Big Markets, Competition Model, Externalities, GDP, Fiscal Policy, and Exchange Rate (Coursework Sample)

Coursework 2 (50% of Total Mark)
All questions must be answered
1 Using the notion of economies of scale explain why specialised service suppliers (like financial consultants for asset management, or lawyers for celebrities, or orthodontists) are only found in big markets. Draw a graph of demand and average total cost of production to illustrate your answer (10%)
2 There are two firms that produce large commercial airplanes, namely, Boeing and Airbus. Boeing and Airbus have different flight control systems, with many pilots preferring one system over the other. The Airbus A380 has a double-deck design that can hold up to 840 passengers and sells for $375.3 million. By contrast, the Boeing 747 can hold up to 568 passengers and sells for $317.5 million. What key conditions of the perfect competition model are violated in the large commercial airplane market? (10%)
3.Which of the following statements is TRUE? (5%)
I. In the face of a positive externality, a perfectly competitive market produces less than the socially optimal quantity of output.
II. If vaccinations create an external marginal benefit, the marginal social benefit of vaccinations will always exceed their private marginal benefit.
III. In unregulated markets, negative externalities create deadweight losses, but positive externalities do not.
IV. In the face of a negative externality, a perfectly competitive market produces more than the socially optimal quantity of output.
A. I, II and V are correct
B. III only is correct
C. I and III are correct
D. I and IV are correct
4 What is the nature of the positive externality associated with research and development? (5%)
A. Firms that engage in research and development may develop more profitable products.
B. Firms that engage in research and development may be able to lower their production costs.
C. Research and development may lead to discoveries that make other firms more innovative.
D. Firms that engage in research and development tend to pay higher stock dividends.
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5 Students at a nearby college often complain about assignments requiring group work. The statement “I could have done a better job by myself” is often heard.
a. Explain why group work, in which everyone in the group receives the same grade, is a public good.
b. Is the quality complaint heard by students consistent with what theory might suggest?
c. Explain how the incentive to free-ride manifests itself in group work. (10%)
6A Why GDP is an imperfect index of social welfare? (5%)
6B Should the government focus on increasing the happiness of its people? (5%)
7 Assume the following economy: Autonomous Consumption = £10,000;
Marginal Propensity to Consume = 0.8; Business Investment = £30,000
A. Find the equilibrium size of income Y and the size of the Multiplier of Business Investment (hint: to find the Multiplier increase investment by 10,000) (5%)
B. Assume now that a government sector is introduced, while business investment is still £30,000. Government spending injects £50,000 into the economy. However, in order to finance its expenditure the government levies an income tax at a rate of 25%.
 Find the new equilibrium size of income and calculate the size of the Multiplier of Business Investment (hint: to find the Multiplier increase investment by 10,000)
 Identify whether the government balance is balanced or not when I=30,000 and G=50,000 (10%)
8 Explain the relationship between inflation and unemployment according to the long-run Phillips Curve. (10%)
9 What factors might limit the effectiveness of fiscal policy? (15%)
10A The uncertainty surrounding the UK – EU trade deal depresses UK investment. How will this affect the sterling pound – euro exchange rate? (5%)
10B Assume that when digging to plant flowers at the backyard of Jordanstown Campus, we strike a very rich vein of gold. If the government (a) monetises (b)
sterilises this windfall how will the sterling pound – US dollar exchange rate be affected? (5%)
Submission date: Essays must be submitted electronically via Blackboard by
Word Limit: 2000 words