ECON1048 Managerial and Business Economics
Report
Semester 1, 2024
1 Introduction
In this assignment you will take the role of a professional economist, assessing the likely impacts of the 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:
. Use A4 sized paper with all margins at least 2.5cm.
. Include a title page as the first page of your report.
. Body text to be 12pt and black. (There is no minimum line spacing.)
. Include a word count at the end of every section except the analysis section.
. All pages, except the title page, to be numbered.
. 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.)
. Optional: Save your assignment as a PDF to ensure that your document and equa- tions appear as you intend.
Food manufacturers in the small island nation of Autarka have complained that the cost of cardboard, used to produce the packaging for their products, is too high. The food manufacturers claim that the price of cardboard in Autarka is much higher than in other countries. They allege that cardboard manufacturers are colluding to raise the price in Autarka.
There are three firms that manufacture cardboard in Autarka: Arthur’s Accoutrements, Boris’ Boxes, and Carl’s Cartons. These firms contend that the relatively high prices in Autarka are due both to the small size of the market and to the fact that cardboard is too expensive to import by air or sea.
In response to the controversy, the chair of the ACCC (Autarkan Competition & Con- sumer Commission) has launched a preliminary investigation into the cardboard market. The purpose of the investigation is to determine whether there is sufficient evidence of collusion to warrant a more extensive criminal inquiry.
2.1 Your task
You are an economist working for the ACCC. As part of the preliminary investigation, you have been asked to determine:
• Which model of oligopoly competition is most appropriate for analysing the cardboard market.
• If there is evidence of collusion between the three cardboard manufacturers, and if so, what is the social cost of the conduct.
• Why no other manufacturer has entered the market to challenge the three existing firms.
2.2 The Market
Cardboard is a homogeneous good produced to industry standard specifications. The annual demand for cardboard in Autarka is given by the function,
Q = 10,000,000 − 1,000,000P,
where Q is the quantity demanded of cardboard for a given year, measured in square metres, and P is the price per square metre.
The equipment for manufacturing cardboard is readily available to manufacturers around the world. Each year a manufacturer must ensure it has sufficient manufacturing capacity installed to produce its desire quantity of cardboard. The marginal cost of cardboard, inclusive of the cost of installing capacity, is $0.60 per square metre. The fixed cost of operating a cardboard manufacturing plant is $4,000,000 per year.
At present, the market price of cardboard is $3.70 per square metre, with 6,300,000 square metres being sold each year.
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:
. Type all equations using the ‘Insert Equation’ function (or equivalent) .
. 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.
For steps 1 and 2 you should assume that the three firms are engaged in Bertrand competition.
Step 1: Find the equilibrium firm prices and quantities. (4 marks)
Step 2: Find the equilibrium producer surplus of a typical firm, consumer surplus, and deadweight-loss. (4 marks)
For steps 3 to 10 you should assume that the three firms are engaged in Cournot competition.
Step 3: Rearrange the demand function to find inverse demand. (2 marks)
Step 4: Find the total cost function of the typical firm. Use QA to represent the quantity produced by the typical firm. (2 marks)
Step 5: Find the profit function for the typical firm. Use X to represent the combined production of the other firms in the market. (3 marks)
Step 6: Find the best-response function of the typical firm. (5 marks)
Step 7: Find the equilibrium quantity of the typical firm as a function of N, the number of firms in the market. (4 marks)
Step 8: Find the equilibrium price as a function of N, the number of firms in the market. (3 marks)
Step 9: Find equilibrium producer surplus of atypical firm, consumer surplus, and deadweight- loss, for the case in which N = 3. (6 marks)
Step 10: Find equilibrium producer surplus of a typical firm for the case in which N = 4 . (3 marks)
For step 11 you should assume that the market price is $3.70 per square metre, and that each of the three firms produces 2,100,000 square metres of carboard each year.
Step 11: Find equilibrium producer surplus of atypical firm, consumer surplus, and deadweight- loss. (4 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.