’, The Economist, 16 May 2015)
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Part B – Case study (10 marks) (500 words)
Choose some aspect of economic activity, and show how a concept or theory we have studied can be used to understand what happens in that situation, and/or to make policy recommendations on how social welfare could be improved through some type of intervention.
I encourage you to discuss your proposed topic for the case study with your tutor. Possible topics for case studies might be:
• Using the model of perfectly competitive markets to explain price changes that have occurred, or to analyse the effects of some type of market intervention;
• Using the concept of incentives to explain behaviour by market participants;
• Using the concepts of surplus to analyse the effect on society’s well-being of a government policy; or
• Use the theory of market power to analyse or explain prices.
To show in more detail how to go about doing a case study, we will post some examples of excellent case studies from previous years. There is also a variety of books that illustrate (in differing amounts of detail) the idea of a case study that you could consult:
The Economic Naturalist by Robert Frank
Freakonomics by Stephen Dubner and Steven Levitt
In the case study you should:
• Introduce the aspect of economic activity that you will analyse;
• Briefly describe the theory or concept you will use in the case study;
• Most importantly, apply the concept or theory to analyse the aspect of economic activity you’ve chosen; and
• Provide any concluding remarks.
Four main factors will be considered in marking your case study:
a) Knowledge of economic concepts – For example: Has the answer used the appropriate economic concepts? Does the answer show a thorough understanding of those concepts?
b) Quality of analysis and application of economic concepts – For example: Is there a logical and thorough supporting argument or description of how conclusions have been drawn? Have economic concepts been applied in an effective manner in the particular application? Are assumptions clearly described? Is an understanding shown of any relevant qualifications to the conclusion?
c) Presentation – For example: Are the writing style and organisation of material such that the main ideas and arguments can be understood? Are diagrams presented clearly and effectively integrated with text?
d) Research – Have examples been chosen that have taken some effort to find? What is the quality of evidence supporting arguments that are made?

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ECON10004: INTRODUCTORY MICROECONOMICS
Hints for doing Part B of Assignment 2
• The objective of the case study is for you to choose some aspect of economic activity, and to show how a concept or theory we’ve studied can be used to understand what happens in that situation, and/or to make policy recommendations on how social welfare could be improved through some type of intervention.
• In terms of structure, in the case study you should:
a. Introduce the aspect of economic activity that you will analyse;
b. Briefly describe the theory or concept you’ll use in the case study;
c. Most importantly, apply the concept or theory to analyse the aspect of economic activity you’ve chosen; and
d. Provide any concluding remarks.
• It is a good idea to start by posing a question. Usually your essay will be of higher quality if you start with a question of interest to you. For example, if you are interested in sports, start with a question on the AFL. If you are interested in movies, pose a question related to the movie industry.
• It is a good idea to have an initial discussion with your tutor about the question you have picked.
• In the table below, I provide a list of sample questions. One of our tutors suggested checking out the website of the Economics Student Society of Australia (ESSA) for further interesting examples.
• Avoid using any of the examples we already talked about in class or that are discussed in the textbook.
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Topic
Economic concept/theory
Application
Is it better to pay HECS up-front or as debt?
Opportunity cost
Compare opportunity cost of paying up-front versus paying by debt – for example, include interest foregone when pay up-front
Do we spend enough time in our gardens?
Cost/benefit
Externality
Compares opportunity cost of spending time in garden against private benefits (for example, increase in property value).
Suggests that spillover benefits to value of nearby houses is a positive externality => Each household will not spend enough time in its garden.
Why are the prices of venomous snakes increasing in reptile pet industry, while prices of pythons and other non-venomous snakes are decreasing?
Supply/Demand
Increase in demand for venomous snakes/Decrease in demand for non-venomous snakes
Price inelastic supply of venomous snakes
Why are taxi licenses so expensive but taxi drivers’ wages so low?
Supply/demand
Government regulation
Government quota on taxi licenses increases price of taxi services and profits, and hence how much willing to pay for a license.
Relatively high supply of potential drivers compared to demand => Low wages
Why does Melbourne University use an online tutor?
Opportunity cost
Public good
Online tutor is public good => Needs to be established by ‘central planner’
Permanence of online posts means that opportunity cost of an online tutor is lower than opportunity cost of pitstop tutorials
Why did News Corp create the free daily newspaper mX?
Fixed cost/Marginal cost
Profit maximisation
High FC/Low MC => Can give away and cover costs as long as get revenue from advertising
Profit maximising to have as large readership as possible to promote advertising
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Why regulate/advertise about adverse health effects of junk food?
Externality
Excessive consumption of junk food => Poor health outcomes => Imposes external cost on rest of society via use of health system => Consumption of junk food greater than socially optimal => Need to regulate
Why are salary caps implemented in sporting competitions?
Supply/Demand
Externality
In free market salaries of players should reflect their talent. Will mean that rich clubs can buy more talent than poor clubs. A rich club buying all the good players imposes negative externality on other clubs by reducing competitive balance in the competition. Hence need to regulate the labour market to ensure an even distribution of playing talent.
Why ending solar panels rebate will cause job loss in that industry?
Supply/Demand
Subsidy
How removing a subsidy will cause a decrease in quantity traded in that market (and hence job losses). How this depends on price elasticity of demand and supply.
Why are food prices at the MCG for AFL matches so expensive?
Market power
High market power of supplier – Can only buy food from within MCG, and single supplier at all MCG outlets (Spotless) => Monopoly
Why do movie theatres offer cheaper tickets on Tuesdays?
Fixed cost/Marginal cost
Market power/Elasticity of demand
High FC/Low MC => Can charge a low price and cover marginal costs
Demand lower and more price elastic on Tuesdays => Profit-maximising price is lower
Why do accommodation prices during Schoolies week in Schoolies destinations increase so significantly
Market power/Elasticity of demand
Demand higher and less price elastic during Schoolies week => Profit-maximising price is higher