ECON1056 Price Theory, Industry Analysis, SIM, Semester 2, 2021

ECON1056PriceTheory IndustryAnalysis SIM,Semester2,2021 1 Introduction Decision-makersingovernmentrelyontheadviceofexpertswhenformulatingpolicyor dischargingtheirstatutoryresponsibilities.Inthisassignmentyouwilltaketheroleofan experteconomist,employedbyagovernmentdepartment.Anexperteconomist'srolein thegovernmentdecision-makingprocessistwo-fold: ‹ Analysis: Economistsusetheirspecialistknowledgeandskillstoanalysethelikely outcomesofpolicyalternatives.Theythenevaluatetheseoutcomesagainstthe government'sobjectivesandstatutoryobligations. ‹ Communication: Economistscommunicatetheirtoministersandsenior publicservants,who,inmanyinstances,donotsharetheirspecialisedknowledge. Thisassignmentwillassessyouraptitudesinbothofthesedomains.Youaretoconduct an industryanalysis basedonthescenariodetailedinsection2.Thenuseyouranalysisas thebasisfora brief (ashortreport)summarisingyourrecommendationsandtheassociated rationale. 1.1 Formattingrequirements YourassignmentmustbetypedusingMicrosoftWord,orasimilarwordprocessor.Both partsoftheassignmentshouldbeincludedinthesamedocumentwiththe brief placed beforethe industryanalysis .Thedocumentshouldhaveaprofessionalappearance,appro- priatetoagovernmentworkplace.Formatyourassignmentasfollows: ‹ UseA4sizedpaperwithallmarginsatleast2.5cm. ‹ Bodytexttobe12ptandblack.(Thereisnominimumlinespacing.) ‹ Allpagestobenumbered. ‹ DONOTincludeacoversheetortableofcontents. ‹ Optional:SaveyourassignmentasaPDFtoensurethatyourdocumentandequa- tionsappearasyouintend. 1.2 Grading Thereareatotalof100marksavailableinthisassignment(50marksfortheindustry analysisand50marksforthebrief),andtheassignmentcontributes40%ofyourgrade forPriceTheory.Themarksallocatedtoeachstepoftheindustryanalysisaredetailedin section3.Themarkingcriteriaforthebriefcanbefoundintherubric. 1 2 Scenario Thegovernmentisabouttoundertakealargeprogramofpublicworks,repairingand upgradingbridgesaroundthecity.The MinistryofTransport hasdecidedthatthepublic workswillbefunded,inpart,byanewtaxontaxicompanies.Thegovernment'srationale forthenewtaxisthattaxioperatorsbfromwellmaintainedroadsandbridges,and thereforeshouldcontributetotheirupkeep. TheMinistryhasdevelopedtwoalternativeproposalsforthenewtaxiindustrytax: 1. Theproposalistolevyataxof $ 2.40pertaxitrip.(Note:Thistaxwould increaseeachcompany'smarginalcostby $ 2.40.) 2. Thesecondproposalistolevyalump-sumtaxof $ 50,000perday,oneachtaxi company,regardlessofthenumberoftaxitripsitprovidestoconsumers.(Note: Thistaxwouldincreaseeachcompany'scostby $ 50,000.) Taxicompaniesopposebothproposals.InasubmissiontotheMinistry,thecompanies claimthatanewtaxwillnothavetheintendedThecompaniesstatethattheywill havenochoicebuttopassthecostofanewtaxontoconsumers,intheformofhigher prices,andthatconsequentlytheburdenofthetaxwillfallontheircustomers,notthe companiesthemselves. 2.1 Yourtask The MinisterforTransport hasinstructedyoutoevaluatethetwoproposalsandrecom- mendwhichofthetwoproposals(ifany)theministryshouldpursue.Inyourrecommen- dationyoushouldconsidertherevenueraisedbyeachproposal,aswellastheimpactthat eachproposalwillhaveonbothconsumersandthetaxiindustry.Inparticular,youareto assessthetaxicompanies'claimthatitisconsumerswhowillultimatelybearthecostof anynewtax.(Theministerisconcernedthatthepublicwillnotsupportthenewtaxesif theyresultinpricerises.) 2.2 Industrystructure Twotaxicompaniescompeteinthetaxiindustry: GoldTopTaxis and DarkGreyCabs . Everymorningthetwotaxicompanieseachdecidehowmanytaxistoputontheroad. Thesedecisionsdeterminethetotalnumberoftaxitripsthataresuppliedinto themarketonthatday.Consumershavenoapparentpreferenceovertaxicompanies. Inversedemandinthemarkethasbeenestimatedtobe, P =50 Q 1400 ; where P representsthepriceofataxitripindollars,and Q isthetotalnumberoftaxi tripssuppliedintothemarketonagivenday. Thecostcharacteristicsofthetwotaxicompanieshavebeenestimatedusingcorporate accountssubmittedtotheMinistryofTransport.GoldTopTaxisfacesamarginalcostof MC G =$12 : 50pertrip.DarkGreyCabsmarginalcostis MC D =$14 : 00pertrip.Both companiesincurcostsof FC G = FC D = $ 140,000perday(regardlessofthenumber oftripssupplied). 2 3 Industryanalysis ForyourIndustryAnalysisyoumustcompleteeachofthestepsdetailedbelow.The requiredanalysisdrawsoncontentcoveredinlectures6{10(primarilylecture9).When completingthestepsyoumust: ‹ Typeallequationsusingthe`InsertEquation'function(orequivalent). ‹ Showallofyourworking. ‹ Includewrittendescriptionforthereadertofollowyourprocess. ‹ Useappropriatenotationandeconomicterminology. Youraudiencefortheindustryanalysisisotherexperteconomistswhomayberequiredto reviewyourwork.ThereisnopagelimitfortheIndustryAnalysis. 3.1 Requiredsteps Whencompletingtheindustryanalysisyoushouldassumethatareengagedin CournotCompetition .Usethesubscript G todenotevariablesbelongingtoGoldTop Taxis,andthesubscript D todenotevariablesbelongingtoDarkGreyCabs. Step1: Derivethetwototalcostfunctionsforthecaseinwhichthereisnotax imposedonthetaxiindustry.(3marks) Step2: Derivethetwopfunctionsforthecaseinwhichthereisnotaximposed onthetaxiindustry.(4marks) Step3: Derivethetwos'bestresponsefunctionsforthecaseinwhichthereisnotax imposedonthetaxiindustry.(6marks) Step4: Derivethelong-runequilibriumquantities,marketprice,pand consumersurplus,forthecaseinwhichthereisnotaximposedonthetaxiindustry.(8 marks) Step5: Repeatsteps1to4forthecaseinwhicha $ 2.40taxpertripisimposedonthe taxiindustry.(20marks) Step6: Derivethelong-runequilibriumquantities,marketprice,pand consumersurplus,forthecaseinwhicha $ 50,000perdaytaxisimposedonthetaxi industry.(9marks) 3 4 Thebrief Thepurposeofthebriefistocommunicateyourrecommendationstothedecision-maker whocommissionedyouranalysis.Youneedtoprovideenoughinformationforthedecision- makertounderstandyourrecommendations,andtoreachadecisiononthematterathand. However,seniorgovernmentareextremelybusy,soyoumustbebrief. ‹ Themaximumlengthforyourbriefis2pages. ‹ Anycontentinexcessof2pageswillnotbereadorgraded. Whenwritingthebriefrememberthatitisforanon-expertaudience.Youmustavoidusing specialisedeconomicterminologyandstateeverythingin`plainEnglish'.Forexample: ‹ Termssuchasconsumersurplus,producersurplus,anddeadweightloss,havelit- tlemeaningoutsideofeconomicsandshouldbeavoided.(Note:Thisisnota comprehensivelist.) ‹ Ontheotherhand,thenceoftermssuchasprice,revenue,andpare generallywellunderstoodoutsideofeconomics. Thebriefshouldnotincludeanyequationsordiagrams.Tablesanddollaramountsmay beincludedasappropriate. 4.1 Template Youmustcomposeyourbriefaccordingtothetemplatedetailedonthefollowingpages. Instructionsforeachrequiredelementofthebriefareincludedwithinthistemplate.These instructionsareintherequirementsoftherubricforthetask.Ensurethatyour briefincludeseachoftheelementsdetailedinthetemplate,andthatyoudonotreorder, rename,oromitanyoftheseelements. 4 forthe(insertdecision-maker'stitlehere) Subject: Includeabriefbutdescriptivesubjectline. Maximumlength1line. Hint:Thesubjectis,inthetitleofyourbrief.Composethesubjectasyou wouldthetitleofareport. Preparedby: Yournamehere. CoreMessage Writeanexecutivesummaryofthebrief.Yourcoremessageshouldconsistofthree sentences:Thesentenceprovidingasummaryofthescenario.Thesecondsen- tencesummarisingthekeyrationaleforyourrecommendation.Andthethirdsentence summarisingyourrecommendation(s). Maximumlength5lines. Hint:Thestatementsinthecoremessageshouldstandontheirown.Provide informationandavoidgeneralities.Thereadershouldbeabletounderstandthecore messagewithoutreferringtothescenarioortherestofthebrief. Recommendation Conciselystatetheprincipalrecommendationthatarisesfromyouranalysis. Hint:Yourrecommendationshouldbestatedasaclearcourseofactionforthegov- ernmenttopursue.Beprecise.Avoidgeneralitiesandambiguousstatements.DONOT explainorseektojustifyyourrecommendationinthissection.DONOTdescribethe consequencesofyourrecommendation.DONOTstateconditionsorcaveatsforyour recommendation. KeyInformation Beginyourkeyinformationsectionwithashort(1{2paragraph)outlineofthecontextfor thebrief(asdetailedinthescenario),theproblemunderconsideration,andanyadditional issuesraised. Hint:These1{2paragraphsshouldsetthesceneforthereader.Theyshouldprovide thereaderwithbackgroundinformationtounderstandthepurposeofthebrief. DONOTusetheseparagraphstoforeshadow,explain,orjustifyyourrecommendation(s). Usetheremainderofthekeyinformationsectiontopresenttherationalebehindyour recommendation(s).Youshouldhighlightanyinvolvedinyourrecommenda- tion(s),andaddressanyadditionalissuesraisedinthescenario.Yourrationaleshouldbe presentedasfollows: ‹ Usesubheadingstoconciselystatethekeyofyourindustryanalysis. The maximumlengthforasubheadingis2lines(1lineispreferable). ‹ Writeashortparagraphfollowingeachsubheadingtobexplainthe Takentogether,thestatedinthesubheadingsshouldformalogicalargument supportingyourrecommendation(s). Hint:Incorporateallinformationrequiredtosupportyourrecommendation(s)inthis section,regardlessofwhetherornotthesameinformationhasbeenincludedelsewherein 5 thebrief.Eachsubheadingshouldbewrittenasastatementoffact.DONOTincludean explanationwithinasubheading,leavethatforthefollowingparagraph.DONOTassert factsthatareunsupportedbyeitherthescenariooryourindustryanalysis. FinancialImplications summarisethedirectimplicationsofyourrecommendation(s)(ifany)for theGovernment.Includetheprecisedollaramountsthatcomeoutofyouranalysis. Hint:Theimplicationssectionshouldprovidethereaderwitheasyaccessto thecostand/orofyourrecommendationstothegovernment.Thissection isnotasubstituteforstatingtheimplicationselsewhereinthebrief., ifthencialimplicationsformapartoftherationaleforyourrecommendation(s),they willneedtobeincludedinboththekeyinformationsectionANDtheimplications section.DONOTusethissectiontosummariseothermarketoutcomes(eg.pand price).DONOTusethissectiontopresentargumentsinsupportofyourrecommenda- tion(s).Thissectionmustbeincludedeveniftherearenodirectancialimplications fromyourrecommendation(s). Beginyourindustryanalysisonanewpagefollowingthebrief. Hint:Usethe`InsertPageBreak'functioninMicrosoftWordtoensurethepagebreak displayscorrectly. 6