Microeconomics

Introduction [5 Marks]

Part A: Microeconomics.

Understanding the Most Famous Monopolies

Government regulation of early American monopolies was initially absent. However, the creation of antitrust regulation in the United States, in the form of the 1890 Sherman Antitrust Act, led to the eventual dismantling and restructuring of Standard Oil and American Tobacco by 1911. Like many antitrust cases brought against companies even today, it took several years for these first cases to navigate through the court system Unlike Standard Oil and American Tobacco, U.S. Steel was challenged, but not found to be the sole supplier of steel to the U.S. market. However, it continued to possess considerable market share for many years. In 2018, U.S. Steel was the 26th-largest producer of steel in the world, according to the World Steel Association.

More Modern Times

A more recent monopoly to have experienced the same fate as Standard Oil and American Tobacco is the American Telephone and Telegraph Company (AT&T). In 1982, AT&T was found to be in violation of U.S. antitrust law while acting as the sole supplier of telephone services to the country. As a result, it was forced to split into six subsidiaries, known as Baby Bells

Near-Monopolies

A good example of a near-monopoly from very recent history is the De Beers Group, the best-known diamond mining, production, and retail company in the world. De Beers was close to a true monopoly for almost a century, but due to a variety of market and regulatory factors, it has seen its market share go from over 80% in the late 1980s to around 35% in 2019.While several U.S. companies in sectors like technology, consumer products, and food and beverage manufacturing have been accused of being monopolies in the media and some in courts, they have rarely been proven so.

The Role of Nationalization

Most monopolies that exist today do not necessarily dominate an entire global industry. Rather, they control major assets in one country or region. This process is called nationalization, which occurs most often in the energy, transportation, and banking sectors. The largest such example of a nationalized major asset is Saudi Arabia's Saudi Aramco, the nation's state-owned oil and natural gas company .Most monopolies that exist today do not necessarily dominate an entire global It is arguably the single most valuable company in the world at $1.7 trillion as of its late 2019 IPO valuation

The Bottom Line

For everything, there is a season, even for monopolies. Monopolies often can help a country or region build or shore up its infrastructure quickly, efficiently, and effectively. But when any company becomes too dominant, leaving little room for competition, service, quality, and consumer wallets can suffer. That's where antitrust laws come in. ^[1]

Question One: [15 Marks]

1. Explain using the above examples why a monopoly is problematic for a given economy or a government? (5 Marks)
2. Reflecting on examples from the article explain how public policy can curb Monopolies? (5 Marks)

• Using Cost curves explain how Monopolies make unusual profits?(5 Marks)

Question Two :  [15 Marks]

1. ^[1] OurDocuments.gov. "Sherman Anti-Trust Act (1890)." Accessed April 3, 2020.
2. World Steel Association. "Top Steel-Producing Companies 2018." Accessed April 3, 2020.
3. The Minnesota Journal of Law, Science and Technology. "Whatever Happened to the Baby Bells? Internationalization and De-internationalization in the Telecommunications Industry." Accessed April 3, 2020.
4. Paul Zimnisky. "A Brief History of De Beers." Accessed April 3, 2020.

The demand and supply schedules for sweet packs are displayed in the above table.

What are the equilibrium price and equilibrium quantity of sweet packs? (3 Marks)

1. If chips were 50 cents a bag, describe the situation in the market for sweets and explain what would happen to the price of a pack of sweets. (3Marks)
   
2. Use the above data to draw a graph with the correct labeling. (4Marks)
3. Explain what is price elasticity of demand and explain why it would be important for producers to know the price elasticity of their product and how it would affect their decision making? (5 Marks)

Question Three:  [5Marks]

 Income elasticity:

Judy’s income has increased from $10,000 to $12,000. Judy increased her demand for concert tickets by 10 percent and decreased her demand for bus rides by 5 percent.

a. Calculate Judy’s income elasticity of demand for concert tickets                                   (2.5 Marks)

 b. Calculate Judy’s income elasticity for   bus rides.                                                              (2.5 Marks)

Question Four: [10 Marks]

Equilibrium in the labour market depends on the demand for labour and the supply of labour.

a. Graphically demonstrate how the supply of labour in the U.S. is affected by the increase in the labour force resulting from Mexican immigrants.                                                                     (5 marks)

b.What other factors that can cause the labour supply curve to shift?                                  (5 marks)

Question Five: [10Marks]

 Externalities

Do you think that there would be external effects associated with Water from a uranium mine leaking into Kakadu National Park? If so, what would be the nature of the external effects? Can you think of policies that might deal with each external effect (that is, improve social wellbeing)?    (10 Marks)

Part B: Macroeconomics:

Question Six: [15 Marks]

“The oil Price run-up of 2007-08 was caused by strong demand confronting stagnating world production.  Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.”                                                                                            

  Source:   Hamilton, J.D., 2009. Causes and Consequences of the Oil Shock of 2007-08 (No. w15002). National Bureau of Economic Research.

a) Oil price shocks have an evident impact on the short run aggregate supply curve. With the help of a graph demonstrate how rising oil prices affect the SRAS and explain what other factors can cause this shift.(5 Marks)

b) Different theories attempted to explain why SRAS curves slope upwards. Identify and explain these theories explaining what they have in common.(10 Marks)

Question Seven: [10 Marks]

The following was released by the Bank of England reflecting on monetary policy on 17^th of Sept 2020

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. In that context, its challenge at present is to respond to the economic and financial impact of the Covid-19 pandemic. At its meeting ending on 16 September 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to continue with its existing programmes of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, maintaining the target for the total stock of these purchases at £745 billion.

The outlook for the economy remains unusually uncertain. The MPC’s central projections in the August Monetary Policy Report assumed that the direct impact of Covid-19 on the economy would dissipate gradually. They were also conditioned on the assumption of an immediate, orderly move to a comprehensive free trade agreement with the European Union on 1 January 2021. Conditional on those assumptions, UK GDP was projected to continue to recover. Activity was also supported by substantial fiscal and monetary policy actions. Nonetheless, the recovery in demand took time as health concerns were expected to drag on activity. The unemployment rate was projected to rise markedly, consistent with a material degree of spare capacity, before declining gradually. Conditioned on prevailing market yields, CPI inflation was expected to be around 2% in two years’ time.

Indicators of global activity have been broadly in line with the Committee’s expectations at the time of the August MPC meeting. The sterling exchange rate index has fallen by around 2%, in part reflecting recent Brexit developments.

1. Discuss how the bank of England can control the Money supply and interest rates and then reflect on the above actions taken?( 5 Marks )
2. Discuss briefly how do Interest rates affect the economy?  (  5 Marks)

Question Eight: [10Marks]

1. Briefly discuss the reasons behind the global financial crisis in 2007 -2009.  (5 Marks )
2. Discuss the UK Policy actions to stimulate the economy to face the global financial crisis.(5 Marks)

References [5 marks]

The following are key factors that are taken into account in the assessment of a report:

1. Evidence for extensive and in-depth reading of relevant literature (journal articles, textbooks, and other relevant sources)
2. Understanding of the subject, as demonstrated by the ability to clearly explain the issues involved and an awareness of alternative views on the topic.
3. Thorough grasp of theories and/or theoretical models (where appropriate) relevant to the topic, the use of relevant concepts and (where appropriate) the use of diagrammatic analysis and/or equations.
4. Good use of comprehensive, relevant, accurate and up-to-date factual/statistical material (where this is appropriate).
5. Ability to think and to reason logically and consistently in the writing of the report.
6. Good use of a wide range of academic sources in the writing of the report, all of which have been fully and comprehensively referenced in the bibliography.
7. Ability to write in clear and grammatically-correct English, with proper use of paragraphs including both an opening/introductory paragraph that sets the scene and concluding paragraph bringing together the issues discussed is the report.
8. Ability to come to a clear set of independent, yet intelligent and well informed, conclusions that derive from the arguments contained in the rest of the report and the evidence cited.

The use of good written and communication skills in the presentation of the report, including typing, spelling, punctuation, sentence construction, the drawing of tables, the presentation of statistical material, the use of footnotes and the overall lay-out of the report