Question 1 [20 marks} Copper Surplus Is Foreseen in '0? by Allen Sykora Wall Street Journal, February 28, 200? Copyright 200? Dow Jones 81 Co. Reprinted by permission of Dow Jones 8: Co. via Copyright Clearance Center. A number of analysts are looking for the global copper market to have a surplus this year, citing an expectation for steadier production after a strikefilled 2006 and potential substitution for the mineral... Data for 2006 from the International Copper Study Group suggest the market already has moved into a small surplus. The group lists a surplus of 108,000 tons for the first 11 months of 2006, compared with a 263,000 deficit for the same period in 2005.... Chuck Bradford, metals analyst with Soleil Securities, looks for a surplus in the 200,000ton area. "One of the interesting things in the International Copper Study Group piece [of Feb. 16] was a rebound in the operating rate at the mine level," Mr. Bradford said. "If you look at the operating rates in earlier '06, they were well below where they had been any time during the rest of the decade... Production was lost during much of 2006 due to a series of strikes, Mr. Bradford said. The ICSG report said global mine output was up 3% in November compared with the same month in 2005. But production disruptions in the rst part of the year left output for the first 11 months of 2006 essentially unchangedup 0.1%compared with the same period in 2005. Mr. Bradford said he doesn't anticipate a "huge" copper surplus in 200?, "because I think we'll have strikes again." Also, he said, when prices are high, companies are willing to mine lowergrade material that they may have not otherwise... Michael Skinner, of base metals sales with Standard Bank, said his firm looks for a modest surplus this year, assuming there is a "constant stream of production" without as many labor disruptions as in 2006.... "It mainly has to do with continuity of production this year," he said. 'There is certainly incentive to do that at these prices. That will help take us into surplus." Mr. Skinner cautioned there can be wide variations in the supplyanddemand estimates by various researchers. This is especially the case for copper due to the difficulty in obtaining data from China. Mr. Skinner said while the ICSG put the surplus at 108.000 metric tons for the first 'Il months of 2006, his firm estimated a surplus of 40,000 metric tons in all of 2006... . Mr. Bradford said a measure of demand may be how much substitution for copper occurs due to historically strong prices. "My biggest fear is substitution," he said. "I keep asking people about it. and | get very conflicting stories. The aluminum guys Page 1 of6 are all convinced they have benefited materially from substitution away from copper into aluminum. "[Copper] has been losing markets because of the price. ltjust takes a long time for that to happen," Mr. Bradford said. An example, he said, is the move toward plastic piping in home construction. Mr. Skinner also said industry appears to be making some effort to find substitutions for coppen He said his firm believes the economy won't slow as much as some have forecast. If demand in other parts of the world holds up, overall demand could increase "marginally" this year, he said. The key may be the level of Chinese imports, he said. "The market is looking at that very carefully. The scrap substitution is also a key," Mr. Skinner said. While many analysts look for Chinese buying to pick up this year, some caution it may not be as aggressive as some expect. In particular, many suspect China has drawn down inventories that must now be rebuilt... (Source: Economics for Managers, Paul G. Farnham, 2"\" edition) Required: Based on the article in question 1 answer the followings: 3] Identify and describe the focus issues in the article. b] Discuss the impacts of the events in the article above on the price and quantity of copper, and with the support of demand and supply curves, clearly indicate the differences between changes in demand and supply and changes in quantity demanded and quantity supplied; (12 marks) (3 marks) Question 2 (20 marks) a} The following quotation appeared in a Wall Street Journal article on the battle for market share in the automobile industry in 2000: "The huge fixed costs involved in developing newr vehicles antir running big auto factories means auto makers feet compeed to maintainor expandmarket share. Losing share long term could mean shutting down factories, or running factories at unprofitable rates." Do these statements support economic theory and show that economies of scale do not benefit a firm if the output level is small? Explain with appropriate example and justification. b} Based on the figurell below answer the following questions: (10 marks) With reference to Fig. 1-1, i. Indicate at what point on its Long run average (LAC) curve the (2 marks) firm is operating the optimum scale of plant at its optimum rate of output. ii. What type of plant would the firm operate and how would the (5 marks) firm utilize its plant for outputs smaller than seven units? iii. What about for outputs greater than seven units? (3 marks) Question 3 (20 marks) a) Compare and contrast the outcomes with respect to price and output in a monopolistically competitive market and a perfectly competitive market. In which situation are consumers better off? Justify your answer. (10 marks) b) Use the information in the following table, which summarizes the payoffs (i.e., profit) to two firms that must decide between an average-quality and a high quality product, to answer the questions that follow: Firm 2 Average Quality High Quality Firm 1 Average Quality 600, 600 400, 1100 High Quality 1 100, 400 900, 900 i) What is each player's dominant strategy? Explain your reasoning. (5 marks) ii) Referring to the table above, is this an example of a prisoner's dilemma game? Explain your reasoning. (2.5 marks) iii) Is there a Nash equilibrium? If so, justify your answer. (2.5 marks)Question 4 (20 marks) a) b} Assume you have been hired to advise two different firms, A and B, regarding the price each firm should charge for its product, focusing on the amount each firm should markup price over marginal cost. While both firms are price setters, the product produced by firm A is extremely unique and enjoys widespread appeal. In contrast, firm B sells a fairly standard product for which there are several good, but not perfect, substitutes. How would your advice to each firm differ? How does the price elasticity of demand influence your recommendations? (10 marks) Explain the basic distinction between microeconomic analysis and macroeconomic analysis. Describe how these types of issues that each branch of analysis focuses on could be important for managerial decision making. {10 marks} Question 5 [20 marks} a) What are the three monetary policy tools of the Fed? Briefly describe how each tool can be used to implement an expansionary monetary policy and a contractionary monetary policy. (10 marks) b} During the recession of 20072009, the U.S. economy was experiencing a decrease in home prices and consumer wealth, a credit crisis in the financial markets, and declining consumer and business condence. What components of aggregate demand were affected and what was the impact on real output? What were the policy options? {10 marks} - END OF