ECO202 Price Ceilings, Subsidies, and Game Theory GBA Jan 2025 Sem

Group-Based Assignment

Question 1

Consider a product which is a necessity with demand and supply functions given as P = 20 – 0.05Q and P = 10 + 0.05Q, respectively, where P is the price in dollars and Q is the quantity. The government wishes to implement policies to lower the price paid by consumers for the product to help low-income consumers. One policy is to impose a price ceiling below the market equilibrium price, and the other policy is to provide a subsidy to the consumers.

1. If the government implements a price ceiling of $12 on the product, appraise the welfare of consumers, producers, and society as a whole with the market equilibrium outcome. Explain your answers with a suitable market diagram. (20 marks)
2. If the government provides a $6 per unit subsidy to the consumers, appraise the welfare of consumers, producers, and society as a whole with the market equilibrium outcome. Explain your answers with a suitable market diagram. (20 marks)
3. Compare between a price ceiling and a subsidy that results in the same price paid by consumers. Comment on the winners and losers under the two policies. (10 marks)

Question 2

1. Two fishermen, X and Y, have to decide whether to catch prawns at North Sea or South Sea and then sell their catch in the same market. It costs $5,000 for a trip to North Sea and $3,000 for a trip to South Sea. If both catch prawns at North Sea, each can catch 1,500 kg of prawns. If both catch prawns at South Sea, each can catch 2,000 kg of prawns. If one catches prawns at North Sea and the other catches prawns at South Sea, the one at North Sea can catch 2,000 kg of prawns while the one at South Sea can catch 3,000 kg of prawns. The price of prawns is dependent on the total supply of prawns in the market. The price will be $18 per kg if the total supply is 3,000 kg, $12 per kg if the total supply is 4,000 kg, and $10 per kg if the total supply is 5,000 kg.
   • Construct the payoff matrix in terms of profit of both fishermen as payoffs. Apply the simultaneous game concept to solve for the Nash equilibrium. Analyse whether the game is a prisoner’s dilemma game. (15 marks)
   • Fisherman Y has an opportunity to invest in a new technology that can result in an increase of 300 kg in prawn catching regardless of whether at North Sea or South Sea. Assume that the market price is not affected when the total supply increases by 300 kg. Construct the new payoff matrix in terms of profit of both fishermen and solve for the Nash equilibrium. Determine the maximum amount that Fisherman Y is willing to pay for this technology. (15 marks)
2. There are two different views on competition. One view is that competition promotes efficiency and increases welfare. The other view is that competition results in inefficiency due to wasting resources and reduces welfare. Present a market regime where competition will incur inefficiencies and not maximise welfare. Examine this market regime and explain why competition is not beneficial. Support your answers with a suitable diagram. (Word limit: 300) (20 marks).

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