ECON 309 SPRING 2022 – ASSIGNMENT 2
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Question Weight
1 3-2-1 Report 100 85%
2 a. 100
b. 100
c. 100
d. 100
Average 100
3 a. 100
b. 100
c. 100
d. 100
Average 100
Q1 to Q3 (Q1+Q2+Q3)/3 100
4 a 5 15%
b. 5
c. 5
Total 15
Total 0.85 x (Q1 to Q3) + Q4 100
Table of Contents
Lecture Coverage by Question 3
Question 1: Reading Report 4
Instructions & tips for filling out the 3-2-1 reading reports 4
Question 2: Dead Weight Loss (DWL) of Monopoly 6
2.a Show our drug dealer was not a monopolist 7
2.b Draw a picture comparing monopoly & perfect competition 8
2.c Calculate the deadweight loss from monopoly 9
2.d Calculate the deadweight loss from imperfect competition 10
Question 3: Fortnite vs Apple 11
3.a Draw the situation before the split 13
3.b Draw the diagram AFTER the split 14
3.c What happened to surplus? 15
Question 4: (Challenge) Video Games and Movie Tickets 16
4.a (5 marks) Market definition 18
4.b (5 marks) A bit of research 20
Source Suggestions for 4.b 21
4.c (5 marks) Who benefits? 22
Lecture Coverage by Question
• Whole Assignment: Intended to make sure all students are comfortable with the basics of producer/consumer/total surplus, on which competition policy relies, before moving on with the course.
• Question 1: Relevant to Lectures 2-8, but can be completed before viewing those lectures.
• Question 2: This question can be solved completely with knowledge of high school geometry and first-year microeconomics (a pre-requisite for this course). From ECON 103, you’ll want to look back at supply & demand, consumer & producer surplus, monopoly & deadweight loss triangles. The topic of the question is relevant to lectures 7 and 8.
• Question 3: As with Question 2. It can be thought of as an application of the theory in Question 2. Since you’re asked to assume zero marginal cost, it’s most relevant to lectures 5 and 6, but the calculations are closest to those seen in lectures 7 and 8.
• Question 4: Relevant to Lecture 4, as it deals with market definition.
Question 1: Reading Report
Read sections I. – VI. (on pages 4-20) of the following working paper:
Glick, M., Lozada, G.A. & Bush, D. (2022, December 6). Why Economists Should Support Populist Antitrust Goals. Institute for New Economic Thinking Working Paper Series, 195. https://ssrn.com/abstract=4318169
a. Complete a 3-2-1 report for the above article using the form found on Brightspace.
Instructions & tips for filling out the 3-2-1 reading reports
A few guidelines and tips for submitting 3-2-1 reports in this course:
• At least 50% (and ideally, almost 100%) of the text in each entry needs to be in your own words, not quoted. If you find yourself counting words to see whether you qualify, then you probably have too much quoted material. Answers with too much quoted material will be given a mark of zero.
• Any material you do quote needs to be cited in Ace homework tutors – APA format. UVic’s Ace homework tutors – APA style guide can be found here: https://www.uvic.ca/library/help/documents/apa7.pdf . If that’s not enough, you can also ask a librarian at McPherson library for help, or Google ‘How to cite X in Ace homework tutors – APA’, where X is the type of material you’re quoting (interview, journal article, etc.).
• The ‘three main points’ part of the report can be a bit subjective, but as a general rule, if your points don’t include what the authors of the paper think is the main point of the paper, you should probably think about re-writing your answer and/or re-reading the paper. This is especially true if you’re not sure what the authors think the main point of the paper is.
• For the ‘two things you didn’t understand, and how you fixed that’ section, we need to see both what you found out, and the source you used to find that out, properly cited in Ace homework tutors – APA format.
• The paper you are asked to read for the assignment CANNOT be used as the source: it’s understood that you will make sure to understand everything within the article you are asked to read, by consulting the article itself. This part of the 3-2-1 report is meant to encourage you to consult outside sources to find things out that you CANNOT find out from the article itself.
• Also, remember to include a summary, in your own words, of what you found. It’s not enough to say, ‘I didn’t know what a raccoon was, so I looked it up on Wikipedia.’ You need to tell us what you discovered about raccoons, in your own words, and you need to cite the source you looked the information up on.
• For the ‘main economic point’ of the article, I want you to think in terms of resource allocation, scarcity, tradeoffs, opportunity costs, etc. If your ‘main economic point’ has the word ‘economic’ or ‘economy’ in it, then you probably haven’t gone far enough and are unlikely to get full (or any) marks. If someone asks you, ‘What’s happiness?’ and you answer with, ‘It’s when you’re happy,’ that’s not a very satisfying answer. Similarly, if someone asks ‘What’s the economic point of this paper on the cod fishery?’, if you answer, ‘Cod was important for the development of Newfoundland’s economy’, that’s not very informative. The point of this question is to get you in the habit of thinking like an economist: what’s the scarce resource? What are the needs and wants that this resource can be used to satisfy? How was the resource used? Why that way, instead of all the other ways it could have been used? Those are the kinds of questions your answer should be a reply to.
Question 2: Dead Weight Loss (DWL) of Monopoly
It’s normally very difficult to obtain supply and demand information for illegal markets, but we have an excellent opportunity to do so for opioids in pre-COVID Vancouver, thanks to a very chatty drug dealer who spoke about their trade to health researchers.
This dealer said that prior to the pandemic, each week they bought one ounce of opioids for $1500, which they would sell over the course of a week for anywhere between $2500 and $3000 (we’ll split the difference and call it $2,750). From a 2020 systematic review of the literature , it’s been estimated that the price elasticity of demand for heroin, a popular opioid, is ε = -0.9.
If we assume linear demand for opioids, this implies that for opioids, the equation for the inverse demand curve (the function you would plot in a supply and demand diagram) is:
P = 5,805.56 – 3,055.56Q
In the above, P is in dollars ($) and Q is in ounces. So, the information we have is:
• The inverse demand curve is P = 5,805.56 – 3,055.56Q
• The observed Price and Quantity are Q = 1 ounce, P = $2,750
• Marginal cost is constant at MC = $1,500 per ounce
• Marginal revenue is given by P = 5,805.56 – 6,111.11Q
2.a Show our drug dealer was not a monopolist
Given the information above, we’ll now prove that our drug dealer was neither perfectly competitive, nor a monopolist. We’ll do this by calculating the price of opioids under perfect competition (this should only take a second or two), calculating the price of opioids under monopoly (marginal revenue = marginal cost), and then seeing that the observed price of $2,750/ounce is in between these two prices.
Hint: Recall that for linear demand, marginal revenue is a line twice as steep as, and with the same intercept as, inverse demand. In our case, marginal revenue is given by P = 5,805.56 – 6,111.11Q
Observed price: $2,750 per ounce
Price under perfect competition: $______________ per ounce
Explanation of how you obtained that result (can be short):
Price under monopoly: $______________ per ounce
Show your work (including calculations):
2.b Draw a picture comparing monopoly & perfect competition
Draw a diagram (like the ones we saw in Lecture 7) that shows the demand curve, the marginal cost curve, producer surplus, consumer surplus, and the deadweight loss from monopoly (when compared to perfect competition). Your diagram must be clearly labeled, like the ones in the lecture. It does not have to be exact – you can freehand sketch it, if you like – but lines should slope in the right direction, and I’d like you to label the intercepts on the Price and Quantity Axes. I need help writing my essay – research paper make sure your diagram is in PDF, JPG, GIF or PNG format, otherwise we may run into display issues while marking. It’s fine to copy-paste the diagram into this file, or to upload it separately. You can draw it by hand and take a picture with your phone, use Excel or Powerpoint and save the graphs/drawings as a picture, use a drawing program and take a screenshot, etc. Below is an example of what I’m looking for in part a.:
Well-Labeled Diagram:
[Take as much space as you need, or submit a separate image file.]
2.c Calculate the deadweight loss from monopoly
Calculate the deadweight loss of monopoly, compared to perfect competition. Show your work. To do this, first calculate total surplus under perfect competition. Then calculate total surplus under monopoly. Finally, subtract the (smaller) total surplus under monopoly, from the total surplus under perfect competition.
Deadweight Loss from Monopoly: $__________________________
Work:
[Show your work here.]
2.d Calculate the deadweight loss from imperfect competition
This time, I want you to calculate the deadweight loss under our drug dealer (P = $2,750/ounce, Q = 1 ounce), compared to perfect competition. Show your work. To do this, first calculate total surplus under perfect competition. Then calculate total surplus under our drug dealer. Finally, subtract the (smaller) total surplus under our drug dealer, from the total surplus under perfect competition.
Deadweight Loss from imperfect competition: $__________________________
Work:
[Show your work here. You may find it helpful to draw a diagram.]
Question 3: Fortnite vs Apple
A few years ago, Epic Games, the owners of the popular Fortnite video game, and Apple were in a bit of a fight . Epic sells vbucks, a virtual currency, within Fortnite. For the Mac version of Fortnite, Apple has been taking 30% of all revenue earned by Epic from these sales.
In 2020, Epic decided to leave what it called the Apple ‘monopoly’ and sell virtual currency directly to Fortnite players, bypassing Apple’s fee. At the same time, it has permanently lowered the price of its virtual currency by 20% .
Epic claimed this was good for its players, and good for society. In this question, you will evaluate this claim in a simple model that keeps much of the flavour of the real-world spat.
Let’s start with a very standard, very simple setup. Suppose that (inverse) demand for Fortnite v-bucks is given by
P(Q) = 20 – 1.35Q
Here, P is in dollars and Q is in thousands of v-bucks (the virtual currency is most often sold in units of 1,000).
At least one game critic has suggested that the marginal cost virtual currency is zero, so let’s go with that. I’m going to ask you to study and compare two situations: BEFORE Epic’s split with Apple, and AFTER Epic’s split with Apple.
BEFORE Epic’s split with Apple: We know Apple charges a fee of 30% of Epic’s revenue. Epic’s revenue is (1 – 30%) x P(Q) x Q = 70% x (20 – 1.35Q) x Q. Epic’s marginal cost is zero. Assume that Epic chooses its price like a monopolist (in this case, a monopolist facing a ‘tax’ by apple.) Assume that Apple faces no costs whatsoever, and this ‘tax’ it charges Epic is essentially free money for Apple .
AFTER Epic’s split with Apple: Epic no longer has to pay Apple’s ‘tax’. Epic’s revenue is P(Q) x Q = (100 – Q) x Q. Assume that Epic sets a price equal to 80% of the price it set before the split with Apple. This is the price that Epic has announced to the world. However, in our simple model, it is impossible for this to be a profit-maximizing price for Epic, as long as Epic’s marginal costs are zero .
For the next two parts, you’ll be asked to draw diagrams, similar to the ones you did in Question 2, for both situations: BEFORE the split with Apple, and AFTER the split with Apple.
3.a Draw the situation before the split
Diagram showing the situation BEFORE the split with Apple:
A few tips to help you out:
• The demand curve for virtual currency is (by assumption) P(Q) = 20 – 1.35Q.
• If Epic were getting the full price consumers paid for the currency, its marginal revenue curve would therefore be MR(Q) = 20 – 2.7Q.
• BUT Epic ISN’T getting the full price paid by consumers. They’re only getting 70% of that, with Apple getting the other 30%.
• Epic’s marginal revenue curve is 70% x (20 – 2.7Q) = 14 – 1.89Q.
• Epic’s ‘Supply’ curve is just a horizontal line at P=0.
• Apple’s ‘producer surplus’ in this case is equal to its share of the income: 30% x Price Paid by Consumers x Quantity sold.
• Since costs are 0, total ‘Producer Surplus’ is equal to Price Paid by Consumers x Quantity sold, and you can split this into Apple’s Producer surplus and Epic’s producer surplus.
• Your final diagram should have: a rectangle representing Apple’s producer surplus, a rectangle representing Epic’s producer surplus, a triangle representing consumer surplus, and a triangle representing the deadweight loss from Epic acting like a monopolist (producing at the point where MR = MC).
[Insert diagram in PDF, JPG, GIF or PNG form here, or upload separate image file]
3.b Draw the diagram AFTER the split
Diagram showing the situation AFTER the split with Apple:
A few tips to help you out:
• The demand curve for virtual currency is (by assumption) P(Q) = 20 – 1.35Q.
• Since now, Epic is getting the full price consumers pay for the currency, its marginal revenue curve is MR(Q) = 20 – 2.7Q.
• BUT keep in mind that Epic can’t just set MR = MC, because it has publicly promised that it will charge 80% of what the price was under Apple. So, instead of choosing quantity and then reading the price off the demand curve, Epic will set the consumer price to 80% of what it was before the split, and the quantity sold will be whatever quantity demanded corresponds to that price.
• Epic’s ‘Supply’ curve is just a horizontal line at P=0.
• Since costs are 0, total ‘Producer Surplus’ is equal to Price Paid by Consumers x Quantity sold.
• Your final diagram should have: a rectangle representing Epic’s producer surplus, a triangle representing consumer surplus, and a triangle representing the deadweight loss (there will still be a deadweight loss, because the price, while lower than before, is above 0, which is what the price would be under theoretically perfect competition (P = MC)).
[Insert diagram in PDF,JPG,GIF or PNG form here, or upload separate image file]
3.c What happened to surplus?
For each of the two situations (BEFORE and AFTER), calculate consumer surplus, Epic’s producer surplus, Apple’s producer surplus, and total surplus. Show your work . Did the change benefit society? Briefly explain your reasoning.
BEFORE the split with Apple:
Consumer Surplus: __________________
Epic’s Producer Surplus: ________________
Apple’s Producer Surplus: _______________
Total Surplus: ________________
Show your work:
[Take as much room as you need]
AFTER the split with Apple:
Consumer Surplus: __________________
Epic’s Producer Surplus: ________________
Apple’s Producer Surplus: $0 (Epic’s not paying their tax anymore.)
Total Surplus: __________________
Show your work:
[Take as much room as you need]
Is society better off before or after the split with Apple? ____________________
Why? (This can be VERY brief.)
Question 4: (Challenge) Video Games and Movie Tickets
When browsing online discussions of the value vs cost of video games, it is not unusual to find comments such as those below:
• “It’s been well worth the $10 for me. I have no problem paying for quality. It cost less than a movie ticket” .
• “Considering the time and effort that I’ve sunk into the game and entertainment I’ve received since I started playing last July, I consider it a fair price. $10 is less than a movie ticket.”
• “Think of it like this. [The game] costs less than a movie ticket, and gives you alot [sic] more entertainment value for the price, than a 2h blockbuster movie (depending on opinion, of course) And you get it for life.”
• “All our Steam games are on sale […] You can get Moon Hunters, The Shrouded Isle, AND Shattered Planet for just under $10! That’s less than a movie ticket (in Canada)!”
• “Give it a try for two hours. Worse comes to worst, if you don’t like it after only two hours, you can return it for a refund provided it’s within two weeks of the purchase date. But think about it this way: two hours is one movie. $8 is less than a movie ticket and the game provides way more than two hours of interesting content.”
• “Single-player becomes unplayable due to horrid level design halfway through, and technical problems continue to mar online co-op. Still, the affair between [the video game] Magicka and myself was hot enough despite its brevity. The fact that it costs less than a movie ticket […] helps.”
These repeated comparisons of the cost of a movie ticket to the cost of a video game when discussing the value of a video game imply that video games and movies are in the same market: if a video game is worthwhile because it’s cheaper than a movie ticket, that suggests that if it were priced higher than a movie ticket, the prospective player would choose to watch a movie in a theatre, instead .
The opposite comparison – of someone saying that a movie ticket is (isn’t) worthwhile because it’s cheaper (more expensive) than a video game – is seldom, if ever, made. This suggests that people considering the purchase of a movie ticket don’t view video games as being obviously in the same market as the ticket.
Of course, there are different types of video game (phone games, single player, multiplayer, etc.) and different types of movies. The price of a movie ticket is largely independent of the movie being seen (more on this in the challenge question), while video games differ dramatically in price, with some being ‘free to play’ under certain conditions.
4.a (5 marks) Market definition
Use your knowledge of competition policy to answer the following question: under what conditions, if any, are video games in the same market as movie tickets? Briefly explain your reasoning, and provide citations in Ace homework tutors – APA format for any sources you used in creating your answer.
You may find the following sources useful:
• Sections ‘X. Market Definition’ on pages 70-78, and ‘3. Evidence on Market Definition’ on pages 164-173 of The Law and Economics of Canadian Competition Policy survey the basic concepts behind market definition.
• Some of you may find the discussion of market definition in Chapter 3 of Motta’s Competition Policy: Theory and Practice to be more readable .
• The following reddit threads provide insight into how consumers make video game purchase decisions:
o How you determine the value of a game, and if you’ve gotten your money’s worth?
o Let’s discuss the “cost per hour” of games .
o Why do video games cost more than movies even though a movie is more expensive to make?
o Judging a game’s worth by the number of hours played divided by cost
• DekuDeals’s ‘Bang for your Buck’ page ranks current Nintendo Switch games according to ‘time to beat’ (time to finish), current price (including discounts) and its Metacritic critic and user scores (a very rough measure of how ‘good’ a game is).
Under what conditions, if any, are video games in the same market as movie tickets? Briefly explain your reasoning. (Your answer should be between 5 and 500 words long.)
[Ace my homework – Write your answer here]
Ace homework tutors – APA Citations of Sources Used:
[Cite your sources here]
4.b (5 marks) A bit of research
Theatrical movies vary dramatically across many dimensions: how much they cost to make, how popular they are, how ‘good’ they are according to critics and audiences, their running time, what genre they are in, their age rating, etc.
Despite movies being very clearly differentiated products, movie theatres generally charge the same admission price(s), regardless of the movie being shown. With few exceptions, ticket prices tend to vary only by age of the viewer , and whether the movie is being shown in a regular, IMAX or 3D format.
As a student of competition policy, you should find this surprising. In the snack section of a typical supermarket, marginally different varieties of potato chips are sold for different prices. Why isn’t the same true of movies shown in theatres?
Use your research skills to discover why movie ticket prices are (mostly) independent of the movie being shown . Report on what you find out, and cite your sources in Ace homework tutors – APA format. (Your answer should be between 5 and 500 words long.)
[Ace my homework – Write your answer here]
Sources used (in Ace homework tutors – APA format):
[Cite your sources here]
For help with sources, see the next page.
Source Suggestions for 4.b
Since this is the first assignment in the course, I’m going to give a bit more help than I normally would, and suggest some sources to get you started. You don’t need to use them if you don’t want to.
Cowen, T. (2005, March 4). Why are all movies the same price? [Blog Post]. https://marginalrevolution.com/marginalrevolution/2005/03/why_are_all_mov.html
Rubin, R. (2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers, August 21). Why Dynamic Pricing for Movie Tickets Could Be a Tough Sell [Web Page]. https://variety.com/2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers/biz/news/dynamic-ticket-pricing-for-movie-tickets-1203308067/
Thoma, M. (2006 – Write a paper; Professional research paper writing service – Best essay writers, December 23). Why Don’t Movie Theaters Have More Variation in Their Prices? [Blog Post]. https://economistsview.typepad.com/economistsview/2006 – Write a paper; Professional research paper writing service – Best essay writers/12/why_dont_movie_.html
Thompson, D. (2014: 2024 – Essay Writing Service. Custom Essay Services Cheap, January 3). Why Do All Movie Tickets Cost the Same? [Web Page]. https://www.theatlantic.com/business/archive/2014: 2024 – Essay Writing Service. Custom Essay Services Cheap/01/why-do-all-movie-tickets-cost-the-same/250762/
4.c (5 marks) Who benefits?
If movie theatres charged different prices for each movie, who would benefit and who would lose? Would society as a whole benefit or be harmed by this change? Briefly explain your reasoning. What I’m looking for, for full marks, is evidence that you understand the implications of the facts and arguments you bring up on consumer surplus, exhibitor surplus, distributor surplus, and society’s total surplus. (Your answer should be between 5 and 500 words long.)
[Ace my homework – Write your answer here]
