Week 3 Tutorial Questions for Tuesday 22nd January 1. In each of the following scenarios try to demonstrate the possible allocations a. Chris has to buy Christmas presents for her two sons, Brett and Toby. She has decided to allocate $400 to buy presents for the two of them. Represent the possible allocations Chris can make in a diagram, and identify the Pareto efcient allocations. Are these allocations fair? b. Chris ends up buying 40 bars of chocolates and 20 books such that they can be divided equally between her two children, Brett and Toby. (That is, each child should receive half the choocies and half the books). Construct an Edgeworth box diagram showing the various ways in which the pressies might be divided. Show the point in this diagram that represents the division of the estate intended by Chris. Can we be sure that this point is on the contract curve?l Is this allocation fair? c. Robinson starts out with It) lobsters and 5 coconuts. Friday starts out with It} lobsters and 15 coconuts. After trading, Robinson ends up with S lobsters and 10 coconuts. Robinson feels neither better nor worse off than when he started but cannot get Friday to agree to any more trades. Friday feels better off than when he started. Draw the Edgeworth box consistent with this story. 2. Adrienne and Sarah consume pizza, Z, and cola, C. Adrienne's utility function is UA=ZACA With \"E? = CA 3113 MUf = Z A. Sarah's utility function is Us = ZE'SCE-Swith MU? = 052;"'5695 and MU: = c.5zg-5c;\"-5. Their initial endowments are 2,510, (3520, 25:20 and (35:10. a. What is the MRS of each person? b. Derive the equation of the contract curve. c. Draw an Edgeworth box and indicate the contract curve. d. Is the initial endowment point on the contract curve? How can we be sure? 3. In an hour, Sue can produce 40 caps or 4 jackets and Tessa can produce 80 caps or4 jackets. a. Does either Sue or Tessa have an absolute advantage? b. Who has a comparative advantage in producing caps and in producing jackets? c. If Sue and Tessa specialise and trade, who will gain? Explain using PPF diagrams for before and after trade. 4. The inverse demand curve a monopoly face is P = 100 2Q. The firm's cost curve is C(Q} = 20 + lQ. a. Tviiihat is the prot maximizing quantity and price? b. How much is the deadweight loss compared with the competitive outcome? c. Illustrate a and b using an appropriate diagram. d. Calculate the Lerner Index of monopoly power and the Point Elasticity of Demand at the monopoly equilibrium. 5. Suppose an Australian monopolist has a total cost function of TC=1 tltlQ+ltltl, where Q is the total number of Pavlovas {they are awesome with fresh fruits and fresh cream; nobody does Pavlovas like him!) he produces. He is able to separate his market into twn distinct segments shop 1 is at the T3 terminal of Singapore's Changi International Airport and shop 2 is the local shop in Crawley where for shop one Pl=5tltl-10Q1 and for shop two P2=300~20Q1 This implies that Q={Q1+Q2). Now answer the following questions: Ifhe is a monopolist in each of markets 1 and 2
