drone attacks on Saudi Arabia’s large oil production facilities caused a large spike in the price for crude oil

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Question 1

a)    In September 2019, drone attacks on Saudi Arabia’s large oil production facilities caused a large spike in the price for crude oil.  In Australia, around 75% of petrol consumption is accounted for by the transport industry and constitutes a significant proportion of their production costs.  Assuming the transport industry is perfectly competitive, analyse the impact this increase in crude oil prices would have on the cost structures for transportation firms. Make sure you draw and explain all relevant cost curves. 3 marks. 

b)  Using the model of a firm in perfect competition, analyse how the increase in crude oil prices will affect the transport industry in the short run and long run, and from both a firm and market perspective. Explain your answer fully and include all relevant diagrams.  7 marks.

Question 2

BHP and the Chinese Steel Association are negotiating over sales of iron ore by BHP to Chinese steel producers.  Iron ore can be sold by long-term contract, or on a spot market.  BHP must make choices about whether to seek to sell a ‘Small’ or ‘Large’ proportion of its iron ore on the ‘spot’ market for iron ore, and about whether to seek a ‘Low’ or ‘High’ price for the iron ore it sells by long-term contract.  The Chinese Steel Association must decide whether to ‘Block’ or ‘Not Block’ BHP from selling its iron ore on the spot market.Payoffs from this game involving BHP and the Chinese Steel Association are shown in the game table below: 

			Chinese Steel Association
			Block	Not block
BHP	Sell on spot market	Price for long-term contract sales
	Small	Low	$70b, $80b	$80b, $40b
	Small	High	$60b, $30b	$40b, $60b
	Large	Low	$60b, $30b	$120b, $40b
	Large	High	$40b, $20b	$60b, $10b

 

Suppose BHP and the Chinese Steel Association make their choices simultaneously:

a) Does either player have a strict dominant strategy? Explain your answer. 1 mark

b) What are the Nash equilibria? Explain your answer. 3 marks

Suppose this game is played sequentially.  First, BHP chooses whether to try to sell a ‘Small’ or ‘Large’ quantity of iron ore on the spot market.  Second, having observed this choice, the Chinese Steel Association decides whether to ‘Block’ or ‘Not block’ BHP from selling on the spot market.  Finally, having observed the choice made by the Chinese Steel Association, BHP decides whether to ask for a ‘Low’ or ‘High’ price for long-term contract sales.

c) What is the rollback equilibrium in the sequential version of the game? Explain your answer. 4 marks

d) Explain how and why your answer to part (c) differs from your answer to part (b). 2 marks 

Question 3

Please refer to Extract 1

a)  Use the supply and demand model with international trade to analyse the impact of tariffs in the US market for steel on the market outcomes (price and quantity) and economic surpluses. 6 marks.

b)  The article states that the price of steel has increased by 30% in the last year. Given the tariff is only 25%, can you think of any reasons why the US price has increased by more than the tariff amount? (No research is required for this question).  2 marks.

c)  Could the tariff on steel in the US have an impact on the world price for steel?  Make sure you clearly state any assumptions you are making in answering this question. 2 marks. 

Question 4

Refer to Attachment 2 ‘The Monsanto Monopoly’ and ‘The Growing Global Challenge to Monsanto's Monopolistic Greed’ and answer the following questions:

a)  Monsanto has considerable market power in the US seed market. What barriers to entry might be important in establishing and maintaining Monsanto’s market power? 3 mark

b)  What if the US Department of Justice’s investigation into Monsanto’s patents and practices in the industry had found against Monsanto. Suppose it cancelled Monsanto’s patents on GM seeds and decided that Monsanto’s practices were anticompetitive in the seed industry. What would be the likely effects of this action on the seed market in the US? 3 marks

c)   There has been considerable public debate about the costs and benefits of patents. If the government were to introduce legislation to provide for lower levels of protection of intellectual property in the seed industry, how might this affect Monsanto’s incentives to develop new products? Discuss the implications of such legislation for economic efficiency. 4 marks

Attachments:

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