EC4003 Intermediate Microeconomics Assignment Example UL Ireland
The course builds on the introductory microeconomics module to explore issues surrounding producer and cost theory. It builds on the ideas of market structures in imperfect market conditions and introduces the issue of pricing and allocation of the factors of production. The latter part of the module looks at the economics of information and how choices are made under conditions of uncertainty. Finally, the notion of general equilibrium and welfare are discussed. The framework can be used to analyze market failure and provide a rationale for government intervention in the public sector.
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In this course, there are many types of assignments given to students like individual assignments, group-based assignments, reports, case studies, final year projects, skills demonstrations, learner records, and other solutions given by us.
At the end of the module, students should be able to:
Assignment Activity 1: Demonstrate and illustrate how firms can apply microeconomic principles to produce at minimum cost, select strategies, decide how much inputs to purchase, and write contracts to provide optimal incentives for employees.
The principles of microeconomics are primarily concerned with the study of how the allocation of limited resources affects both prices and quantities. Therefore, firms can apply microeconomic principles to even the simplest operation by allocating limited resources. One of the primary allocation decisions faced by a firm is determining which technologies to use and how much labor and capital to purchase.
For instance, if a firm wants to produce paper, it needs some amount of capital (such as mill machinery) and labor. The expected cost of producing paper with various amounts of capital and labor can be mapped in a production possibilities frontier (PPF). By running a production possibilities frontier, the firm will be able to determine how much output it can produce based on its resources.
At a minimum cost, a firm should choose a point at which the marginal benefit of an additional unit is equal to the cost. The optimal allocation of resources for each input may result in different amounts of capital and labor being used in combination. For example, if producing 50 units of output requires 100 units of labor and 150 units of capital, then the optimal combination would be to use 50 units of labor and 100 units of capital.
Once a firm has decided what quantity and mix of inputs to purchase, it should write a contract to ensure optimal incentives for employees. The goal of writing an employment contract is to provide incentives for workers so they work hard and productively. By setting compensation equal to the marginal product of labor (MPL), we can give each worker the incentive to produce as much as possible.
For instance, if a worker has an MPL of 10, then the worker should be compensated at 10 units for each unit of output produced. This will ensure that the worker is trying to produce as much as possible since the worker will be receiving more compensation (10 units) for each additional unit of output.
Assignment Activity 2: Describe different games and predict their outcomes conditional on the rules of the game, the information available to players, and other factors, and apply game theory to firm decision-making.
The best predictor for an outcome in a game is the likelihood of different outcomes when played under similar rules. In other words, the game theory is used to understand how people make decisions and how this affects the results of a game.
One of the most popular games in microeconomics is called the prisoners’ dilemma. In this game, two prisoners are arrested and offered a deal: If they both confess, they will each get three years in jail. If one prisoner confesses and the other stays silent, the confessor will get a reduced sentence of two years while the other prisoner is sentenced to five years.
If both prisoners stay silent, then they will only receive a one-year sentence each. Given this information, if both prisoners stay silent and the prosecutor doesn’t know which prisoner confessed, both prisoners will only get a one-year sentence. However, if one prisoner decides to confess while the other stays silent, the confessor will get a two-year sentence while the other prisoner is sentenced to five years.
The key feature of this game is that both players are better off when they cooperate (both stay silent), but the temptation to defect (confess) leads to a suboptimal outcome.
In the business world, the prisoners’ dilemma can be used to understand why firms might not cooperate even when it would be mutually beneficial. For example, two firms might not cooperate in a price-fixing scheme because the temptation to defect (raise prices) is too great.
In a perfect prisoner’s dilemma, the best strategy for both prisoners is to confess. However, given that the other player will likely defect (confess), it may be beneficial in a repeated game to cooperate and stay silent and avoid an additional three years of jail time (five years total).
Game theory explains how firms may make the same mistake, that is, they should cooperate but one firm thinks the other will not cooperate. This leads to a suboptimal outcome for both firms.
A possible solution to the prisoners’ dilemma is what’s called a “trigger strategy.” In this situation, both players agree to cooperate until one player defects. Once a player defects, the other player uses a pre-specified punishment for defecting. For instance, in a price-fixing case, firms might agree that if one firm raises prices, the other firm will lower prices by an equal amount. This type of punishment ensures that players cooperate as long as both are rational and believe that the other player will follow through on the punishment.
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Assignment Activity 3: Demonstrate how the interaction of factor supply and factor demand curves determines the equilibrium in competitive factor markets and discuss the factors that underpin factor demand and supply.
The intersection of the factor supply and demand curves determines the equilibrium wage and quantity of workers. At this equilibrium, the quantity of labor demanded is equal to the quantity of labor supplied, so the wage is set at a level where workers are willing to work and firms are willing to hire.
For example, if the market for engineers is competitive and there are many firms that employ engineers, demand for these workers will be high. This means that there will be a downward-sloping supply curve because more workers are willing to work at any given wage.
Given the law of diminishing returns (that as you hire additional units of labor, the marginal product of labor decreases), the downward-sloping supply curve will intersect with the upward-sloping demand curve at point A where the quantity demanded is equal to the quantity supplied. There, engineers are paid their marginal value product (the value of their marginal product) and workers are paid the equilibrium wage.
The factor market for CEOs seems to work differently. For one, the number of people who want to be CEOs is much smaller than the number of people who want to be engineers. This means that the demand curve for CEOs is likely to be more inelastic (not very responsive to price changes). In addition, CEO skills are not as easy to replicate as engineer skills, so the marginal value product of CEOs is likely very high.
As a result, the demand curve for CEOs may be upward-sloping (the marginal product is greater than the wage), which means that as you hire additional units of labor, the value of their output increases at a rate higher than the increase in cost (wage).
This will intersect with the downward-sloping supply curve at point B where the quantity demanded is equal to the quantity supplied. There, CEOs are paid their marginal value product (the value of their marginal product) and workers are paid the equilibrium wage.
Assignment Activity 4: Predict how people make decisions in uncertain situations depending on their attitude towards risk and after calculating the expected payoff of the choices they face.
People face uncertainty every day. It can be something as simple as what to wear in case it rains or as complex as making financial decisions. In general, people make decisions by trying to maximize their expected payoff.
This means that they consider the likelihood of each outcome and the payoff (positive or negative) associated with each outcome. They then choose the option with the highest expected payoff.
When it comes to making decisions under uncertainty, people’s attitudes towards risk play a big role. Some people are risk-averse, which means that they prefer to avoid any chance of losing money. Other people are risk-tolerant, which means that they are willing to take risks in order to potentially earn a higher payoff.
For example, when it comes to the weather, a risk-averse person might want to take an umbrella with them in case it rains. A risk-tolerant person might decide they don’t want to carry an umbrella with them in case there is no chance of rain and would instead travel without one.
When making financial decisions, people also tend to be risk-averse or risk-tolerant. For example, a risk-averse person might want to put their money in a savings account that offers a low return but is guaranteed not to lose any money. A risk-tolerant person might invest their money in stocks even if there is a chance they could lose some of it.
Assignment Activity 5: Recognize how policymakers can employ microeconomic theories to predict the impact of taxes, regulations, and other measures before they are enacted.
In some cases, taxation and other policies can have a significant impact on the economy. In order to predict how this will affect things like employment levels, wages, or prices, policymakers need to know what is going to happen in microeconomic theory.
For example, say that a city wants to increase its tax on gasoline from 10 cents per gallon to 20 cents per gallon. In order to predict the likely effects of this increase, policymakers would need to know about the supply and demand in the gasoline market. They would also need to know how people are likely to respond to the change in price.
If the increase in the tax leads to a decrease in the quantity of gasoline demanded, this might decrease the price of gasoline by more than the increase in tax. It might lead to a situation where the quantity demanded increases and prices go up even more than before, which will result in a net loss in revenue for the city.
If people respond to a higher price by buying less, then an increase in the supply curve will shift out to the right at the same price (a movement along the demand curve). If people respond by buying more, then an increase in the supply curve will shift out to the right at a higher price (a movement along the demand curve). If people were not responding to changes in price at all, then there would be no change in quantity demanded.
In order to make the best decisions, policymakers need to be able to understand and use microeconomic theory. This way, they can accurately predict how people are likely to respond to changes in policy before those policies are enacted.
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