Question 1

McDonald’s, a big burger joint, is charging $5 for its very famous Big Mac hamburger and selling 20 million Big Macs a year in Australia.

• McDonald’s increases the price of its Big Mac to $6 and still manages to sell the same quantity as the Big Mac. How much revenue will McDonald’s gain? What can you infer about the price elasticity of demand (PED) for McDonald’s Big Mac? Assume in an alternative scenario, the increase in the price of the Big Mac to $6 reduces its quantity sold to 18 million. How much revenue will McDonald’s gain now? What can you conclude about the PED now?
• Which one do you think is more likely and why? Present evidence in 100 words or less to support your prediction. Acceptable forms of evidence include books, journal articles, or news reports.
• McDonald’s Big Mac and movie tickets have a negative cross-price elasticity of -1.5. What does this number tell us about the relationship between the Big Mac and movie tickets? Suppose that Village Cinemas, one of Australia’s leading cinema exhibitors, decides to increase the price of its movie tickets by 10%. How will this development affect McDonald’s pricing decisions as indicated in part (a)? Discuss both scenarios.

Question 2

Tobacco King is a monopolist in the cigarette market in the Nicotiana Republic, where the Australian dollar is used as the official currency. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. The firm’s demand curve can be expressed as P = 8 – 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $).

• A table shows Tobacco King’s demand schedule, total revenue, average revenue, and marginal revenue for prices $2, $4, $6, and $8.
• Based on the table created in your answer to part, show Tobacco King’s average revenue and marginal revenue curves on a graph. Comment on why the MR curve lies below the AR curve in 100 words or less.
• Add the marginal cost curve to the graph drawn in part. Find the price and quantity combination of cigarette packets at which Tobacco King will maximize its profit.

Question 3

The drainage of waste products from the chemical factory, Ultra Chemicals, situated along the banks of the Misty River has led to the formation of a dead zone in the river that cannot support aquatic life.

• Without any government intervention, will Ultra Chemicals produce a socially optimal quantity? Why or why not? Explain your answer in 200 words or less with the help of a suitable diagram.
• Does Ultra Chemicals impose a deadweight loss on society? Explain in 100 words or less. Use your diagram to show the deadweight loss to society.
• How can a government intervene to improve upon the outcome from society’s point of view? Explain in 100 words or less. The diagram is not needed.