QUESTION 1

Suppose the market for smartphones in Australia is oligopolistic with three firms owning the entire market: Apple, Samsung and Google.

(a) Suppose all the products are unbranded (homogeneous) and all three firms have similar cost functions. What would be the best outcome for consumers in this market and what is the best outcome for the three oligopolists? Which one is the efficient outcome?

(b) Suppose Apple can differentiate its smartphone by using a different operating system than the other two firms. This would increase the marginal cost of Apple to a point above the other two firms. How would your answers to part (a) change?

(c) Suppose all three firms have different cost functions and heterogeneous products. What would be the predicted outcome in this case?

QUESTION 2

Country A is currently experiencing a balanced budget in a normal cycle. The government in country A is in charge of undertaking different policies to prevent a predictable recession in future.

(a) Suppose the government offers a stimulus package to prevent the recession. Describe how this stimulus package could prevent the recession and would it necessarily work well?

(b) Now suppose there is a Country B that trades with Country A. In particular, Country A imports some products from Country B. What would be the effects on trade between the two countries as a result of the policy in part (a)?

(c) How would the unemployment in Country A change due to the policy in part (a)?

QUESTION 3

Australia is one of the major exporters of iron ore as one of its resources. However, there are many other producers of iron ore in the world. Suppose the price of iron ore is set in an internationally competitive market.

(a) Due to a major demand shock in China, the demand for iron ore by China increased significantly. However, at the same time some mines in Africa closed down due to production issues. Explain how would the market equilibrium price and quantity for this product change internationally?

(b) Based on the answer you provided for part (a) what would be the new market equilibrium in Australia?

(c) What would be the effects on the macroeconomy of Australia as a result of this change in the iron ore market?