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this is a the tutorial work for week 2...

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ECON2245 Business Economics Tutorial 2 1. Aunty Bree is attending UWA and likes to eat a meal at lunchtime. Apart from price, Aunty Bree’s decisions on where to eat are based on her tastes for food quality and pleasantness of the surroundings (Aunty Bree is a party girl likes to socialise with other students). Assume that she has three choices to eat at: I. II. III.

The University Guild Caf* – which has equal amounts of food quality and pleasantness of surroundings. Varsity Bar – which has a greater emphasis on the pleasantness of surroundings than food quality. Nedlands Restaurant – which has a greater emphasis on the food quality than the pleasantness of surroundings.

a) Using characteristics analysis with indifference curves, illustrate a situation where Aunty Bree would only dine at Varsity Bar. Also illustrate the levels of food quality and pleasantness Aunty Bree receives from dining at Varsity.

food quality

A = Guild Caf* B = Varsity Bar C = Nedlands Restaurant

Pleasantness of surroundings b) Indicate on the diagram, the levels of food quality and pleasantness that Aunty Bree would need to shift from only dining at Varsity Bar to be indifferent from dining at Varsity Bar, the University Guild Caf* and Nedlands Restaurant. What would the University Guild Caf* and Nedlands Restaurant need to do to make Aunty Bree change her preference for solely consuming at Varsity Bar.  Nedlands has to ↑ the pleasantness of its surroundings & Guild Caf* has to ↑ both factors 2. Like many other firms, Bunnings sometimes advertises that if you buy a product from them and subsequently find it cheaper elsewhere in Perth, they will refund the difference plus an additional 10%. What do you think will be the effect of this kind of guarantee on prices in that industry? Are these kinds of guarantees good for consumers?

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This form of advertising will cause the price of the goods to ↓ until the remaining competition leaves the market allowing Bunnings to have a monopoly on the market. It will be good for consumer in the SR as the price will ↓, however in the LR due to the monopoly Bunnings has on the market thy can drive the price up.

3. The following are approximate market shares of different brands of soft drinks during the early 2000s: Coca Cola: 40% Pepsi: 30% Seven-Up: 10% Dr Pepper: 10% Coles Home Brand: 6% Woolworths Home Brand: 4% a) Calculate the Herfindahl Hirschman Index (HHI) and the CR4 for the soft drink market.  HHI = (0.40 + 0.30 + 0.10 + 0.10 + 0.06 + 0.04) ^ 2 = 0.28  CR4 = 0.40 + 0.30 + 0.10 + 0.10 = 0.9 b) Suppose Pepsi took over Seven-Up. Calculate the likely post-merger Herfindahl Hirschman Index (HHI) and CR4. How many equally sized firms are implied by the Herfindahl Hirschman Index?  HHI = (0.40 + 0.40 + 0.10 + 0.10 + 0.06 + 0.04) ^ 2 = 0.334  CR4 = 0.40 + 0.40 + 0.10 + 0.06 = 0.96  3 c) The ACCC might be concerned by the increase in the Herfindahl Hirschman Index. How might Pepsi respond to their concerns about monopoly power?  They could argue that they are not a monopoly as they possess the same market share coke, with the accession of Seven-Up.

4. Assume that Grill’d (a burgers chain) is a profit-maximizing, monopolistically competitive firm that has optimally chosen its advertising/sales ratio. Research has shown that the price elasticity of demand for Grill’d’s products is –3.4, and that its advertising elasticity is +0.068. Grill’d will spend which of the following proportions of total revenue on advertising?  Formula = advertising elasticity / price elasticity of demand  0.068 / 3.4 = 0.02 or 2.0% (a) 50.0%, or (b) 2.0%, or (c) 23.1%, or (d) 5.5%, or (e) Insufficient information to say 5. Read the following, taken from Box 11.3 “Windows Cleaning” on pages 170 and 171 of the textbooks. Answer the following: In what aspects might Microsoft’s behaviour be deemed to have been against the public’s interest and in the public’s interest?

Against the public’s interest:  Prevents competitor’s product usage  Trying to be a monopoly  ↓ comp  Blocks third parties from coming in In the public’s interest:  Values data protection  Innovation  Same OS and hardware  EOS...