2025
EMIC2714 Activity Workbook
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1
Introduction
The aim of this workbook is two-fold:
1. To provide the student with class examples;
2. To provide the student with additional activities.
This workbook should be used in conjunction with the Calculation Steps document. The
Class examples are explained in the Calculation Step Guide. The additional activities are
there for the students’ own practice. Additional activities may form part of the homework
activities and the answers will only be dealt with in class.
2
UNIT 1.1
Class activity:
Suppose that medical research studies have established that grilling meat over hot coals
causes cancer. Since government cannot regulate home cooking methods, it decided to
place a R10 tax on charcoal to discourage the consumption of barbequed meat. You are
given the following information about the market for charcoal.
Market Demand: 𝑃𝑃 = 500 − 2𝑄𝑄
Market Supply: 𝑃𝑃 = 40 + 3𝑄𝑄
1. Calculate the before-tax equilibrium price and quantity in this market.
2. Calculate the value of consumer surplus in this market.
3. Calculate the value of producer surplus in this market.
4. Calculate the shortage/surplus at the P = 280
5. Calculate the shortage/surplus at the P = 400
6. Calculate the elasticity of demand at equilibrium.
7. Calculate the after-tax equilibrium price and quantity in this market.
8. Calculate the tax incidence on consumers.
9. Calculate the tax incidence on producer.
10. Calculate the amount of revenue government will receive.
11. Calculate the deadweight-loss as a result of the tax.
12. Illustrate all your values on a graph.
i.
Original equilibrium price and quantity
ii. Post-tax equilibrium price and quantity
iii. Government income
iv. Consumer and producer tax burden
v. Deadweight-loss
3
Additional Activity
This question walks you through the problem as a consultant for the taxation authority in
Neverneverland. Study the following information for the demand and supply functions for
two goods – Iced-tea and hamburgers:
Iced-tea
Demand function
Supply function
Hamburgers
𝑃𝑃 = 125 − 5𝑄𝑄
𝑃𝑃 = 5 + 7𝑄𝑄
𝑃𝑃 = 200 − 4𝑄𝑄
𝑃𝑃 = 20 + 2𝑄𝑄
1.
Find the equilibrium price and quantity in both markets.
2.
Find the value of consumer surpluses and producer surpluses in both markets.
3.
Calculate the elasticity of demand given the equilibrium price and quantity
calculated above in question 1.
4.
At a price of R40 per Iced-tea, will there be a surplus or a shortage? Indicate by how
much.
5.
At a price of R100 per Hamburger, will there be a surplus or a shortage? Indicate by
how much.
6.
Suppose you can choose only ONE of the two goods to apply an excise tax on the
producer side of the particular market.
Option 1: Apply the excise tax of R12 per Iced-tea
Option 2: Apply the excise tax of R12 per hamburger
6.1
Write down the new supply curve function for both markets after the excise tax has
been imposed.
6.2
Calculate the post-tax equilibrium price and quantity for both markets.
6.3
Calculate the post-tax consumer surplus for both markets
6.4
Calculate the tax burden on the consumer and on the producer at new equilibrium
6.5
Calculate the tax revenue that government will receive.
6.6
Calculate the deadweight loss at new equilibrium.
6.7
Given your answers above, which option should the taxation authority choose if she
wishes to maximize her tax revenue?
4
6.8
Given your answers above, which option should the taxation authority choose if she
wishes to minimize the consumer's burden?
6.9
Given your answers above, which option should the taxation authority choose if she
wishes to minimize the producer's burden?
7.
Make use of a demand and supply diagram to illustrate your answers above in both
markets. Clearly show:
i.
Original equilibrium price and quantity
ii. Post-tax equilibrium price and quantity
iii. Government income
iv. Consumer and producer tax burden
v. Deadweight-loss
UNIT 1.2
Class Activity
Given:
𝑈𝑈 (𝑋𝑋; 𝑌𝑌) = 𝑋𝑋𝑋𝑋
𝑃𝑃𝑃𝑃 = 6
𝑃𝑃𝑃𝑃 = 3
𝑀𝑀 = 60
1.1
Write down the budget constraint.
1.2
Calculate the optimal number of X and Y to maximize utility.
1.3
Calculate the total utility that the consumer will derive given your answer above in
question 1.2
1.4
Calculate the MRS at optimal utility level, assuming product X is labeled on the xaxis.
1.5
Plot all the values on an indifference curve analysis.
5
Additional activities
Question 1
Make use of the following values to answer the question below.
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 30𝑋𝑋𝑋𝑋
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑋𝑋 = 100
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑌𝑌 = 25
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = 5000
1.1
Write down the budget constraint.
1.2
Calculate the optimal number of X and Y to maximise utility.
1.3
Calculate the total utility that the consumer will derive given your answer above in
question 1.2
1.4
Calculate the MRS at optimal utility level, assuming product Y is labeled on the x-axis.
1.5
Plot all the values on an indifference curve analysis.
Question 2
Make use of the following values to answer the question below.
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 6𝑋𝑋𝑋𝑋
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑋𝑋 = 20
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑌𝑌 = 5
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = 1400
2.1
Write down the budget constraint.
2.2
Calculate the optimal number of X and Y to maximise utility.
2.3
Calculate the total utility that the consumer will derive given your answer above in
question 2.2
2.4
Calculate the MRS at optimal utility level, assuming product X is labelled on the xaxis.
2.5
Plot all the values on an indifference curve analysis.
6
UNIT 1.3
Class Activity
Activity 1:
Make use of an indifference curve analysis to illustrate how the relationship between the
income-, substitution and total effect contribute towards the classification of a normal
good. Assume that the price of decreases. To simplify your model, show the exact value of
the SE, IE and TE by making use of the following Qd values: Qd = 50, Qd = 56 and Qd = 60.
Activity 2
Make use of an indifference curve analysis to illustrate how the relationship between the
income-, substitution- and total effect contribute towards the classification of an inferior
product. Assume that the price decreases. To simplify your model, show the exact value of
the SE, IE and TE by making use of the following Qd values: Qd = 30, Qd = 35 and Qd = 42.
Activity 3
𝑃𝑃 = 1600 − 2𝑄𝑄
•
Calculate Ed and Total expenditure at P = 1200 and at Q = 500
Activity 4
𝑌𝑌 = 5 + 0.5𝑄𝑄
•
Calculate the income elasticity of demand if Q = 6 and Y = 50
•
Classify the nature of the good.
7
Activity 5:
Use the following values to illustrate the exact values of the pure-price effect, the
bandwagon effect and the total effect of a positive network externality and to derive the
market demand curve. P1= R2000; P2= R1500; Qd of 350; Qd of 850; Qd of 1150.
Activity 6:
Use the following values to illustrate the exact values pure-price effect, the snob-effect and
the total effect of a negative network externality and to derive the market demand curve:
P1 = 600; P2 = 400; Qd of 200;
Qd of 300;
Qd of 600
Additional Activities
Question 1
Use the following demand- and income function of Susan and Peter to answer the questions
that follow:
Susan
Demand-function
Income-function
𝑃𝑃 = 180 − 2.5𝑄𝑄
𝑌𝑌 = −500 + 5𝑄𝑄
Peter
P = 45 − 0.25Q
Y = 903 − 1.15Q
1.1 Calculate and classify both Susan’s and Peter’s price elasticity of demand at Q = 20.
1.2 Using your answers in question 1.1 above, calculate both Susan’s and Peter’s total
expenditure.
1.3 Calculate and classify both Susan’s and Peter’s price elasticity of demand at P = 35.
1.4 Using your answers in question 1.3 above, calculate both Susan’s and Peter’s total
expenditure.
1.5 Calculate both Susan’s and Peter’s income elasticity of demand at 𝑄𝑄 = 400 and classify
the nature of the products.
1.6 Calculate both Susan’s and Peter’s income elasticity of demand at 𝑌𝑌 = 500 and classify
the nature of the products.
8
UNIT 2.1-2.2
Class Activity
Suppose a company currently faces the following input-output information. Use the
information to answer the questions that follow:
Budget = R92 000
Price of labour = R1000
Return on capital = R2000
Number of labour employed = 42
Number of capital employed = 25
Number of units produced = 280
1.1
Write down the isocost function.
1.2
Illustrate the optimal number of inputs employed on an isoquant-isocost diagram.
On your diagram also calculate and indicate the marginal rate of technical
substitution. (Also show all the intercepts of the isocost-lines and the optimal input
combination. Label labour on your x-axis and clearly show ALL values on your axes
and curves).
1.3
Suppose government implements a minimum wage of R2000. Keeping all the other
variables constant (budget, return on capital, number of capital employed, number
of units produced), calculate the new number of labourers that the firm will employ.
1.4
Given your answer above, in question 1.3, use an isocost-isoquant diagram to
illustrate the ‘new’ optimal level of input combination. On your diagram also
calculate and indicate the ‘new’ marginal rate of technical substitution. (Show all the
intercepts of the isocost-lines and the optimal input combination. Label labour on
your x-axis and clearly show ALL values on your axes and curves).
9
Additional Activities
Question 1
Clothing-for-u uses both labour and capital in its production of clothes. The table below
indicates the budget, wage rates, return on capital rate and the units of capital and labour
used in the production during May 2016 and May 2017. By making use of the information
below and the isoquant-isocost graph, illustrate and calculate the marginal rate of technical
substitution at optimal input combinations for both May 2016 and May 2017. In addition,
show all the intercepts of the budget constraints and the optimal input combination. (Note:
label labour on your x-axis and clearly show ALL values on your axes and curves).
May 2016
May 2017
Budget
50 000
162 000
Wage rate
R2000
R3000
Return on capital
R500
R600
Number of labourers
19
30
Number of capital
24
120
Number of units of cloths produced
200
400
Question 2
Suppose Kovsies-Bottled-Water spends R4000 daily to produce 2000 bottles of water and is
faced with two possible daily budget constraints. In the first budget constraint given as 200L
+ 500K= 4000, the company can use 10 units of labour (L) and 4 units of capital (K) to
produce 2000 bottles of water. If the company decides to use the second budget constraint
given as 400L + 100K = 4000, it will use 5 units of labour (L) and 20 units of capital (K) to
produce 2000 bottles of water. By making use of an isoquant-isocost graph, illustrate the
information provided above and clearly show the marginal rate of technical substitution at
optimal input combinations for both budget constraints. In addition, show all the intercepts
of the budget constraints and the optimal input combination. (Note: label labour on the
horizontal axis).
10
UNIT 2.3
Class Activity
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 𝑃𝑃 = 600 − 4𝑄𝑄
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 𝑃𝑃 = 20 + 1.8𝑄𝑄
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 5𝑄𝑄 2 + 10𝑄𝑄 + 190
Calculate the price, output, marginal cost, average total cost and profit of a perfectly
competitive firm and illustrate your answer on a graph.
Additional Activity
The data below indicates the demand and cost conditions for 3 different firms operating in 3
different perfectly competitive markets. Use the following hypothetical information in the
table below to answer the questions that follow:
Firm A
Market demand-function
Market supply-function
Total Cost-function
𝑃𝑃 = 200 − 2𝑄𝑄
𝑃𝑃 = 10 + 1.8𝑄𝑄
𝑇𝑇𝑇𝑇 =
32 + 10𝑄𝑄 2 + 20𝑄𝑄
Firm B
𝑃𝑃 = 500 − 20𝑄𝑄
𝑃𝑃 = 200 + 5𝑄𝑄
𝑇𝑇𝑇𝑇 =
200 + 2𝑄𝑄 2 + 220𝑄𝑄
Firm C
𝑃𝑃 = 1000 − 2.25𝑄𝑄
𝑃𝑃 = 120 + 0.5𝑄𝑄
𝑇𝑇𝑇𝑇 =
6000 + 4𝑄𝑄 2 + 40𝑄𝑄
For all three Firms:
1.
Calculate the market equilibrium price and quantity.
2.
Given your answer above, calculate the output level at which a profit maximising
perfectly competitive firm will operate.
3.
Given your answers above, calculate the marginal cost, average total cost and profit
/ loss that the firm will make.
4.
Given all your answers above, indicate the situation (price, output, profit) on a
perfectly competitive graph.
11
UNIT 2.4
Class Activities
Activity 1
Use the following information to calculate the MR using the Ed-method.
𝑃𝑃 = 200 − 2.5𝑄𝑄
P = 500
Q = 100
Activity 2
If the elasticity of demand for good X is 𝐸𝐸𝐸𝐸 = −5 and the elasticity of demand for good Y
𝐸𝐸𝐸𝐸 = −2, calculate the optimal price given a total cost function: 𝑇𝑇𝑇𝑇 = 8 + 100𝑄𝑄
Activity 3
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 1200 − 8𝑄𝑄
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 𝑇𝑇𝑇𝑇 = 146 + 32𝑄𝑄
Calculate and illustrate the price, output, marginal cost, average total cost and profit of this
monopoly.
Activity 4
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 1000 − 6𝑄𝑄
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 𝑇𝑇𝑇𝑇 = 18000 + 5𝑄𝑄 2 + 10𝑄𝑄
Calculate and illustrate the price, output, marginal cost, average total cost and profit of this
monopoly.
12
Activity 5
Make use of the information in activity 3 to answer the following questions.
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 1200 − 8𝑄𝑄
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 𝑇𝑇𝑇𝑇 = 146 + 32𝑄𝑄
1. Calculate the Lerner Index by making use of the Price-MC formula and comment on the
degree of market power.
2. Calculate the Lerner Index by making use of the Ed-coefficient and comment on the
degree of market power.
Activity 6
Market demand 1: 𝑃𝑃1 = 65 − 2𝑄𝑄
Market demand 2: 𝑃𝑃2 = 35 − 3𝑄𝑄
Total cost function: 𝑇𝑇𝑇𝑇 = 7 + 5𝑄𝑄
Calculate and illustrate (on 3 separate graphs) the demand and MR origin / intercept points,
Q1, Q2, P1, P2, MC as well as the total Q for this firm.
13
Additional Activities
Question 1
Three of the most (in)famous monopolies in South Africa is Eskom, Telkom and Spoornet.
Use the following hypothetical information in the table below to answer the questions that
follow:
Eskom
Demandfunction
Cost-function
Telkom
Spoornet
𝑃𝑃 = 250 − 7𝑄𝑄
𝑃𝑃 = 550 − 10𝑄𝑄
𝑃𝑃 = 200 − 5𝑄𝑄
𝑇𝑇𝑇𝑇 = 540 + 5𝑄𝑄 2 + 10𝑄𝑄
𝑇𝑇𝑇𝑇 = 6250 + 50𝑄𝑄
𝑇𝑇𝑇𝑇 = 2850 + 10𝑄𝑄
1.1 Calculate the price, output and profit/loss of each of the three firms – Eskom, Telkom
and Spoornet – and indicate your answers on three separate monopoly graphs.
1.2 Calculate the Lerner-index for each of the three firms – Eskom, Telkom and Spoornet –
using the Price-Marginal Cost formula.
1.3 Calculate the Lerner-index for each of the three firms – Eskom, Telkom and Spoornet –
using the price elasticity of demand method.
1.4 Suppose Telkom wishes to provide 2 different price-quantity packages for ADSLinternet – a 2MB-line and a 4MB-line. If the elasticity of demand for a 2MB line is -2.5
and the elasticity of demand for a 4MB line is -4, calculate the optimal price given a
constant MC of R60.
1.5 Suppose Spoornet practices 3rd-degree price discrimination. The two separate demand
curve functions are given as: 𝑃𝑃1 = 150 − 2𝑄𝑄1 and 𝑃𝑃2 = 48 − 3𝑄𝑄2 . The total cost
curve function is 𝑇𝑇𝑇𝑇 = 8 + 6𝑄𝑄.
1.5.1 Calculate and illustrate (on 3 separate graphs) the demand and MR origin / intercept
points, Q1, Q2, P1, P2, MC as well as the total Q for Spoornet.
14
1.5.2 Calculate the price elasticities of demand at the profit maximizing points for each of
the two markets, given your answers above.
Question 2
Mzanzi mobile network sells its cell phones using intertemporal price discrimination. During
the launch of the latest mobile cell phone called ‘matamela’ their economists estimated the
demand curve as 𝑃𝑃1 = 800 − 30Q a year later the demand was estimated as 𝑃𝑃2 = 400 −
5Q . The total cost function is given as TC = 10 + 20Q .
2.1
Calculate the price, quantity sold and Ed during the launch and after a year when
‘matamela’ cell phone was launched.
2.2
Given your answers above, indicate it graphically on an intertemporal price
discrimination graph.
Question 3
A firm's demand curve is given by 𝑃𝑃 = 500 − 1.5𝑄𝑄. The firm's current price is R300 and the
firm sells 100 units of output per week.
3.1
Calculate the elasticity of demand.
3.2
Given your answer above, calculate the firm's marginal revenue at the current price
and quantity using the price elasticity of demand coefficient calculated above.
UNIT 2.5
[Note: calculations for monopolistically competitive firm is identical to that of monopoly
(Unit 2.4) and perfectly competitive firms calculation are dealt with in Unit 2.3]
Demand-function
Cost-function
Monopolistic Competition
Perfect competition
𝑃𝑃 = 250 − 10𝑄𝑄
𝑃𝑃 = 80
𝑇𝑇𝑇𝑇 = 1440 + 10𝑄𝑄
𝑇𝑇𝑇𝑇 = 5𝑄𝑄 2 + 30𝑄𝑄 + 125
15
Compare the Monopolistically competitive firm to that of a perfectly competitive firm in
terms of:
•
Price & output
•
Profit
•
Allocative efficiency
UNIT 2.6
Class activity 1
Suppose Ster Kinicor, Film-tastic, Movie-Screen and Big Screen cinema decides to merge and
form a new company called Cinamagic. The new company, Cinamagic, now controls 85% of
the total market output of 125 000 movie-tickets, while the rest of the 4 firms collectively
only control 15%. Cinamagic sets the price of movie tickets as a monopoly at R80. By making
use of the necessary diagrams and calculations, illustrate the price- and output-setting
behaviour of the firms in the cinema market. Clearly show
(i)
Cinamagic’s demand curve, price and output as well as
(ii)
the rest of the firms in the industries output and price, and
(iii)
the total market demand for movie tickets on your graphs.
Class activity 2
Graphically illustrate why there is an incentive to form a cartel.
Illustrate and explain
(i)
why there is an incentive of a member to cheat on the cartel agreement, and
(ii)
what the result of cheating by the cartel members will be.
16
UNIT 2.7
Class activity 1
Firm
Sales
Firm A
200
Firm B
100
Firm C
50
Firm D
400
Firm E
800
Firm F
20
Firm G
250
Firm H
16
1.
Market shares
HHI
Calculate the CR4 and the HHI and comment on the degree of concentration in the
industry.
Suppose Firm B and Firm G decides to merge. Would you be in favour of such a
2.
merger? Explain your choice comprehensively by using the necessary HHIcalculations.
Class activity 2
Suppose that a market consist of eight firms. The largest firm controls 60% of the market
sales and the second largest firm, 10%. The remainder of firms share equal market share.
i)
Calculate the CR4
ii)
Calculate the CR 6
iii)
Calculate the HHI
iv)
Calculate the change in the HHI if any of the smallest two firms merge. Would
you be in favour of the merger? Substantiate your answer.
17
Additional Activities
Suppose the table below indicates the firms in the coffee-capsule market. Use the
information to answer the questions that follow.
Name of firm
1.
Turnover (‘000)
Caffeluxe
5000
Ric-cofy
4500
Nescave
1000
Café-caps
2200
Cof-expreso
8800
Nepresso
1800
Frisku
11300
Tiger-coffee
400
Calculate the CR4 and the HHI and comment on the degree of concentration in the
industry.
2.
Suppose Caffeluxe and Nespresso decides to merge. Would you be in favour of such
a merger? Explain your choice comprehensively by using the necessary HHIcalculations.
UNIT 2.8
Class Activity 1
Use the following information to answer the questions below:
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑: 𝑃𝑃 = 500 − 5𝑄𝑄
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: 𝑇𝑇𝑇𝑇 = 540 + 5𝑄𝑄 2 + 20𝑄𝑄
1. Calculate the monopolies price and output.
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2. Calculate the perfectly competitive markets price and output. [Note: this is the same
calculation as being asked to calculate the regulatory price and output using marginalcost price regulation]
3. Calculate the consumer surplus for both a monopoly and perfectly competitive market.
4. Calculate the marginal cost for a monopoly.
5. Calculate the deadweight-loss.
Class Activity 2
Innovation can be used both as an argument against or in favour of the monopoly?
Does a monopoly suppress innovation?
1. Use innovation to argue in favour of the monopoly, and
2. Use innovation to argue against a monopoly.
Additional Activity
Use the following information to answer the questions below:
𝑃𝑃 = 2000 − 50𝑄𝑄
𝑇𝑇𝑇𝑇 = 800 + 5𝑄𝑄 2 + 20𝑄𝑄
1. Calculate the monopolies price and output.
2. Calculate the perfectly competitive markets price and output. [Note: this is the same
calculation as being asked to calculate the regulatory price and output using marginalcost price regulation]
3. Calculate the consumer surplus for both a monopoly and perfectly competitive market.
4. Calculate the marginal cost for a monopoly.
5. Calculate the deadweight-loss.
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UNIT 3.1
Class Activities
A monopsony’s demand for labour is given by 𝑤𝑤 = 200 − 20𝐿𝐿, its AFC (supply) is given as
𝑤𝑤 = 50 + 5𝐿𝐿 and the 𝑀𝑀𝑀𝑀𝑀𝑀 = 𝑤𝑤 = 50 + 10𝐿𝐿
1. Calculate the wage rate and the employment levels for a (1) perfectly competitive
market and a (2) monopsony.
2. Suppose the government sets a minimum wage of (i) R77.50 and (ii) R88. How would the
level of employment change?
3. Illustrate all your values on diagrams
Additional Activities
Additional Activity 1
Suppose Trans-atlantic Busline operates as a monopsony. The demand curve function for
bus-drivers is given by 𝑤𝑤 = 150 − 15𝐿𝐿, its supply (AFC) curve function is given by 𝑤𝑤 = 50 +
5𝐿𝐿, with a corresponding MFC curve function of 𝑀𝑀𝑀𝑀𝑀𝑀 = 50 + 10𝐿𝐿.
1.1
Calculate the profit maximising wage rate, MRP and the number of bus-drivers
Trans-atlantic Busline will hire.
1.2
Given your answers in question 1.1 above, illustrate these values on a graph.
1.3
Suppose that, due to changing market conditions, Trans-atlantic Busline now
operates in perfectly competitive labour market. Calculate the new wage rate and
level of employment.
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Additional Activity 2
Suppose a monopsonist, Shine Gold Mine, demand curve for mineworkers is given by 𝑤𝑤 =
1200 − 20𝐿𝐿, its AFC (S) curve function is given by 𝑤𝑤 = 800 + 40𝐿𝐿, with a corresponding
MFC curve function of 𝑀𝑀𝑀𝑀𝑀𝑀 = 800 + 80𝐿𝐿.
2.1
Calculate the profit maximising wage rate, MRP and the number of mineworkers
Shine Gold Mine will hire.
2.2
Given your answers above, illustrate these values on a monopsonistic graph.
2.3
Suppose government decides to implement a minimum wage of R1000. How will this
influence Shine Gold Mines employment levels? Calculate the new level of
employment and indicate the minimum wage and the new level of employment on
your diagram plotted in question 2.2 above.
Additional Activity 3
The next table shows the supply of labour to Ndebele coal-mine.
Workers ( in
Wage (R) per
Total factor cost
Average factor
Marginal factor
thousands)
hour
(TFC)
cost (AFC)
cost (MFC)
1
10
2
11
3
12
4
13
5
14
6
15
3.1
Complete the table.
3.2
Plot the company’s AFC curve and MFC curve in the space provided below. The firm’s
MRP curve is already in the graph.
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3.3
Why is the firm’s MFC curve above the AFC?
3.4
How many workers will the firm hire? What wage will it pay to each of these
workers?
3.5
What would be the equilibrium wage and employment if this were a perfectly
competitive market? How do these values compare with those of the monopsonist?
3.6
What would be the new equilibrium wage and employment level if the government
imposes a minimum wage rate of R15 in this market (Monopsony case)? Compare
result with your answer in 3.4 above
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Additional Activity 4
The next diagram illustrates the labor market in which there is only one employer
(Monopsony).
4.1
What is the profit-maximizing amount of labor for this monopsonistic firm? Why?
4.2
What wage will it pay each unit of labor? Why?
4.3
If the government sets a minimum wage of R6, how many units of labor would be
hired?
4.4
The demand for labour is a derived demand. Explain.
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UNIT 3.2
Class Activity 1
Suppose that government is concerned about the level of pollution – a negative externality
– in the production of product X. As a result, government implements a Pigouvian tax of
R20. Assume no positive externality. The MSB-function is given as 𝑃𝑃 = 500 − 2𝑄𝑄 and the
MPC-function is given as 𝑃𝑃 = 40 + 3𝑄𝑄
13. Calculate the before-tax equilibrium price and quantity in this market.
14. Calculate the social optimal equilibrium price and quantity in this market.
15. Calculate the quantity that the market over-produces due to the negative externality.
16. Calculate the net-social cost.
17. Illustrate all your values on a graph.
Class Activity 2
Suppose that the production of good X is associated with a positive externality. Assume no
negative externality. As a result, government grants a Pigouvian subsidy of R20 to the
producers. The MSB-function is given as 𝑃𝑃 = 500 − 2𝑄𝑄 and the MPC-function is given as
𝑃𝑃 = 40 + 3𝑄𝑄
1. Calculate the original equilibrium price and quantity in this market.
2. Calculate the social optimum equilibrium price and quantity in this market.
3. Calculate the price that the consumers will pay and the price that the producers will
receive after the subsidy.
4. Calculate the quantity that the market under-produces due to the positive externality.
5. Calculate the net-social loss (loss in social benefit).
6. Calculate the total value of the subsidy that government should grant in order to achieve
the social optimal level of output.
7. Illustrate all your values on a graph.
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Class Activity 3
Suppose that the consumption of good X is associated with a positive externality. Assume no
negative externality. As a result, government grants a Pigouvian subsidy of R40 to the
consumers. The MPB-function is given as 𝑃𝑃 = 300 − 2𝑄𝑄 and the MSC-function is given as
𝑃𝑃 = 20 + 3𝑄𝑄
1. Calculate the original equilibrium price and quantity in this market.
2. Calculate the social optimum equilibrium price and quantity in this market.
3. Calculate the price that the consumers will pay and the price that the producers will
receive after the subsidy.
4. Calculate the quantity that the market under-produces due to the positive externality.
5. Calculate the net-social loss (loss in social benefit).
6. Calculate the total value of the subsidy that government should grant in order to achieve
the social optimal level of output.
7. Illustrate all your values on a graph.
Additional Activities
Question 1
Suppose that government is concerned about the level of pollution – a negative externality
– in the production of product X. As a result, government implements a Pigouvian tax of
R30. Assume no positive externality. The MSB-function is given as 𝑃𝑃 = 1200 − 2.25𝑄𝑄 and
the MPC-function is given as 𝑃𝑃 = 30 + 1.5𝑄𝑄
1. Calculate the before-tax equilibrium price and quantity in this market.
2. Calculate the social optimum equilibrium price and quantity in this market.
3. Calculate the quantity that the market over-produces due to the negative externality.
4. Calculate the net-social cost.
5. Illustrate all your values on a graph.
25
Question 2
Suppose that the production of good X is associated with a positive externality. Assume no
negative externality. As a result, government grants a Pigouvian subsidy of R100 to the
producers. The MPB-function is given as 𝑃𝑃 = 1000 − 4.5𝑄𝑄 and the MPC-function is given as
𝑃𝑃 = 50 + 0.5𝑄𝑄
1. Calculate the original equilibrium price and quantity in this market.
2. Calculate the social optimum equilibrium price and quantity in this market.
3. Calculate the price that the consumers will pay and the price that the producers will
receive after the subsidy.
4. Calculate the quantity that the market under-produces due to the positive externality.
5. Calculate the net-social loss (loss in social benefit).
6. Calculate the total value of the subsidy that government should grant in order to achieve
the social optimal level of output.
7. Illustrate all your values on a graph.
Question 3
Suppose that the consumption of good X is associated with a positive externality. Assume no
negative externality. As a result, government grants a Pigouvian subsidy of R160 to the
consumers. The MPB-function is given as 𝑃𝑃 = 600 − 5.5𝑄𝑄 and the MSC-function is given as
𝑃𝑃 = 20 + 4.5𝑄𝑄
1. Calculate the original equilibrium price and quantity in this market.
2. Calculate the social optimum equilibrium price and quantity in this market.
3. Calculate the benefit that the consumers and the producers will receive given the
subsidy.
4. Calculate the quantity that the market under-produces due to the positive externality.
5. Calculate the net-social loss (loss in social benefit).
6. Calculate the total value of the subsidy that government should grant in order to achieve
the social optimal level of output.
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7. Illustrate all your values on a graph.
Question 4
The diagram below indicates the effect of a Pigouvian subsidy on a market.
Price
2200
MPC = MSC
Subsidy = (E)
2000
(A)
Producer benefit = (B)
Consumer benefit = (C)
Net social loss = (G)
670
(D)
MSB
20
MPB
380
(F)
Q
Make use of the following equations and the diagram above to answer the questions that
follow.
MPB = 2000 − 3.5Q
MSC = 100 + 1.5Q
1. What is the value of the subsidy that government granted per unit?
2. Write down the MSB-equation.
3. Calculate the missing value for Points (A) – (G)
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UNIT 3.3
Class Activity 1
1. Plot the WTP-curve for each of the two consumers given the WTP-equations provided
below.
Consumer 1 (C1): 𝑃𝑃1 = 12 − 0.75𝑄𝑄
Consumer 2 (C2): 𝑃𝑃2 = 10 − 1𝑄𝑄
2. Plot the AWTP curve.
3. Make use of the diagram below to answer the questions that follow:
P
12
10
C1 WTP
C2 WTP
10
16 Q
3.1. Write down consumer 1 (C1) WTP-equation.
3.2. Write down consumer 2 (C2) WTP-equation.
3.3. Write down the AWTP-equation.
4. Calculate the optimal amount that government should produce if the MC-function is
given as 𝑀𝑀𝑀𝑀 = 2 + 3.5𝑄𝑄. Plot this value on your graph.
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5. Calculate the amount that each consumer will pay for the optimal amount and the total
amount government will receive. Plot these values on your graph.
Class Activity 2
Bloemfontein municipality intends to install street lights in a specific area. The willingness to
pay demand curve for high income residents are: 𝑃𝑃1 = 120 − 0.5𝑄𝑄 while that of low
income residents is: 𝑃𝑃2 = 60 − 1.5𝑄𝑄. The marginal cost of providing street lights is: 𝑀𝑀𝑀𝑀 =
12 + 5𝑄𝑄
1. Calculate the optimal number of streetlights that should be installed.
2. Calculate the amount levied on low and high income residences.
3. Calculate the total amount collected by the municipality.
4. Draw on diagram.
Additional Activities
Question 1
Mangaung Municipality estimated the demand for the installation of street lights for ‘nonresident’ and ‘resident students’ on the campus of the University of the Free State. The
willingness to pay demand curve for ‘resident students’ is given as: 𝑃𝑃1 = 200 − 2.5𝑄𝑄, while
that of ‘non-residents students’ is given as: 𝑃𝑃2 = 120 − 1.2𝑄𝑄. The marginal cost of providing
these street lights on campus is: = 20 + 2.3𝑄𝑄 .
1.1
Calculate the optimal number of street lights that Mangaung Municipality should
install.
1.2
Calculate the amount of money to be levied on a ‘resident student’, a ‘non-resident
student’ and the total amount to be collected by Mangaung Municipality.
1.3
On a single graph, show the optimal provision of street lights, which is a public good
to university students.
29
Question 2
Suppose that government estimated that demand for the garbage removal public services
differs between high income living areas and lower income living areas. The willingness to
pay demand curve for higher income areas is given as: 𝑃𝑃1 = 120 − 2.5𝑄𝑄, while that of lower
income areas is given as: 𝑃𝑃2 = 60 − 3𝑄𝑄. The marginal cost of providing garbage removal
service is: 𝑀𝑀𝑀𝑀 = 40 + 12𝑄𝑄 .
1.1
Calculate the optimal number of garbage removal service that government should
provide.
1.2
Calculate the amount of money to be levied on higher income areas, lower income
areas and the total amount to be collected by Government.
1.3
On a single graph, show the optimal provision of garbage removal services.
Question 3
Make use of the diagram below to answer the questions that follow.
R/C
MC
(A)
(B)
(C)
(D)
(H)
(I)
(J)
Q
30
The WTP-equations for the two groups of consumers are given as: 𝑃𝑃1 = 240 − 5𝑄𝑄, and
𝑃𝑃2 = 80 − 4𝑄𝑄. The marginal cost of providing the public good is given as: 𝑀𝑀𝑀𝑀 = 20 + 16𝑄𝑄.
1.1
Write down the AWTP-function.
1.2
Calculate the missing values from (A) to (J).
Question 4
Make use of the diagram below to answer the questions that follow:
R/C
550
MC
C1
400 C2
333
250
25 30
50 62
90
100
150
155
160
Q
80
1.1
Identify the optimal amount of the good that government will provide.
1.2
What is the optimal price that consumer 1 is willing to pay for the optimal amount?
1.3
What is the optimal price that consumer 2 is willing to pay for the optimal amount?
1.4
What is the total (aggregate) amount that government will receive from supplying
the optimal amount?
1.5
For how many units is consumer 1 WTP that consumer 2 is not?
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1.6
Compute consumers 1 WTP-function.
1.7
Compute consumers 2 WTP-function
1.8
Compute the AWTP-function.
END OF WORKBOOK