ECON 309 Public Sector and Project Management Questions

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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 wouldn’t answer the question, ‘What is happiness?’ with ‘It’s when
you’re 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, you’ll 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 Brunswick’s Print
Media Industry. Canadian Journal of Communication, 38(1), 57-81. Retrieved from
https://doi.org/10.22230/cjc.2013v38n1a2578
Can’t 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 it’s ALL about the math (and
geometry). I want to make sure we’re 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 industry’s 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 I’d
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. It’s 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 I’m 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 Apple’s 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.
Let’s 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 let’s go with that. I’m going to ask you to
study and compare two situations: BEFORE Epic’s split with Apple, and AFTER
Epic’s split with Apple.
BEFORE Epic’s split with Apple: We know Apple charges a fee of 30% of Epic’s
revenue. Epic’s revenue4 is (1 – 30%) x P(Q) x Q = 70% x (100 – Q) x Q. Epic’s 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 Epic’s split with Apple: Epic no longer has to pay Apple’s ‘tax’. Epic’s 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 Epic’s marginal costs are zero6.
Morrison, S. (2020, September 8). Apple’s 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 ISN’T getting the full price paid by consumers. They’re only getting
70% of that, with Apple getting the other 30%.
?Epic’s marginal revenue curve is 70% x (100 – 2Q) = 70 – 1.4Q.
Epic’s ‘Supply’ curve is just a horizontal line at P=0.
Apple’s ‘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 Apple’s Producer surplus and Epic’s
producer surplus.
Your final diagram should have: a rectangle representing Apple’s producer
surplus, a rectangle representing Epic’s 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 can’t 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.
Epic’s ‘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 Epic’s 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,
Epic’s producer surplus, Apple’s producer surplus, and total surplus. Show your
work8. Did the change benefit society? Briefly explain your reasoning.
BEFORE the split with Apple:
Consumer Surplus: __________________
Epic’s Producer Surplus: ________________
Apple’s Producer Surplus: _______________
Total Surplus: ________________
Show your work:
[Take as much room as you need]
AFTER the split with Apple:
Consumer Surplus: __________________
Epic’s Producer Surplus: ________________
Apple’s Producer Surplus: $0 (Epic’s 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, it’s 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 Nintendo’s 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. We’ll 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 we’re keeping QPC constant, if QM goes up as the result of this rotation of
the demand curve, so does QM/QPC.
If you’re feeling fancy, or if you don’t trust your intuition, you can run the numbers
and create a precise plot that shows you what happens. I’m lazy, and I’m comfortable
with Excel, so I’d probably get Excel to do the hard work for me. I’d 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 Nintendo’s 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 – let’s 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 Epic’s marginal costs were
equal to zero. Let’s 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 Epic’s revenue is 0.7 x (100 –
Q) x Q. AFTER Epic leaves, there’s no more tax, so Epic’s revenue is (100 – Q) x Q.
This time, though, do NOT assume that Epic’s marginal costs are zero. Instead,
assume Epic’s 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 we’ll call Q before.
From Epic’s 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 don’t 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. That’s why I’ve 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, Epic’s producer
surplus, Apple’s 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, Epic’s
producer surplus, Apple’s producer surplus, and total surplus. Show your work.
AFTER the split with Apple (MC(Q) = d + cQ):
Consumer Surplus: __________________
Epic’s Producer Surplus: ________________
Apple’s Producer Surplus: $0 (Epic’s 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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