Explain whether the following events in questions 1 and 2 will affect fixed costs or variable costs
(make sure you justify your answer):
- The federal government applies a once off fee on every airplane used for domestic flights in
Australia of 100,000 AUD to cover inspection costs. (1 mark) Word count 40 - Samsung spends an additional $50 million US on research and development for the next
generation of its mobile phone. (1 mark) Word count 40
Read the following excerpt and answer question 3.
Money down the drain
Households hit by sky high power bills have also been silently battling
surging water and sewage costs in a double – whammy on their budgets A
Herald Sun analysis of 10 years of bureau of Statistics data has found that
water and sewerage charges jumped an average 91 per cent since 2007, not
far behind electricity’s jump 116 per cent jump. ……
Water economics specialist and Australian National University professor
Quentin Grafton said the costs to “drought-proof” cities [by building higher
cost desalination plants] had been passed on to customers over the past
decade, and authorities had started charging households more for water use
above certain thresholds. …
Author Anthony Keane
Source: The Herald Sun October 21st, 2017 - Using the cost diagrams, including drawing a graph, explain, what is happening to costs of the
firm. Identify any relevant information provided in the article.
What solution would you recommend to the government to address any equity concerns
where poorer households experiencing high water prices (noting that clean water is an
important commodity)? Explain your solution carefully. (4 marks) Word count 350.
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Task 4: Market Power - Strong demand and accompanying higher prices will result in higher profits. However,
eventually the high prices will bring an end to existing companies increased prosperity in a
market with lower barriers to entry. Explain, using appropriate diagrams (hint: use the
perfectly competitive market framework to analysis this question). (2 marks) – Word count
200 - What is a network externality? How does a network externality serve as a barrier to entry? Is
this barrier surmountable? Provide one example. Make sure you carefully explain your
answer. (2 marks) – Maximum number of words 120
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Task 5: Business Strategy and Market Failure
Melbourne Limousine Company (MLC) and Airport Connections (AC) are the only two airport
limousine rental service companies. Each firm must decide whether to increase its advertising
spending to compete for customers. The following figure shows the payoff matrix for this
advertising game. - Define dominant strategy. Does MLC have a dominant strategy? Explain. (2 marks) – Maximum
number of words 130 - What would happen if AC increases their advertising budget but MLC does not? Explain. (1
mark) – Maximum number of words 100 - What is (are) the Nash equilibrium(s) in this game. Explain. Why are the alternative scenarios
from the payoff matrix not Nash? Explain. (2 marks) – Word count 150