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Econ10004 Introductory Microeconomics SUBJECT GUIDE Semester 1, 2013

Prepared by Gareth James Department of Economics Faculty of Economics and Commerce

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Subject Guide Contents

A. Key Information………………………………… 3

B. Subject details………………………………........4

C. Subject objectives……………………………….. 5

D. Lecture Outline and Readings…………………... 6

E. Details on Assessment…………………………... 8

F. About Tutorials………………………………….. 9

G. Tutorial Enrolment Information………………… 10

H. How to Study…………………………………….10

I. Resources for Study……………………………… 11

J. Subject Prize……………………………………... 14

K. Plagiarism………………………………………..14

L. About Microeconomic Theory…………………...15

Appendices

1. Sample multiple choice exam questions………… 18

2. 2010 Final examination…………………………..22

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A. Key information

Lecturer:

Gareth James

Rm. 542b

Phone: 90358057

Email: gjames@unimelb.edu.au

Tutorial coordinator:

Nahid Khan

Rm. 606

Phone: 8344-3621

Email: n.khan@unimelb.edu.au

Assessment Dates

1. Monday March 25 (12 midday) to Wednesday March 27 (12 midday) – Multiple-

choice exam (on-line).

2. Monday April 8 (4.00pm) – Assignment 1.

3. Monday May 13 (4.00pm) – Assignment 2.

Web address:

http://www.lms.unimelb.edu.au

[Use the same username and password that you use to access your University of

Melbourne email account.]

B. Subject details

Class times:

a) Lectures – 2 x 1 hour each week –

Lecture times: Tuesday - 10.00, 11.00, 2.15, 4.15 - Copland Theatre (Arts West);

and Thursday - 10.00, 11.00, 2.15, 4.15 – Copland Theatre (Arts West).

b) Tutorials – 1 x 1 hour each week (Timetable via ISIS – See section G of Subject

Guide for details.) Begin in Week 1 – from Monday February 27.

Textbooks:

• Required -

Principles of Microeconomics (2012) – Joshua Gans, Stephen King, and N. Gregory

Mankiw (GKM), 5th

Edition. [The 4th

edition can also be used.]

Case Studies and Applications Microeconomics (2013) [2nd

edition] – Jeff Borland.

This text includes summaries of key concepts and theories; a variety of applications; and key lessons.

Readings for each lecture from the current editions of the textbooks are listed in

section D of the Subject Guide.

The textbooks are required for the subject. For most lectures they are the only

prescribed reading. At some points in the subject however we will move beyond the

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coverage of the GKM text. For these lectures reading material is provided to you in

the form of ‘Reading hand-outs’. These will be posted to the LMS subject webpage.

• Recommended –

The Undercover Economist – Tim Harford (330.90511 HARF).

Reinventing the Bazaar – John McMillan (330.122 MCMI).

The Economic Naturalist – Why economics explains almost everything, Robert H

Frank.

Super Freakonomics – Steven Levitt and Stephen Dubner

[These books provide excellent non-technical introductions to many topics that we

will study, and include plenty of useful examples. Either one or both could be read at

the start of semester as an introduction to the subject, or during the semester to help

you review what we are studying. The books should be thought of as an optional

supplement to the texts. Reading them is a way to develop your understanding of

microeconomics, and to see a range of applications of key concepts. But material

from these books will not be directly examined.

• Other resources –

Principles of Microeconomics: Study Guide – Judy Tennant and David R. Hakes.

Assessment:

Exercise 1: Multiple choice exam (5%) – On-line - To be completed between Monday

March 25 (midday) and Wednesday March 27 (midday).

Exercise 2: Assignment 1 (10%) – Due: Monday April 8 by 4.00pm.

Exercise 3: Assignment 2 (15%) – Due: Monday May 13 by 4.00pm.

Exercise 4: Tutorial participation and attendance (10%).

Exercise 5: Final examination (60%) – Two hour examination.

C. Subject objectives

Students who complete this subject will be able to:

• Describe the main objectives of the study of economics - to seek to understand the

operation of the economy, and to guide decision-making by individuals, businesses

and government.

• Explain the nature and role of theory and models in economic analysis.

• Explain the concepts of demand, supply, and market equilibrium; and apply the

model of demand and supply in a market to explain the determinants of prices and

output of goods and services.

• Explain how market and social welfare outcomes are affected by changes in

demand/supply and government policy, and explain how and in what circumstances

intervention by government in the operation of the economy can improve efficiency

and social welfare.

• Explain models of firm behaviour in choosing output, price, and how to produce.

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• Identify ‘strategic situations’ in economic activity, and be able to analyse and

predict outcomes of strategic situations.

• Identify the main characteristics of different market types such as perfectly

competitive and monopoly markets. Describe the nature of competitive behaviour in

those markets, analyzing and predicting price and output outcomes in the different

markets.

• Use examples to illustrate key concepts – such as the role of demand and supply

factors in determining market outcomes, the effects of government intervention on

market outcomes, the existence of strategic situations in the economy, and different

types of markets.

• Apply economic models of individual behaviour and markets to describe the main

features of actual markets, and to explain outcomes in actual markets, including prices

and output levels, and business performance and profitability.

• Evaluate and critically analyse government policy, and make an informed

contribution to public debate on economic issues.

• Proceed to the study of other economics and commerce subjects that have a

knowledge of introductory microeconomics as a prerequisite.

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D. Lecture Outline and Readings

Lecture Date Topic Textbook references

A. Introduction

1 March 5 Subject overview

GKM chapters 1 and

2

2 March 7 Introduction to key concepts in

microeconomics

GKM chapters 1and

2

Reading hand-out 1

Borland 1.1, 1.2, 1.3,

1.4, 1.5 and 1.7

B. The working of

competitive markets

3 March 12 Market forces of supply and

demand 1

GKM chapter 4

Borland 2.1 and 2.2

4 March 14 Market forces of supply and

demand 2

GKM chapter 4

Borland 2.3, 2.4, 2.5,

2.10, 2.11 and 2.12

5 March 19 Elasticity and applications

GKM chapter 5

Borland 2.5

6 March 21 Welfare and markets

GKM chapter 7

Borland 1.6, 2.6 and

2.7

7 March 26 Welfare application 1:

Government intervention

GKM chapters 6 and

8

Borland 2.8, 2.9

8 March 28 Welfare application 2:

International trade

GKM chapter 9

Borland 3.1, 3.2, 3.3

and 3.4

March 29 –

April 7

Non-teaching period

9 April 9 Market failure 1: Externalities

GKM chapter 10

Borland 4.1, 4.2, 4.3

and 4.4

10 April 11 Market failure 2: Public goods

GKM chapter 11

Borland 4.5 and 4.6

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C. The firm and markets

11 April 16 Key concepts of production

GKM chapter 13

Borland 5.3

12 April 18 Costs of production 1: short

run analysis

GKM chapter 13

Borland 5.1, 5.2 and

5.4

13 April 23 Costs of production 2: long run

analysis

GKM chapter 13

14 April 25 Firms in competitive markets 1

GKM chapter 14

15 April 30 Firms in competitive markets 2

GKM chapter 14

Borland 5.8

16 May 2 Monopoly 1

GKM chapter 15

Borland 5.5, 5.6, 5.7

and 5.10

17 May 7 Monopoly 2

GKM chapters 15

and 17

Borland 5.10

18 May 9 Price discrimination

GKM chapter 15

Borland 5.8 and 5.9

19 May 14 Monopolistic competition

GKM chapter 18

Borland 5.5 and 5.6

D. Game theory

20 May 16 Oligopoly and business

strategy

GKM chapter 16

21 May 21 Game theory: Simultaneous

move games

GKM chapter 16

Reading hand-out 2

Borland 6.1, 6.2 and

6.3

22 May 23 Game theory: Sequential move

games

Reading hand-out 2

Borland 6.4 and 6.5

23 May 28 Game theory: Further

applications

Reading hand-out 2

24 May 30 Exam review

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E. Details on Assessment

Exercise 1: Multiple choice question exam (5%)

The multiple-choice exam will be conducted on-line through the ‘FAT’ program that

can be accessed via ‘TLU Tools’ on the LMS subject webpage. The exam will be on

material that relates to the first 3 weeks of the course. There will be 10 multiple-

choice questions (each worth equal marks). You will have 30 minutes to complete the

exam. Each student will receive a different set of questions randomly chosen from a

much larger set of questions. A sample of the types of questions that might be asked

is included as Appendix 2 to this Subject Guide. Review multiple choice questions

are also available on-line from the ‘FAT’ program.

Exercise 2: Assignment 1 – 1000 words (10%)

In this assignment you will be required to use economic concepts and theories to

answer questions on material that relates to the sections A and B of the subject. If you

have questions about completing this assignment, see your tutor at their consultation

times or the ‘On-line Tutor’ is available.

Exercise 3: Assignment 2 – 1500 words (15%)

In this assignment you will be required to use economic concepts and theories to

answer questions on material that relates to sections B and C of the subject. If you

have questions about completing this assignment, see your tutor at their consultation

times or the ‘On-line Tutor’ is available.

Exercise 4: Tutorial participation and attendance (10%)

At the end of semester your tutor will assign you a mark out of 10 for tutorial

participation. Your grade for participation will depend on: evidence of preparation

for the tutorial; frequency of participation in discussion; relevance and logic of

comments in discussion; and evidence of active listening to other students’

contributions. If you have attended at least 7 tutorials during the semester your final

mark for this exercise will be equal to the tutor’s original mark. If you have attended

less than 7 tutorials during the semester your final mark for this exercise will be equal

to the tutor’s original mark minus 1 for each tutorial less than 7 that you attended.

(For example, suppose your tutor gives you 8/10, and that you attended 10 tutorials.

Then your final mark is 8. Alternatively, suppose your tutor gives you 8/10, but you

only attended 3 tutorials. Then your final mark is 4. That is, you lose 4 marks

because you missed 4 tutorials under the threshold of 7, and each of these missed

tutorials reduces the mark by 1.) Note that to receive a mark for tutorial

participation/attendance, you must have a valid tutorial enrolment.

Exercise 5: Final examination (60%)

The exam is held at the end of semester. Duration – Two hours. The exam will

involve a mix of multiple choice, short answer and essay type questions. The final

examination paper for 2012 is Appendix 2 to this Subject Guide. Past exam papers

and solutions will be posted to the subject LMS site later in the semester. More details

about the exact format of the 2013 exam will also be provided later in the semester.

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Submitting Assignments 1 and 2

Assignments 1 and 2 will be submitted in electronic format using the Assignment

Tool. You can access the Assignment Tool by clicking on ‘Assignment Tool’ in the

navigation menu from the LMS subject website. A guide to using the Assignment

Tool can be downloaded from:

http://tlu.ecom.unimelb.edu.au/pdfs/StudentsGuideAssignmentTool.pdf

Please note that you are required to keep a copy of your assignment after it has been

submitted, as it may be necessary for you to be able to provide a copy of your

assignment at some later date.

Meeting Deadlines

It is very important that you submit Assignments 1 and 2 by the specified times on the

due dates. After that time there will be a penalty for late submission. To request an

extension for an assignment, you’ll need to submit an ‘Assignment Extension Request

Form’. The form must be submitted at Commerce Student Centre (ICT Building, 111

Barry Street, Upper Ground Floor). Information on requesting an extension is

available at: http://www.ecom.unimelb.edu.au/students/undergrad/assignment.html Late assignments, where approval for late submission has not been given, will be

penalised at the rate of 10% of the total mark per day, for up to 10 days, at which time

a mark of zero will be given.

Special Consideration

If you wish to apply for Special Consideration in relation to any component of

assessment in this subject you will need to lodge an application online with the

Commerce Student Centre. Application for Special Consideration in relation to a

component of assessment must be lodged within 3 working days of the date that

component of assessment was due to be submitted/performed. Information on the

process for applying for Special Consideration, and on the material you will need to

submit is available at: http://www.ecom.unimelb.edu.au/students/special/

F. About tutorials

Pre-tutorial work

Each week in tutorials a reading guide - a‘blue sheet’ - will be distributed. The blue

sheet provides a reading guide to the subject matter of that week’s lectures and what

will be the subject matter of the next week’s tutorial. For example, the blue sheet

distributed in week 1 covers material that is the subject of lectures in week 1, and will

be reviewed in tutorials in week 2. The blue sheet lists the main concepts and

readings, and includes review questions. It is an important part of learning in this

subject that you should attempt these questions. Usually solutions to the questions

will not be covered in tutorials. Instead, solutions are posted on the LMS subject site.

This happens at the end of the week following when the blue sheet is distributed.

In-tutorial work

Each week in your tutorial a ‘pink sheet’ will be distributed. The pink sheet lists the

tasks that will be covered in the tutorial. Generally these tasks will be problem-type

questions. Your tutor will break you up into small groups where you will work out

solutions to the problems. At the end of the tutorial the tutor will bring everyone back

together and review solutions. Often this will involve asking the small groups to take

turns in presenting their suggested solutions.

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G. Tutorial enrolment information

There will be weekly tutorials starting in the week beginning Monday February 27.

Allocation to tutorials is determined by the student system ISIS. You must enroll in a

tutorial via ISIS as soon as possible. You access ISIS through the Student Portal.

If you have any problems regarding tutorials contact Ms. Nahid Khan (Room 606;

8344-3621; n.khan@unimelb.edu.au).

Note that tutors are not permitted to authorise a transfer from one tutorial to another,

not even from one of their own tutorials to another of their own tutorials. Tutors are

only permitted to allow you to attend their tutorial if you are not enrolled in that

tutorial: (a) Where because of illness you have missed your allocated tutorial in a

particular week. In that case a tutor may permit you to ‘sit in’ for that week only and

on no subsequent occasion during the semester; or (b) Where you miss your regular

tutorial because of the Good Friday Public Holiday. In either of these cases you may

attend any other tutorial in that week. In both these cases you should obtain an

attendance form from the tutor to pass on to their regular tutor to be entered into the

attendance record.

H. How to study

• Attend lectures. These will give you a broad understanding of each topic and where

it fits into the subject. You should also read the relevant pages of the textbook and the

case study reading.

• Work outside class contact hours. Working outside class hours is essential for

performing to your full potential in the subject. It is recommended that 5-6 hours per

week (on average) should be spent on Introductory Microeconomics – This would

consist of about 1 hour per week reading the textbook, 2 hours per week doing the

pre-tutorial exercises, 2 hours per week (averaged over the semester) on the

assessment tasks, and ½ hour using the on-line revision tools.

• Learn how to apply the main concepts. To do well in this subject it is not enough

to be able to remember definitions or to provide a summary of lectures; what is most

important is to be able to apply the concepts and approaches that are presented. The

best way to develop this skill is through ‘active learning’ – for example, trying to

answer problems and questions, and discussing those answers with your fellow

students and with your tutor. Of course, you also need to know things like definitions

of concepts – but this should be the start rather than the end of your study for the

subject.

• Practice writing up answers and doing diagrams. You should attempt to write up

answers to each set of pre-tutorial and tutorial exercises, including drawing diagrams

that assist with explanations of the answers. This is good practice for the exam.

• Do the assessment exercises. Ensure you attend exams, submit essays, and

contribute to tutorials.

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I. Resources for study

Subject homepage:

You can access the subject homepage at: http://www.lms.unimelb.edu.au

To access the homepage you need to use the same username and password that you

use to access your University of Melbourne email account.

A range of information is available on the subject website:

• Subject Guide.

• Announcements about the subject.

• Lecture overheads, audio lectures, and supplementary notes – ‘Economist’ work-

outs.

• Tutorial material - Solutions to ‘blue sheet’ questions.

• ‘FAT’ – Access to multiple-choice question revision modules, and to Assessment

exercise 1 (Multiple choice test) (Via ‘TLU Tools’).

• Old exam papers.

• Access to ‘On-line tutor’ (Via ‘TLU Tools’).

• Access to ‘Assignment Tool’.

It is important to check regularly the subject homepage for any new messages about

the subject – Usually these messages would be placed under ‘Announcements’.

Audio lectures:

An audio recording of lectures delivered in this subject will be made available for

review in the days following each lecture. Audio recordings of lectures allow you to

revise lectures during the semester, or to review lectures in preparation for the end of

semester exam. Audio lectures can be accessed from ‘Audio lectures’ on the LMS

subject website. Audio streaming and podcast formats are available.

Extra hand-outs:

Copies of missed handouts from tutorials (blue and pink sheets) will be available from

the LMS subject site at the end of the week in which those sheets were distributed.

Tutor consultation times:

Your tutor will have a designated consultation time when you will be able to consult

on an individual basis about questions or problems you have with the subject material

or about assessment exercises.

On-line tutor:

The Online Tutor (OLT) allows you to direct questions to a tutor via the Internet. This

system can be accessed on the LMS subject webpage. The Online Tutor (OLT)

provides the scope to ask questions you may have concerning the subject matter or

assessment exercises. However, the OLT cannot give answers to any upcoming or

current assignments, nor will it answer questions where the answer can easily be

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obtained from the textbook. It also is not a facility for providing solutions to tutorial

questions, review questions, past exams or questions from the textbook.

Your questions and the OLT’s answers can be accessed by all students in the subject,

allowing everyone to benefit from the question and answer. Importantly, your identity

will not be revealed to other students. Even if you don’t ask a question, you can still

access the OLT question bank and view existing questions and answers.

Always search for an answer to your question before posting it to the system. If the

answer to your question already exists, the OLT will most likely reply to you directly

and ask you to search the OLT question bank. Note that it’s worth spending some

time searching through the question and answer bank as you’re more likely to receive

an answer immediately, when the question is fresh in your mind.

When preparing your questions ensure that you provide an accurate description of

your question in the subject line. This will help other students who may have a similar

question. Also if your question is about a reference, please include the title and author

of the reference and page number(s).

What the OLT is intended to for is to assist you in being able to work out solutions to

problems yourself. So if you have a query about any subject matter you need to

describe what aspect of the question you do not understand and show that you have

made some attempt to resolve the problem yourself. You should also consult the

relevant sections of your textbook before asking a question. Definitions, which are

readily available in the textbook, will also not be provided by the OLT. It is however

appropriate to consult the OLT if you have a question about an aspect of the definition

you do not understand. The OLT will inform students directly if a question does not

fall within the guidelines for the systems use. Those questions that show some

evidence of thinking and work will be given the most thorough response.

Each time you access the OLT you will be prompted for keywords that relate to the

question you want to ask, and the OLT system will direct you to previously asked

questions that relate to these keywords. It is very important to check whether your

question has been previously asked – since the OLT will not respond to questions that

have already been asked, and are hence already available for viewing.

Your tutor and the OLT are available to help point you in the right direction as far as

what is expected in an assessment exercise and to provide clarification on aspects of

the assessment question. Clearly OLT will not give answers to questions that relate

too directly to a question set for the assessment.

The OLT will attempt to answer your questions within 24 hours on weekdays,

although there will sometimes be a response on weekends as well. However, you

should not expect the OLT to respond over the weekend.

For further information on the OLT you can access the Student’s Guide to the Online

Tutor available on the Centre for Excellence in Learning and Teaching website.

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Centre for Excellence in Learning and Teaching:

The Centre for Excellence in learning and Teaching (CELT) (formerly the Teaching

and Learning Unit) offers a wide range of support services to students. If you are

having any difficulty in studying for this subject you could arrange a consultation

with the Centre’s learning skills specialist. The learning skills specialist can review

your current approaches to study and offer advice. If you are a student from a non-

English speaking background there is an ‘English as a Second Language’ specialist

who is available to help you with your written work. Both of these specialists are

available for face-to-face consultations or electronically through email. The CELT is

located on Level 6 at 198 Berkeley Street. You can arrange for consultations or

contact the CELT on-line through its webpage at: http://fbe.unimelb.edu.au/celt/

Make use of the CELT. It is there to help you.

Supplementary texts:

A range of alternative textbooks – appropriate for this subject - are available. There is

no requirement to read any of these extra texts. However, if you are seeking to

improve your understanding by reading alternative explanations of key concepts, or

looking for extra examples, those texts may be useful.

Copies of three texts have been placed on reserve at the Baillieu Library:

Principles of Microeconomics – John Sloman and Keith Norris (2005, Pearson

Education) (338.5 SLOM).

Microeconomics: A Contemporary Introduction – Michael Swann and William

McEachern (2006, 3rd edition, Thomson Learning) (338.5 SWAN).

Principles of Microeconomics – Robert Frank, Sarah Jennings and Ben Bernanke

(2009, 2nd

edition, McGraw Hill) (338.5 FRAN).

Other texts that could be consulted are:

• Microeconomics – Paul Krugman and Robin Wells (2005, 1st edition, Worth Publishers).

• Microeconomics – John Jackson and Ron McIver (2004, 7th

edition, Irwin McGraw-Hill).

• Microeconomics – Douglas McTaggart, Christopher Findlay and Michael Parkin (2006,

5th

edition, Addison-Wesley).

J. Subject prize

The student who receives the highest marks in Introductory Microeconomics is

awarded the State Chamber of Commerce Exhibition (University Regulation R6.19).

K. Plagiarism

It is the policy of the Department of Economics that attention be drawn to the

nature and serious consequences of plagiarism and collusion.

Plagiarism

Plagiarism is the presentation by a student of an assignment that has in fact been

copied in whole or in part from another student's work, or from any other source (e.g.

published books or periodicals), without due acknowledgement in the text. In all

written work submitted for assessment in the faculty, you must show the sources you

have referred to throughout your assignment. The principle is that whenever including

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information or an argument in an assignment that is not your original work or thought

the original source must be acknowledged. To present materials without

acknowledgement is, in effect, to claim the ideas or work of another as your own.

Quoted passages should be placed in quotation marks and their sources cited within

the text. A list of all references cited should be placed at the end of your essay or

assessment task.

Presenting material from other sources without full acknowledgement (plagiarism) is

penalised heavily. This holds for both copying and paraphrasing of other's work.

Collusion

Collusion is the presentation by a student of an assignment as his or her own which is

in fact the result in whole or in part of unauthorised collaboration with another person

or persons. Collusion involves the cooperation of two or more students in plagiarism

or other forms of academic misconduct. Both the student presenting the assignment

and the student(s) willingly supplying unauthorised material (colluders) are

considered participants in the act of academic misconduct. There is no objection to

assignments being discussed in a preliminary way among students. What is not

permissible is anything in the nature of joint planning and execution of an

assignment.

Where an allegation of academic misconduct involving either plagiarism or collusion

is upheld, significant penalties such as deprivation of credit for a subject or

component or assessment can be imposed. More information on plagiarism and

academic honesty can be on the Centre for Excellence in Learning and Teaching

website:

http://fbe.unimelb.edu.au/celt/tools/faculty_guidelines/plagarism_and_academic_hone

sty

Assignment checklist

Review this checklist before beginning to write your assignment, and again after you

have completed your first draft, to ensure you acknowledge sources fairly and avoid

plagiarising:

a) What type of source are you using: your own independent material, common

knowledge, or someone else's material?

b) If you are quoting someone else's material, is the quotation exact? Have you used

quotation marks for quotations that are part of the text? Have you set off block

quotes with an extra space before and after the quote, single spacing within the

quote and left indenting of all lines of the block quote? Are omissions shown as

ellipses and additions with square brackets?

c) If you are paraphrasing someone else's material, have you rewritten it in your own

words and sentence structures? Does your paraphrase employ quotation marks

when you resort to the author's exact language? Have you represented the author's

meaning without distortion?

d) Have you acknowledged each use of someone else's material?

e) Do all references contain complete and accurate information on the sources you

have cited?

f) Have you completed and signed a cover sheet for your work if you are submitting

it in hard copy, or completed an electronic form if you're submitting your work

electronically?

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L. About microeconomic theory by Professor Jeff Borland.

The objective of economics is to understand the operation of the economy, and to

guide decision-making by individuals and organisations such as firms or government

in the economy.

Economists seek to achieve this objective by developing ‘theories’. The structure of

an economic theory consists of two components: a model and a set of hypotheses that

represent the logical consequences of that model. A model is a simplified

representation of an aspect of the economy that is to be the subject of theoretical

analysis. Having specified a model to characterise the operation of some aspect of the

economy, hypotheses or propositions are derived as logical consequences of the

specified model. The degree of consistency between the hypotheses and actual

market outcomes provides one test of the value of the theory for understanding the

operation of the economy.

It is not only economists who use models to seek to understand behaviour and social

outcomes. For example, in political science and industrial relations the use of models

is also common. A distinction between ‘economic’ and ‘non-economic’ models is

generally made on the basis of the specific features of those models. Two types of

features identify economic models. First, there is a range of general core assumptions

common to most modern economic models. Neoclassical economists, for example,

have as basic modelling assumptions that all decision-makers are rational and have

well-defined objectives they seek to achieve. The assumption of rationality means

that in any environment, a decision-maker is aware of the complete set of actions

available, can calculate the consequences of each action, and chooses the action which

is best for achieving their objective. Second, in developing theories for studying

specific economic situations, most economists would draw on the same general set of

models. For example, for modelling strategic situations a common approach would

be to apply a ‘game theoretic’ model.

An important detail regarding an economic model is that it will necessarily be a

simplified and subjective representation of the aspect of the economy it seeks to

describe. First, it would never be possible, or indeed useful, to provide a

representation of the economy which included every possible detail about the

economy. The objective of an economic theory is to identify and highlight the key

factors which might explain some economic outcome, and to abstract from inessential

details regarding that outcome or the situation from which it arose. In this regard,

Keith Whitfield (The Australian Labour Market, 1987, Sydney, Harper and Row, p.7)

has noted with reference to labour economists that:

"Some labour economists have likened their work to the making of a map - for

the objective is not so much to describe reality as to give a representation

which will be useful to those having to plot a course through it. Instead of

contours or symbols, the labour economist develops theories and concepts, but

the aim is much the same, that is, to develop a representation of a complex

phenomenon which allows the main features to be highlighted and the

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superficial to be ignored."

A second consideration is that each economist will perceive different aspects of the

operation of the economy, and different economic outcomes, in very different ways.

The historian E.H. Carr (What is History?, 1964, Pelican Books, p.22) has observed

that:

"...the facts of history never come to us 'pure', since they do not and cannot

exist in a pure form: they are always refracted through the mind of the

reader."

The study of economics is no different. There are no objective facts about the

operation of the economy or the nature of economic outcomes - only individual

economists' perceptions of economic activity. Hence, any representation of the

economy, and any choice of what aspects of the economy should be highlighted in a

model, will be subjective.

As Keynes wrote (in Essays in Biography, pp.207-208, Macmillan, London) in 1933:

"The theory of economics does not furnish a body of settled conclusions

immediately applicable to policy. It is a method rather than a doctrine, an

apparatus of the mind, a technique of thinking, which helps its possessor

to draw correct conclusions."

All this suggests that an economist must have two main skills – first, a ‘tool-kit’ of

approaches to modelling the economy; and second, knowledge of how to apply those

approaches to develop theories which fit the specific situations in which the

economist is interested.

The primary objective of this subject is to enhance both types of skills. Specifically

the subject will:

a) Introduce approaches and concepts fundamental to microeconomics – the

concepts of demand, supply and market equilibrium in perfectly competitive

markets; game theory; and firm behaviour in competitive and non-competitive

markets; and

b) Present applications of microeconomic theory – using case studies, tutorial

problem sets, and assessment exercises.

Saying that economics is about applying particular types of theories to understand the

operation of the economy of course begs the question – what is the economy? Or put

another way, what types of situations does economics seek to understand? There is

no simple answer to this question. One response is to say that economics is concerned

with situations involving choices about the allocation of scarce resources – and that

microeconomics is about situations where individual units such as households and

firms must make choices. This definition, however, still includes a wide range of

situations. Amongst these situations there will be some where valuable insights can

be obtained using economic modelling, and others where economic models seem of

less use. For example, the application of economic models to seek to understand what

factors influence consumers’ demand for food seems to provide useful insights; on the

other hand, economic models seem much less relevant to understanding decisions

about household formation (such as marriage). Economists however will disagree

17

about what situations can and cannot usefully be understood using economic models

(for example, some economists would disagree with my opinion on using economic

models to study marriage). Therefore the decision about what types of situations can

be understood using economic models is also a subjective one.

One final issue about economic models concerns the use of mathematics. It is

important to know that maths is just another language for describing a model of the

economy. Any model expressed mathematically can also be expressed in words.

There are a number of reasons though why it is often useful to express a model in

mathematical form. First, maths provides a common language for communicating the

details or structure of a model. And second, a mathematical representation makes it

easy to test the logical consistency of hypotheses or propositions derived from a

model, and clarifies the relation between the model and conclusions. (For more

discussion of this issue, see Krugman, P. (1998), ‘Two cheers for formalism’,

Economic Journal, pages 1829-1836.

18

Appendices

1. Sample multiple choice exam questions

2. 2012 Final examination

Appendix 1

Sample multiple choice questions

Note: You will be able to attempt these questions and check your answers using the

‘FAT revision tool’ that can be accessed at the LMS Introductory Microeconomics

subject web-page.

1. Fred decides to start a flower-growing business. To do this, he works only half-

time in his job as a consultant, from which he could earn $100,000 per year as a full-

time employee. Hot houses for the flowers cost him $50,000, and if he decides at any

time to discontinue his business, he could sell the hot houses for $30,000. Seeds to

grow the flowers cost $10,000. There are no other costs. Assume there is a zero rate

of interest. Flowers to sell will not be available until one year after the business

commences.

The opportunity cost to Fred if he ceased to operate his business at the end of the first

year would be:

a) $50,000

b) $160,000

c) $80,000

d) $130,000

e) $110,000

2. Dan the Developer owns a block of land on which he has been thinking of building

a new house. He paid $200,000 for the land, and has already spent another $20,000

on building permits and preliminary work. The cost of building the house would be

$200,000. Costs of selling either the house and land, or just re-selling the land, would

be $10,000. Dan knows that he could re-sell the land for $160,000. He must decide

to either sell the land, or to build a house and sell the land/house.

What is the minimum amount for which Dan would need to expect to be able to sell

the house and land, in order for him to decide to build the house?

a) $430,000

b) $360,000

c) $350,000

d) $210,000

e) $160,000

19

3. Tastes of television viewers change towards ‘reality TV’ and away from

‘documentaries’. At the same time there is an increase in consumer income, and

watching TV is known to be a normal good.

From the information provided, we can say that the following must occur:

a) Demand for ‘reality TV’ will increase, and demand for ‘documentaries’ will

decrease.

b) Demand for ‘reality TV’ will increase, and it is not possible to say what will

happen to demand for ‘documentaries’.

c) It is not possible to say what will happen to demand for ‘reality TV’, and demand

for ‘documentaries’ will decrease.

d) Supply of ‘reality TV’ will increase, and it is not possible to say what will happen

to supply of ‘documentaries’.

e) Demand and supply of ‘reality TV’ will increase, and it is not possible to say what

will happen to demand and supply of ‘documentaries’.

4. There is a drought in regions in Australia where oranges are grown. At the same

time, there is an increase in the number of mango growers. Finally, an increase in

income of Australian consumers occurs.

From the information provided, we would expect:

a) An increase in demand for mangos and oranges.

b) An increase in demand and supply of mangos.

c) An increase in demand for mangos, and a decrease in supply of oranges.

d) An increase in supply of mangos, and a decrease in supply of oranges.

e) An increase in supply of mangos, and a decrease in demand for oranges.

5. Assume the market for CDs is perfectly competitive. There is an improvement in

production processes for manufacturing CDs.

At the price that was the equilibrium price prior to the improvement in production

processes, following the improvement there will be:

a) An excess supply of CDs.

b) Excess demand for CDs.

c) An increase in demand.

d) A decrease in supply.

e) Both a) and d).

20

6. Consider the following perfectly competitive market for a good:

SQ = 2P

DQ = 100 – 2P

Which of the following is correct?

a) At P = 50 there will be excess demand for the good.

b) Only at prices below P = 30 will there be excess demand for the good.

c) The equilibrium quantity traded is 25.

d) At prices above P = 25 there will be excess supply for the good.

e) The equilibrium price is 50.

7. The price of the first-year microeconomics textbook, ‘Micro Made Easy’ by Al

Marshall, has increased. Assume the market for first-year microeconomics textbooks

is perfectly competitive.

Which of the following could not explain the price increase?

a) A new first-year microeconomics textbook ‘Micro Matters’ by the world-famous

economist Adam Smith has been published.

b) The price of other first-year microeconomics textbooks has increased.

c) Enrolments in first-year microeconomics subjects have increased.

d) The author of ‘Micro Made Easy’, Al Marshall, negotiates a new contract that

requires the publisher to pays him a higher royalty per copy sold.

e) There has been a decrease in supply of the type of paper used for ‘Micro Made

Easy’.

8. In the world market for cocoa beans there have been two main recent phases:

Phase 1: Pre-early 2001: Decrease price/Increase quantity traded; and

Phase 2: Post-early 2001: Increase price/Decrease quantity traded.

Assume the market for cocoa beans is perfectly competitive.

Which of the following cannot be correct?

a) Supply increased in both phases.

b) Only supply changed in both phases.

c) Only demand changed in both phases.

d) In the first phase there was an increase in supply, and an increase in demand.

e) Both a) and c).

21

9. Motor vehicles and petrol can be considered to be complements. Crude oil is an

input to petrol, and steel is an input to motor vehicles. Assume markets for petrol,

motor vehicles, crude oil, and steel, are all perfectly competitive. Suppose that the

price of motor vehicles decreases, and the price of petrol increases.

Which of the following could explain these changes?

a) There is a decrease in supply of crude oil.

b) There is an decrease in supply of steel.

c) There is an increase in demand for steel.

d) There is a decrease in demand for crude oil.

e) Either a) or c).

10. Beer is an inferior good, and wine is a normal good. Both goods are traded in

perfectly competitive markets. There is a decrease in consumer income. We would

expect the direct effect of the change in income to be:

a) A decrease in the equilibrium price of beer, and an increase in the equilibrium price

of wine.

b) An increase in the equilibrium price of beer, and an increase in the equilibrium

quantity traded of wine.

c) No change in equilibrium price or quantity traded of either good since the decrease

in income will have an equal effect on supply and demand of both goods.

d) An increase in equilibrium price of beer, and a decrease in equilibrium quantity

traded of wine.

e) A decrease in demand for both beer and wine.

22

Appendix 2

THE UNIVERSITY OF MELBOURNE

DEPARTMENT OF ECONOMICS

SEMESTER 1 ASSESSMENT, 2112

ECON10004 INTRODUCTORY MICROECONOMICS

Time Allowed: TWO hours

Reading Time: 15 minutes

This examination paper contributes 60% to the assessment in ECON10004.

The Response Sheet for the multiple-choice questions should be inserted in the back

of the examination script book at the end of the examination. For the multiple-choice

questions, you may use the examination script books to make notes or calculations.

These notes will NOT be taken into account for your assessment.

SECTION A: ANSWER ALL QUESTIONS

This section is worth 25% of the total exam marks.

Answer all questions. Fill in the small circle in the appropriate place with a 2B pencil

on the Response Sheet provided. An incorrect answer, no answer, or more than one

answer, will receive a zero mark.

SECTION B: ANSWER ALL QUESTIONS

This section is worth 25% of the total exam marks.

Answer all questions. Each question is worth equal marks.

SECTION C: ANSWER ALL QUESTIONS

This section is worth 50% of the total exam marks.

Answer all questions. Questions are worth different marks.

The following items are authorised in the examination room:

A print dictionary that translates English into a foreign language

A scientific calculator that does not store text

This exam paper cannot be removed from the examination room.

A copy of this exam paper will be held in the Baillieu Library.

This exam paper has 10 pages

23

SECTION A

ANSWER ALL QUESTIONS IN THIS SECTION

This section is worth 25% of the total exam marks.

All questions in this section are worth the same number of marks.

For each question select the one BEST answer. Incorrect answers, multiple

answers, or no answer, will receive zero.

Mark your answer on the Response Sheet.

Question A1

A chemical factory is located on the shore of a lake. The factory owner derives a private

marginal benefit from selling his products of: PMB = 50 – Q and his private marginal

costs of production are: PMC = 10 [where Q = tonnes of chemicals produced per

week, and PMB and PMC = $ per tonne]. His private marginal costs of production

are: PMC = $10. The social marginal benefit from producing the pesticide is the same

as the private marginal benefit (that is, PMB = SMB). However, with respect to the

social marginal costs, each tonne of production causes an additional cost of $15 to an

oyster farm through the dumping of chemical waste by the factory into the lake.

Which of the following is NOT correct?

a) To achieve a socially efficient outcome the government could require that

production be no more than 25 tonnes per week.

b) To achieve a socially efficient outcome the government could impose a tax on

production of $15 per tonne.

c) To achieve the socially efficient outcome the government could assign property

rights over the lake to the factory and the oyster farm will now be willing to pay

up to $15 for every tonne the factory reduces its output.

d) To achieve the socially efficient outcome the government could require that

output must not exceed 40 tonnes.

Question A2

The ‘Tiger Golf Club’ is the only golf course in a country town. Each customer to

the golf course incurs a MC of $1. The demand for the golf course by each individual

customer can be expressed as P = 10 – q, where q = number of visits to the golf

course and P = price per round of golf. The pricing scheme that earns the highest

profits for the golf club is to:

a) Set a price per round of golf of $10.

b) Set a price round of golf of zero, and an entry fee of $50.

c) Set a price round of golf of $1, and an entry fee of $81.

d) Set a price round of golf of $1, and an entry fee of $40.50.

Question A3

24

Suppose that a 20 per cent increase in the price of tomatoes causes a 10 per cent

decline in the quantity demanded of cucumbers. The coefficient of the cross elasticity

of demand for cucumbers is:

a) negative and, therefore, these goods are substitutes.

b) positive and, therefore, these goods are substitutes.

c) negative and, therefore, these goods are complements.

d) positive and, therefore, these goods are complements.

Question A4

At its current level of output, q , the firm Alpha Incorporated has marginal cost of

$20, average total cost of $16, and average variable cost of $12. Marginal cost is

increasing with the quantity supplied. Alpha Incorporated operates in a perfectly

competitive market where the price of each unit of output sold is $18. From this

information we can infer that:

a) The firm should reduce its quantity below q to maximise profits, and will be

willing to operate in both short run and long run.

b) The firm should reduce its quantity below q to maximise profits, and operate in

the short run but not long run.

c) The firm should reduce its quantity below q to maximise profits, but it is not

possible to say whether it will operate in either the short run or long run.

d) The firm should increase its quantity beyond q to maximise profits, and will be

willing to operate in both short run and long run.

Question A5

The demand for milk in Victoria is very price inelastic. Suppose that a disease in the

dairy herds in Victoria leads to a 20 per cent fall in the supply of milk. We would

expect the fall in supply to lead to:

a) A relatively large increase in the price of milk and a relatively large change in the

quantity of milk sold.

b) A relatively small increase in the price of milk and a relatively large change in the

quantity of milk sold.

c) A relatively large increase in the price of milk and a relatively small change in the

quantity of milk sold.

d) A relatively small increase in the price of milk and a relatively small change in the

quantity of milk sold.

Question A6

Suppose that Australian and US dollars are traded in a perfectly competitive market.

Treat the price in this market as the amount of $US that can be traded for $1AUS

(referred to as the US/AUS exchange rate), and the quantity traded as the quantity of

25

$AUS traded. Suppose that there is an increase in the rate of inflation in Australia

relative to the US. The predicted effect would be:

a) A decrease in the US/AUS exchange rate

b) An increase in the US/AUS exchange rate

c) An increase in demand for $AUS

d) A decrease in the supply of $AUS

Question A7

Suppose there is only one company that supplies telecommunications services to a

regional centre. The company offers two products to its customers – mobile telephone

services and broadband internet connections. The marginal cost of producing each

product for the company is a constant $50 per customer and there are no fixed costs.

There are two groups of consumers with the following willingness to pay (WTP) for

the respective products:

Mobile telephone (WTP) Broadband (WTP)

Consumer A $200 $150

Consumer B $150 $200

The telecommunications company is unable to distinguish between the two groups of

consumers. If the company can bundle the mobile telephone and broadband services,

what would be the company’s profit?

a) 150

b) 200

c) 350

d) 500

Question A8

Suppose iron ore is traded in a perfectly competitive market. Australia is an exporter

of iron ore. A fall in the world demand for iron ore reduces the world price of iron

ore. The effect of the fall in the world price of iron ore will be to:

a) Increase consumer surplus for Australian consumers, and decrease producer

surplus for Australian producers.

26

b) Decrease the quantity of iron ore consumed by Australian consumers, and

decrease exports of iron ore.

c) Decrease consumer surplus for Australian consumers, and increase producer

surplus for Australian producers.

d) Increase the quantity of iron ore consumed by Australian consumers, and increase

exports of iron ore.

Question A9

Suppose there are two competitors in the DVD player market in Australia – Big

Picture and Clear View. They are considering various pricing options. The payoffs (in

millions of dollars) from different pricing strategies are shown in the following payoff

matrix:

Clear View

Low price Medium price High price

Big Picture Low price 2,6 3,8 2,10

Medium price 5,1 3,6 1,5

High price 8,4 6,3 0,2

What are the set of Nash equilibria of the game described in the matrix above?

a) {Low price; Low price}

b) {Medium price; Medium price} and {High price; High price}

c) {High price; Low price} and {Low price; High price}

d) {Medium price; Low price} and {Low price; High price}.

Question A10

The market for wine in Australia can be represented by the following supply and

demand diagram:

27

Suppose the government implements a price floor in the wine market at P’. Assume

that prior to the imposition of the price support scheme, the price in the wine market

was P* and the quantity sold is Q*. The effect on the wellbeing outcomes of the price

floor are:

a) Consumer surplus equals area A, and producer surplus equals areas B+C+D+E+F.

b) Producer surplus increases by the area B, but producers lose the area F.

c) Producer surplus increases by the area B+C+D, and consumers lose area B+C.

d) Deadweight loss equals the area C+F+D.

$

B

A

P*

P’ D

Supply

Demand

Q

C

F E

Q*

G H

I

28

SECTION B

ANSWER ALL QUESTIONS IN THIS SECTION

This section is worth 25% of the total exam marks.

All questions in this section are worth the same number of marks.

For each of the following questions:

Consider the statements made by Dan and Sue. Say whether you believe each

statement is correct or incorrect. Briefly explain your answer and use diagrams

where appropriate. Note that most of the marks will be given for your

explanation.

Question B1

Suppose the market for laptop computers is perfectly competitive. The introduction

of new technology in the industry has lowered the cost of producing laptop

computers. Dan has observed this development, and comments: ‘The introduction of

a new technology should mainly benefit the manufacturers of laptop computers as it

will lower their costs of production and so cause a permanent increase in their

economic profits.’ Sue disagrees. She says: ‘ The main beneficiaries of the reduction

in costs in the industry in long run will be the consumers of laptop computers because

it will lower prices, I don’t consider there will necessarily be a permanent increase in

the economic profits for the manufacturers of laptop computers’.

Question B2

Dan and Sue are discussing the effects of a proposed 10 per cent increase in the

minimum wage by Fair Work Australia in their particular industry. At present, the

minimum wage in the industry is above the equilibrium wage in the market for

unskilled workers. Sue says: ‘I think that such an increase in award wages will reduce

employment in the industry. The extent of the reduction in employment will depend

on the elasticity of the supply of labour’. Dan disagrees and says: ‘While the effect of

an increase in the minimum wage may be to reduce employment in the industry, the

extent of the reduction in employment will depend on the elasticity of the demand for

labour not the elasticity of the supply of labour’.

Question B3

The production of paper creates as a by-product a chemical called dioxin. Scientists

believe that once dioxin enters the environment it raises the population’s risk of

cancer and birth defects. This is an externality cost involved in the production of

paper. Therefore the market for paper creates a deadweight loss by producing a

quantity greater than the socially efficient level. Dan comments that: ‘We can easily

eliminate this deadweight loss by the government imposing a price floor in the market

for paper manufacturing.’ Sue disagrees. She says: ‘Price floors always create

deadweight losses and so this would only make the situation worse’.

29

SECTION C

ANSWER ALL QUESTIONS IN THIS SECTION

This section is worth 50% of the total exam marks.

Question C1 (20 marks)

Part A (10 marks)

Suppose two companies – Multiplex and Buildcorp – are bidding for a construction

project for the government. Each firm is deciding whether to bid either $5 million or

$4 million. [Note that in this type of bidding the winning bid is the low bid because

the bid represents the amount the government will have to pay for the work done].

Each firm will have costs of $2.5 million to do the work. If they both make the same

bid, they will both be hired and each do half the project. This means they will each

earn half the revenue from the project and incur one half the costs. If one firm makes

a low bid and the other makes a high bid, only the low bidder will be hired and it will

receive all the profits. The bids by the firms will be made simultaneously.

a) Draw a payoff matrix to represent this game. (5 marks)

b) Do any of the players have a dominant strategy in this game? (1 mark)

c) What is the Nash equilibrium for this game? (2 marks)

d) Does the Nash equilibrium outcome maximise the total payoff to the firms?

Explain your answer. (2 marks)

Part B (10 marks)

Suppose Photosmart is a small software firm that has developed software that edits

pictures from digital cameras. Now HP Computers is considering making an offer to

Photosmart to install the software on every computer it sells. First HP decides what

price to offer Photosmart for its software. The alternatives it chooses are between a

contract price of either $20 per copy or $30 a copy for Photosmart’s software. Second,

having observed HP’s offer, Photosmart must decide whether to accept or reject the

offer.

If HP offers a contract of $20 per copy and Photosmart accepts this offer its profits

will be $3 million and HP will earn an additional profit of $15 million. If Photosmart

rejects this offer, its profits will be the $2 million it earns from selling its software on

the internet, and HP will earn zero additional profits. If HP offers a contract of $30

per copy and Photosmart accepts this offer its profit will be $5 million, and HP will

earn additional profits of $10 million. If Photosmart rejects this offer it will earn

profits of only $2 million, and HP will earn zero additional profits.

a) Draw a game tree for this game. (4 marks)

b) Derive the rollback equilibrium for this game. Explain your reasoning. (4 marks)

c) Suppose Photosmart attempts to obtain a favourable outcome by threatening HP

that it will reject a $20 offer. Should HP believe that Photosmart’s threat is

credible?

(2 marks)

Question C2 (15 marks)

30

The Toshima Corporation manufactures external hard discs. Suppose that the firm

operates in a perfectly competitive market. The following is a cost schedule for the

firm.

Quantity Total cost [$]

0 42

1 52

2 64

3 78

4 94

5 112

6 132

7 154

8 178

a) Calculate the average total cost, average variable cost and marginal cost curves for

the above cost schedule. Suppose the market price of the external hard discs is

$16. What is the profit-maximising quantity that Toshima Corporation will sell?

Is the firm earning a profit? Is it profitable in the short run for the company to

continue to supply the market at this price? Explain your answer. (6 marks)

b) Draw the short run supply curve for Toshima Corporation. Explain how you

derived the supply curve. (4 marks)

c) In long-run equilibrium in the external disc market, what will be the price per disc

and quantity that Toshiba Corporation will sell? Explain how you arrived at this

result. (2 marks)

d) The market demand for external discs is:

Price per box ($) 20 21 22 23 24

Market demand

[boxes per week]

180 160 140 120 100

Suppose all other firms in the external hard disc industry are identical to Toshima

Corporation. In long-run equilibrium, how many firms will operate in the industry?

(3 marks)

31

Question C3 (15 marks)

‘The unstoppable march of coffee has been underway for some time in this country,

once famed as a nation of tea drinkers. Over the last half-a- dozen years, as India’s

middle class has grown and a new upper-middle class has more money for consumer

spending, Western-style cafes with comfortable furniture and frothy coffee have been

sprouting up all over its towns and cities. According to the government’s own data,

the total consumption of coffee rose to an estimated 94,400 metric tons in 2008, an

increase of almost 90 per cent since 1998.

It’s easy to see why coffee shops are so popular. Not only do they offer a comfortable

seat on which to sit, unlike grubby chai stalls where drinkers are invariably forced to

stand or else crouch on their haunches, but with their air-conditioning and cleanliness

coffee shops are marketed strongly at young professional women.

This week the world’s largest coffee chain, Starbucks, finally announced a deal to that

will see it bring its cafes to India. Reports suggest Starbucks coffee shops could be

opening in as little as 6 months, as the company seeks to continue its expansion into

new markets. In India, they face the challenge of being a little late to enter the market

and will find itself competing with Café Coffee Day, Costa Coffee, Barista and

Coffee Bean.’

(‘India wakes up to the smell of Starbucks coffee’, The Independent, 14 January

2011)

a) Why is product differentiation important as a competitive strategy in such markets

as the coffee shop market in India? What are the costs and benefits of product

differentiation to the firm and to the consumer? How have the coffee shops in

India differentiated themselves from the traditional tea stalls? (6 marks)

b) According to the article above there has been an increase in the consumption of

coffee in India since 1998. What factors have caused consumption to increase?

Explain and illustrate the effect of this change on the short run profit maximising

price and output for a typical coffee shop in India. What will be the impact on

profits? (4 marks)

c) Starbucks has announced its intention to enter the coffee shop market in India in

as little as six months. Explain and illustrate the effect of Starbuck’s entry into the

market on the long run profit maximising price and output for a typical coffee

shop in India. What will be the impact on profits? In the long run, are these coffee

shops allocatively and/or productively efficient? (5 marks)

END OF EXAMINATION