ECON1048 Managerial and Business Economics Report Melbourne, Semester 1, 2022 1 Introduction In this assignment you will take the role of a professional economist, assessing the likely impacts ofthe proposal detailed in section 2. You will analyse the proposal using techniques developed throughout this course, and prepare a research report detailing your findings and their implications. 1.1 Formatting requirements Your assignment must be typed using Microsoft Word, or a similar word processor. The document should have a professional appearance, appropriate to a corporate workplace. Format your assignment as follows: 0 Use A4 sized paper with all margins at least 2.5cm. 0 Include a title page as the first page of your report. a Body text to be l2pt and black. (There is no minimum line spacing.) 0 Include a word count at the end of every section except the analysis section. 0 All pages, except the title page, to be numbered. 0 Use headings to indicate sections, and subheadings to provide organisation and struc ture within a section. (Do not use subheadings in the introduction or conclusion.) 0 Optional: Save your assignment as a PDF to ensure that your document and equa tions appear as you intend. 1.2 Grading There are a total of 100 marks available in this assignment, and the assignment contributes 40% of your grade for Managerial and Business Economics. The marks allocated to each step of the report's analysis section are detailed in section 3. The marking criteria for the remainder of the assignment can be found in the rubric. 2 Scenario Your client, lnsureCorp, is an insurance company considering launching an 'income insur ance' product in the island nation of Autarka. Income insurance is a product that fully insures a household against changes in income caused by a major injury or illness. At present, no businesses are selling income insurance products in Autarka. Initial mar ket research suggests that there are 10,000 households in Autarka interested in purchasing income insurance. Your client expects that the fixed cost of launching the income insurance product will be $20,000,000 per year, and that each policy issued to a customer will cost the company an additional $1,500 in sales commissions. 2.1 Your task Your client wants you to analyse the potential market for income insurance and report on the following: o What is the maximum price the company can charge a household for an income insurance policy? a What is the expected profit (or loss) for the company if it becomes a monopoly provider of income insurance? o Is there a risk that rival insurance companies will also enter the market. selling identical income insurance products? If so, what would be the expected profit of your client? (You should assume that any competitors would face the same costs as your client.) 2.2 Household welfare A typical household in Autarka has an income of $160,000 per year, which they spend on food (good x) and clothing (good y). Their preferences over consumption baskets are represented by the utility function, U = X1/4y1/4_ The associate marginal utilities are, 1/4 1/4 _ Y _ X MUX 4x3/4 and MUy 4y3/4' The price of food is PX = $8 per meal, and the price of clothing is Py = 128 per item. Each household has a 10% probability of experiencing a major injury or illness in any given year. If a household experiences a major injury or illness, its income is reduced to $6.400 per year. 3 Report Your report should be prepared with the following structure: 1. Introduction 2. Analysis 3. Discussion 4. Conclusion The requirements for each section of the report are detailed below. 3.1 Introduction In your introduction you should succinctly and accurately summarises the purpose of your report. You should also outline the methodology employed in your analysis, and your key findings. The introduction has a 200 word limit. 3.2 Analysis In the analysis section you must complete each of the steps detailed below. When com pleting the steps you must: 0 Type all equations using the 'lnsert Equation' function (or equivalent). a Show all of your working and include sufficient written description for the reader to follow your process. Note that hand draw figures and equations are not acceptable. There is no word/page limit for the analysis section. Step 1: Derive an expression for the typical household's marginal rate of substitution. (4 marks) Step 2: Find the typical household's optimal consumption basket when its income is $160.000. What is the household's associated level of utility? (10 marks) Step 3: Find the typical household's optimal consumption basket when its income is $6,400. What is the household's associated level of utility? (10 marks) Step 4: What is the typical household's expected utility if it does not purchase insurance? (4 marks) Step 5: What is the expected payout to the typical household if it does purchase insurance? (4 marks) Step 6: What is a household's maximum willingness to pay for insurance? (Hint: Use the utility function U = \\/'/64 for this step only.) (8 marks) 3.3 Discussion In your discussion you should address all the issues raised in the scenario. This includes explaining the significance of the findings of your analysis in the context of the scenario, and providing arguments in support of the conclusions of your report. Be sure to base your discussion on the results in your analysis section and avoid assertions or speculation. Use economic terminology as appropriate. The discussion has a 500 word limit. 3.4 Conclusion Your conclusion should succinctly and accurately summarises the findings of your analysis and the implications of these findings for the scenario. The conclusion has a 200 word limit