Microeconomic Principles

⦁ Section B: Total marks for Section B: 30.
⦁ For Section B, record your answers for each question in this respective Word document. These answers need to be typed, but diagrams must be hand-drawn (and scanned/snapped) into this Word document.
⦁ Submit your completed work in the Word document to Turnitin.

Section B. Short Written Answers. [30 marks] [Answer using well-labelled, hand-drawn diagrams, with accuracy and sufficient explanations]

Q1. L6. Economics of the Environment (II) [10 marks] ⦁ Use the cap-and-trade model to explain in technical detail the two outcomes of abatement using CO2 permits: the 50:50 split and the cap-and-trade equilibrium. In your answer, show the gains from trade between the two firms.
[suggested word limit: 300] [6 marks]

⦁ Describe the way a cap-and-trade policy works to someone who has not studied economics. How would you respond to their concerns that the policy is likely to be ineffective and unfair to producers?
[suggested word limit: 250] [4 marks]

Q2. L7. Employment Relationship [10 marks] In the labour-discipline model (LDM), the employer sets the wage to minimise the cost of effort. Using the LDM, illustrate and explain how a change in conditions affect the employee’s best response function (BRF) in the following scenarios:
⦁ Being monitored by the boss using tracking technology to detect ‘shirking’ whilst working from home in urban Australia.
[suggested word limit: 270] [5 marks]

⦁ In relation to the hospitality sector (e.g. restaurant industry) in the US: a sharp increase in the pool of unemployed people due to a hiring freeze, combined with a rise in unemployment benefits.
[suggested word limit: 270] [5 marks]

To support your answer in (a), refer to following news article by Edwina Stott and Nick Wiggins (2020), “Being monitored by your boss while working from home — necessary trade-off or ‘stupid’ surveillance?”, ABC News, October 16, available: https://www.abc.net.au/news/2020-10-16/work-from-home-tracking-software-monitoring/12766020
To support your answer in (b), refer to following news article by Neil Irwin (2021), “‘Unemployment Is High. Why Are Businesses Struggling to Hire?”, The New York Times, May 11, available: https://www.nytimes.com/2021/04/16/upshot/unemployment-pandemic-worker-shortages.html

Q3. L8. The Firm and its Customers [10 marks] Suppose the profit-maximising choice of price and quantity for General Mills’ Cheerios is represented in Figure 1 below:

Draw diagrams to show how the curves in Figure 1 would change in each of the following cases:
⦁ General Mills’ finances its “Accelerate Growth” program. For simplicity, assume that the program costs $7,000 per week.
[suggested word limit: 270] [5 marks]

⦁ General Mills’ experiences rising input costs of production. For simplicity, assume that the costs of Cheerios production rise by $2 per pound.
[suggested word limit: 270] [5 marks]

To make sketching the curves easier, assume the demand curve is linear. In each case, (a) and (b), elaborate on what might happen to the price and the profit for Cheerios. Also, note the following:

To support your answer in (a), refer to the following article by Elizabeth Crawford (2021), “General Mills bets on cereal, ice cream, snack bars & Mexican food as it deploys 4-prong growth strategy”, February 17, FoodNavigator-USA, available: https://www.foodnavigator-usa.com/Article/2021/02/17/General-Mills-bets-on-cereal-ice-cream-snack-bars-Mexican-food-as-it-deploys-4-prong-growth-strategy

To support your answer in (b), refer to the following article by Elizabeth Crawford (2021), “General Mills eyes net price increases as rising costs squeeze margins, but analysts question execution”, FoodNavigator-USA, March 25, available: https://www.foodnavigator-usa.com/Article/2021/03/25/General-Mills-eyes-net-price-increase-as-rising-costs-squeeze-margins-but-analysts-question-execution

Q4. L9. Rent-seeking and Bubbles [10 marks] Refer to the following news articles on ‘Dogecoin’:
⦁ David Chau (2021), “Dogecoin ‘bubble’ surges ahead of Elon Musk’s debut on Saturday Night Live”, ABC News, May 07, available: https://www.abc.net.au/news/2021-05-07/dogecoin-elon-musk-tesla-snl-to-the-moon-doge/100113706
⦁ James Purtill (2021), “Some Australians have made a fortune on Dogecoin, but they say it’s not all about the money”, ABC News, May 21, available: https://www.abc.net.au/news/science/2021-05-21/dogecoin-cryptocurrency-stories-of-australians-who-made-money/100144664

Based on this discussion in the articles and relevant microeconomic theory, explain the endogenous processes at work of the Dogecoin bubble. Use relevant demand and supply diagrams to aid your answer and show how there is an unstable equilibrium.
[suggested word limit: 400] [10 marks]