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PURPOSEFUL READING (3-2-1) REPORT Version 2.1

Lightly Adapted from a template by Geraldine Van Gyn.

Question 1: In your own words, what are the 3 most important points in the reading? (Make

sure you include what the author(s) thought was the most important point this is often found

in the abstract, introduction and/or conclusion.)

Point 1 (In your own words) (2 marks)

Point 2 (In your own words) (2 marks)

Point 3 (In your own words) (2 marks)

Question 2: What are 2 words, concepts, ideas or issues in the article that you had difficulty

understanding, or that are missing but should have been included? In your own words, briefly

explain what you did to correct the situation (e.g. looked up an unfamiliar word or a missing

fact), and the result (e.g. the definition of the word). Cite any sites or sources used in APA format.

Issue 1 (In your own words) (1 mark)

Citation 1 (in APA format) (1 mark)

Issue 2 (In your own words) (1 mark)

Citation 2 (in APA format) (1 mark)

Question 3: What is the main economic story of the reading? Remember that economics studies

the allocation of scarce resources. Please avoid using words like economy, economic, etc. (This

is for the same reason you wouldnt answer the question, What is happiness? with Its when

youre happy.)

Story (In your own words) (2 marks)

ECON 309 SPRING 2022 ASSIGNMENT 2

TO BE SUBMITTED VIA BRIGHTSPACE BY 11:59 PM ON FEBRUARY 11, 2022

Name (First, Family)

Last 3 digits of Student ID#

TO SPEED UP MARKING, PLEASE ANSWER THE QUESTIONS IN THE FORMS AND SPACES PROVIDED.

By submitting this assignment you agree to the following honor code, and understand

that any violation of the honor code may lead to penalties including but not limited

to a non-negotiable mark of zero on the assignment:

Honor Code: I guarantee that all the answers in this assignment are my own work. I

have cited any outside sources that I used to create these answers in correct APA

style.

Marking scheme Make sure you answer all the questions before handing this in!

ASSIGNMENTS WILL BE MARKED AS SUBMITTED.

CHECK YOUR FILE UPLOADS!

Question

Q1

3-2-1 Report

a

Q2

b

a

Q3

b

c

Q2+Q3 Average

Q4

a

a

b

Q5

c

d

Subtotal (Q2 + Q3) + Q4+Q5

Communication

Q2 & Q3 & Q4 Total

Out of

12

75

75

75

75

75

75

5

3

3

3

1

90

10

100

Weight

30%

70%

1

Table of Contents

Lecture Coverage by Question ………………………………………………………………………… 2

Question 1: Reading Report ……………………………………………………………………………. 3

Question 2: Dead Weight Loss (DWL) of Monopoly ……………………………………………. 4

2.a ……………………………………………………………………………………………………………………. 4

2.b ……………………………………………………………………………………………………………………. 6

Question 3: Fortnite vs Apple …………………………………………………………………………. 7

3.a ……………………………………………………………………………………………………………………. 8

3.b ……………………………………………………………………………………………………………………. 9

3.c ………………………………………………………………………………………………………………….. 10

Question 4: DWL and price elasticity of demand. ……………………………………………. 11

4.a ………………………………………………………………………………………………………………….. 12

Question 5: Calibrating models and comparing equilibria ………………………………… 13

5.a ………………………………………………………………………………………………………………….. 14

5.b ………………………………………………………………………………………………………………….. 15

5.c ………………………………………………………………………………………………………………….. 16

5.d ………………………………………………………………………………………………………………….. 16

Lecture Coverage by Question

Whole Assignment: Intended to make sure all students are comfortable with

the basics of producer/consumer/total surplus, on which competition policy

relies, before moving on with the course.

Question 1: Most relevant to Lecture 8, but you can complete the question

before viewing Lecture 8.

Question 2: This question can be solved completely with knowledge of high

school geometry and first-year microeconomics (a pre-requisite for this course).

From ECON 103, youll want to look back at supply & demand, consumer &

producer surplus, monopoly & deadweight loss triangles. The topic of the

question is relevant to lectures 6 and 7.

Question 3: As with Question 2. It can be thought of as an application of the

theory in Question 2.

Question 4: Again, this only requires high school geometry and ECON 103. It

is meant to enhance your intuition of the relationship between deadweight loss

& consumer demand. This is most relevant to lecture 7.

Question 5: This is just Question 3 with some of the training wheels taken off.

Again, it can be solved using only high school geometry & ECON 103 material.

2

Question 1: Reading Report

[Reading] Read the following article:

Couture, T. (2013). Without Favour: The Concentration of New Brunswicks Print

Media Industry. Canadian Journal of Communication, 38(1), 57-81. Retrieved from

https://doi.org/10.22230/cjc.2013v38n1a2578

Cant find the full text of the article? On the page above, look above the abstract, and

above the Keywords. There you will find TINY links labeled PDF and HTML. Click

on one of those to access the full version of the article.

a. Complete a 3-2-1 report for the above article using the form found on Brightspace.

3

Question 2: Dead Weight Loss (DWL) of Monopoly

This is one of the rare occasions in this course where its ALL about the math (and

geometry). I want to make sure were all on the same page about the very basics of

the calculations involved. Consider a market described by the following questions: P

= Price and Q = Quantity

The inverse demand curve is P = 100 Q

The marginal revenue (MR) curve is MR = 100 2Q1

The industrys marginal cost curve (the supply curve) is MC = 20 + 2Q

2.a

i. Draw a diagram (like the ones we saw in Lecture 7) that shows the demand curve,

the marginal cost curve, producer surplus, consumer surplus, and the deadweight

loss from monopoly (when compared to perfect competition). Your diagram must be

clearly labeled, like the ones in the lecture. It does not have to be exact you can

freehand sketch it, if you like but lines should slope in the right direction, and Id

like you to label the intercepts on the Price and Quantity Axes. Please make sure

your diagram is in PDF, JPG, GIF or PNG format, otherwise we may run into display

issues while marking. Its fine to copy-paste the diagram into this file, or to upload it

separately. You can draw it by hand and take a picture with your phone, use Excel or

Powerpoint and save the graphs/drawings as a picture, use a drawing program and

take a screenshot, etc. Below is an example of what Im looking for in part a.:

Price

650

MC

PM=316

CS

PS

DWL

75

P(Q)

MR

QM=125

150

Quantity

250

For those of you who know calculus: Marginal revenue = derivative of revenue with respect to

quantity. Revenus is Price x Quantity ? MR = d/dQ (P(Q) x Q) = d/dQ ((100 Q) x Q) = d/dQ (100Q

Q2) = 100 2Q. With linear demand, the marginal revenue curve is always twice as steep as the

demand curve, with the same vertical intercept.

1

4

Well-Labeled Diagram:

[Take as much space as you need, or submit a separate image file.]

5

2.b

Calculate the area of the Dead Weight Loss triangle. Show your work.

It might be helpful to split the deadweight loss triangle into two different triangles,

as shown below. The area of each of those two triangles DWL 1 and DLW 2 is

equal to ½ x base x height. Add the areas of DWL 1 and DWL 2 to get the total area

of the entire DWL triangle.

Area of the DWL triangle: __________________________

Work:

[Show your work here.]

6

Question 3: Fortnite vs Apple

A few years ago, Epic Games, the owners of the popular Fortnite video game, and

Apple were in a bit of a fight2. Epic sells virtual currency within Fortnite. For the

Mac version of Fortnite, Apple has been taking 30% of all revenue earned by Epic

from these sales.

Epic recently decided to leave what it called the Apple monopoly and sell virtual

currency directly to Fortnite players, bypassing Apples fee. At the same time, it has

permanently lowered the price of its virtual currency by 20%3.

Epic claimed this was good for its players, and good for society. In this question, you

will evaluate this claim in a simple model that keeps much of the flavour of the realworld spat.

Lets start with a very standard, very simple setup. (Inverse) demand for virtual

currency is given by P(Q) = 100 Q. At least one game critic has suggested that the

marginal cost virtual currency is zero, so lets go with that. Im going to ask you to

study and compare two situations: BEFORE Epics split with Apple, and AFTER

Epics split with Apple.

BEFORE Epics split with Apple: We know Apple charges a fee of 30% of Epics

revenue. Epics revenue4 is (1 30%) x P(Q) x Q = 70% x (100 Q) x Q. Epics marginal

cost is zero. Assume that Epic chooses its price like a monopolist (in this case, a

monopolist facing a tax by apple.) Assume that Apple faces no costs whatsoever, and

this tax it charges Epic is essentially free money for Apple5.

AFTER Epics split with Apple: Epic no longer has to pay Apples tax. Epics revenue

is P(Q) x Q = (100 Q) x Q. Assume that Epic sets a price equal to 80% of the price

it set before the split with Apple. This is the price that Epic has announced to the

world. However, in our simple model, it is impossible for this to be a profitmaximizing price for Epic, as long as Epics marginal costs are zero6.

Morrison, S. (2020, September 8). Apples Fortnite ban, explained [Web Page]. Retrieved from

https://www.vox.com/recode/2020/8/20/21373780/fortnite-epic-apple-lawsuit-app-store-antitrust

3 1,000 V-Bucks cost $7.99 directly from Epic, compared with $9.99 if bought through Apple.

Spangler, T. (2020, August 13). Fortnite Looks to Sidestep Apple, Google App Store Fees With 20%

Discount

for

Direct

Payment

[Web

Page].

Retrieved

from

https://variety.com/2020/digital/news/fortnite-discount-epic-games-apple-google-app-store-fees1234734274/

4 If revenue is 70% x (100 Q) x Q, then marginal revenue is just 70% x (Marginal Revenue when

Revenue is (100 Q) x Q). As mentioned above, for inverse demand of the form P = a bQ, leading to

revenue equal to (a bQ) x Q, marginal revenue is (a 2bQ).

5 This is, of course, a very strong assumption.

6 Think about it: a monopolist sets marginal revenue = marginal cost. If that marginal cost is ZERO,

and marginal revenue in the two cases is only off by a positive factor (70%)

2

7

Draw diagrams, similar to the ones you did in Question 1, for both situations:

BEFORE the split with Apple, and AFTER the split with Apple.

3.a

Diagram showing the situation BEFORE the split with Apple:

A few tips to help you out:

The demand curve for virtual currency is (by assumption) P(Q) = 100 Q.

If Epic were getting the full price consumers paid for the currency, its marginal

revenue curve would therefore7 be MR(Q) = 100 2Q.

BUT Epic ISNT getting the full price paid by consumers. Theyre only getting

70% of that, with Apple getting the other 30%.

?Epics marginal revenue curve is 70% x (100 2Q) = 70 1.4Q.

Epics Supply curve is just a horizontal line at P=0.

Apples producer surplus in this case is equal to its share of the income: 30%

x Price Paid by Consumers x Quantity sold.

Since costs are 0, total Producer Surplus is equal to Price Paid by Consumers

x Quantity sold, and you can split this into Apples Producer surplus and Epics

producer surplus.

Your final diagram should have: a rectangle representing Apples producer

surplus, a rectangle representing Epics producer surplus, a triangle

representing consumer surplus, and a triangle representing the deadweight

loss from Epic acting like a monopolist (producing at the point where MR =

MC).

[Insert diagram in PDF,JPG,GIF or PNG form here, or upload separate image file]

7

I explained in a footnote to question 1 that the marginal revenue curve

8

3.b

Diagram showing the situation AFTER the split with Apple:

A few tips to help you out:

The demand curve for virtual currency is (by assumption) P(Q) = 100 Q.

Since now, Epic is getting the full price consumers pay for the currency, its

marginal revenue curve is MR(Q) = 100 2Q.

BUT keep in mind that Epic cant just set MR = MC, because it has publicly

promised that it will charge 80% of what the price was under Apple. So, instead

of choosing quantity and then reading the price off the demand curve, Epic will

set the consumer price to 80% of what it was before the split, and the quantity

sold will be whatever quantity demanded corresponds to that price.

Epics Supply curve is just a horizontal line at P=0.

Since costs are 0, total Producer Surplus is equal to Price Paid by Consumers

x Quantity sold.

Your final diagram should have: a rectangle representing Epics producer

surplus, a triangle representing consumer surplus, and a triangle representing

the deadweight loss (there will still be a deadweight loss, because the price,

while lower than before, is above 0, which is what the price would be under

theoretically perfect competition (P = MC)).

[Insert diagram in PDF,JPG,GIF or PNG form here, or upload separate image file]

9

3.c

c. For each of the two situations (BEFORE and AFTER), calculate consumer surplus,

Epics producer surplus, Apples producer surplus, and total surplus. Show your

work8. Did the change benefit society? Briefly explain your reasoning.

BEFORE the split with Apple:

Consumer Surplus: __________________

Epics Producer Surplus: ________________

Apples Producer Surplus: _______________

Total Surplus: ________________

Show your work:

[Take as much room as you need]

AFTER the split with Apple:

Consumer Surplus: __________________

Epics Producer Surplus: ________________

Apples Producer Surplus: $0 (Epics not paying their tax anymore.)

Total Surplus: __________________

Show your work:

[Take as much room as you need]

Is society better off before or after the split with Apple? ____________________

Why? (This can be VERY brief.)

As mentioned earlier, its fine to use a math program to perform the in-between steps after you set

up a system of equations to be solved.

8

10

Question 4: DWL and price elasticity of demand.

A 1989 article9 points out that Nintendo could have sold 45,000,000 game cartridges

in 1989, but chose to produce only 33,000,000. This suggests that Nintendo acted like

a monopolist, and that the base10 of its deadweight loss triangle was equal to about

27% of the competitive output. Put another way, if QM is the monopoly output and

QPC is the perfectly competitive output, in Nintendos case we saw Q M/QPC = 33/45 =

73% (approx), or equivalently, (QM/QPC)/QPC = 27%.

Superior Propane is a famous Canadian Competition Policy case that hinged on a

deadweight loss calculation. Well cover it later in the course. In that case, it was

found by one analyst11 that the base of the deadweight loss triangle was equal to

about 13% of the competitive output. Put another way, it was found that in the

market Superior Propane was operating in, QM/QPC = 87%, or equivalently,

(QM/QPC)/QPC = 13%.

Given what you know about deadweight loss calculations, which company, Nintendo

or Superior Propane, faced a steeper demand curve? Explain your reasoning. You

may use diagrams and/or math as part of your explanation.

You may assume that the demand and marginal costs curves are linear, just like in

Lecture 7.

Hints: There are a number of ways to do this. One is by a geometric demonstration.

Starting from the same competitive equilibrium (where demand = supply), draw a

steeper demand curve (so that the new one crosses the original equilibrium, but has

a higher vertical intercept), and see what happens to the difference between QPC and

QM. Even a quick freehand sketch should be able to show you what happens. Note

that since were keeping QPC constant, if QM goes up as the result of this rotation of

the demand curve, so does QM/QPC.

If youre feeling fancy, or if you dont trust your intuition, you can run the numbers

and create a precise plot that shows you what happens. Im lazy, and Im comfortable

with Excel, so Id probably get Excel to do the hard work for me. Id want to see what

happens with a steeper demand curve that passes through the same competitive

Ramirez, D. (1989, December 21). The Sales Game Played by Nintendos Wizard. The New York

Times, D1. Retrieved from https://www.nytimes.com/1989/12/21/business/the-games-played-for9

nintendo-s-sales.html

10 The base of the deadweight loss triangle is equal to the difference between the quantities produced

under perfect competition, and under monopoly.

11 See the values for Q1 and Q2 given in Footnote 14 on the last page of Mathewson, F. & Winter, R.

(2000). The analysis of efficiencies in Superior Propane: correct criterion incorrectly applied .

Retrieved from

https://www.researchgate.net/publication/242536722_The_analysis_of_efficiencies_in_superior_propa

ne_Correct_criterion_incorrectly_applied

11

equilibrium, so we want a line with a higher vertical intercept lets say, P=120, that

also crosses the competitive equilibrium. Those are two points, and standard high

school math (and Google) can help you find the equation of a line going between two

points.

4.a

(1 mark) Did Nintendo or Superior Propane face a steeper demand curve?

_______________________

(4 marks) Explain your reasoning. You may include math and diagrams if you wish

to.

[Explain your reasoning here]

12

Question 5: Calibrating models and comparing equilibria

Some of you may not have found the regular question very satisfying, because we

assumed that Epic set a non-optimal price after splitting with Apple. This assumption

was needed because of another assumption we made that Epics marginal costs were

equal to zero. Lets fix that.

As before, assume inverse demand is P = 100 Q, and that in the BEFORE scenario,

Apple takes away 30% of the money Epic earns, so that Epics revenue is 0.7 x (100

Q) x Q. AFTER Epic leaves, theres no more tax, so Epics revenue is (100 Q) x Q.

This time, though, do NOT assume that Epics marginal costs are zero. Instead,

assume Epics marginal costs are of the form MC = d + c x Q, where d and c are

constants. This is a straight line with slope c and intercept d.

In part a., you calculated the monopoly price (and quantity) for Epic in the BEFORE

scenario. You have available to you the optimal quantity, which well call Q before.

From Epics comments, you know that their price AFTER the split is 20% lower than

their price under Apple. So Pafter = 0.8Pbefore. In part a., you calculated this price, and

the corresponding quantity demanded. Call that quantity demanded Qafter.

A profit-maximizing monopolist sets Marginal Revenue = Marginal Cost. The

BEFORE and AFTER scenarios have different marginal revenue curves associated

with them. Call these MRbefore and MRafter. In the BEFORE scenario, Q = Qbefore, and

MR = MRbefore(Qbefore). In the AFTER scenario, Q = Qafter, and MR = MRafter(Qafter).

You can represent the first one as a point on the (x,y) = (Q,P) plane equal to

(Qbefore,MRbefore(Qbefore)), and the second one as (Qafter,MRafter(Qafter)). If Marginal Cost,

MC, is a straight line, and if MR = MC in both cases, so that the monopolist (Epic) is

maximizing surplus, then MC must be the line connecting those two points. If you

have two points, you can use high school math to derive the equation of a line

connecting them12.

If you need a refresher, this YouTube video may help: McLogan, B. (2011, January 27). How to find

the equation of a line given two points [Video file]. Retrieved from https://youtu.be/4vXqMsvPSv4

12

13

5.a

(3 marks) Find an equation for marginal cost, of the form MC = d + c x Q, which is

consistent with Epic setting MR = MC in both scenarios (BEFORE and AFTER). To

make things easier, assume that the price consumers pay before the split is 90 (yes,

this is different from the earlier question). You will need to find numerical values for

d and c using the line through two points method described above. Show your work.

Hint: The easiest way to solve this is to play around with the geometry. A quick peek

at the geometry will show that prices below 50 dont make sense for our monopolist,

since that corresponds to output where marginal revenue is negative. It therefore

makes sense to pick a convenient price pair where BOTH prices (before & after split)

are above 50. Thats why Ive asked you to assume that P = 90 before the split, and

therefore P = 80% x 90 = 72 after the split.

Next, draw horizontal lines at those levels, and where they meet the demand curve,

drop them down to find our quantities. Then follow our quantities up to the marginal

revenue curves, and we have the coordinates for our two points.

What two points? The two points you need to find the equation of a line. Specifically,

a line such that MR = MC before the split, and after the split. Keep in mind that this

line will not necessarily be upward sloping.

Equation: MC(Q) = ___________________________________

Work:

[Take as much space as you need]

14

Now repeat the calculations from the earlier question (3), but this time taking into

account your non-zero marginal cost function. You may find re-drawing your

diagrams extremely useful, and you may include diagrams as part of your answer, if

you wish, but it is not required.

5.b

For the situation BEFORE the split, calculate consumer surplus, Epics producer

surplus, Apples producer surplus, and total surplus. Show your work.

BEFORE the split with Apple (MC(Q) = d + cQ):

Consumer Surplus: __________________

Total Producer Surplus: ________________

Total Surplus: ________________

Show your work:

[Take as much room as you need; include a diagram, if you wish]

15

5.c

(3 marks) For the situation AFTER the split, calculate consumer surplus, Epics

producer surplus, Apples producer surplus, and total surplus. Show your work.

AFTER the split with Apple (MC(Q) = d + cQ):

Consumer Surplus: __________________

Epics Producer Surplus: ________________

Apples Producer Surplus: $0 (Epics not paying their tax anymore.)

Total Surplus: __________________

Show your work:

[Take as much room as you need; include a diagram, if you wish]

5.d

(1 mark) According to your calculations, is society better off before or after the split

with Apple?

____________________

Why?

16

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