Supply and Demand and the COVID-19 Shock - Economics Assignment Help

Assignment Task:

Economic Principles 

Assignment 3 

1. (25 marks) Consider the hypothetical example using game theory.  Assume that it is a one-off simultaneous move game, and that each  player only cares about their own payoff. 

LG and Samsung are deciding whether or not to release a new 360- degree camera. 

If both LG and Samsung release the camera, then LG will make $20  million profit, and Samsung will make $40 million profit. 

If LG releases the camera, and Samsung does not, then LG will make  $30 million profit and Samsung will make $0 profit. 

If LG does not release the camera, and Samsung does, then LG will  make $30 million profit, and Samsung will make $60 million profit. 

If neither LG nor Samsung release the camera, they both receive $0  profit. 

a) Depict the above outcomes in a payoff matrix. [4 marks] b) If LG releases the camera, what is Samsung’s best response? [4 mark] 

c) Does LG have a dominant strategy?  

If so, what is it? If not, explain why not. [4 marks] 

d) Does Samsung have a dominant strategy?  

If so, what is it? If not, explain why not. [4 marks] 

e) Find the Nash Equilibrium of the game. [4 mark] 

f) Explain why the Nash Equilibrium is a likely outcome for this game.  [5marks] 

2. (25 Marks) Briefly explain whether you agree or disagree with the  following statements. 

(a) ‘If nominal GDP is less than real GDP, then the price level must have  fallen during the year. (8 marks) 

(b) ‘Whether real GDP declines, nominal GDP must also decline’ (8  marks) 

(c) ‘If a recession is so severe that the price level declines, then we know  that both real GDP and nominal GDP must decline’ (9 marks)

3. (25 marks) 

a) Give two different examples of types of people who are not  currently working but would not be considered ‘unemployed’ as  economists define the term, and explain why they are not  ‘unemployed’. [5 marks] 

b) Provide a definition for each of the three main types of  unemployment: frictional, structural and cyclical. [5 marks] c) Provide a definition for the ‘natural rate of unemployment’. [5 mark] d) Is it likely to achieve an unemployment rate of 0%? And would this  be desirable? [5 marks] 

e) Can the natural rate of unemployment be changed? Explain. [5  marks] 

4. (25 marks) The COVID-19 pandemic, and associated public health  responses such as shutdowns, can be thought to include both a  negative supply shock, and a negative demand shock. 

Excerpt from article 

Three macroeconomic issues and Covid-19 

BY: LEONARDO CADAMURO AND FRANCESCO  

PAPADIA, DATE: MARCH 10, 2020 

https://www.bruegel.org/2020/03/three-macroeconomic-issues-and covid-19 

Supply and demand and the COVID-19 shock 

COVID-19 has had clear supply effects: quarantines, closed factories,  supply chain disruptions and impaired mobility obviously affect  production[1]. The effects on demand are more difficult to gauge but it  is critical from an economic policy point of view to get a sense of them  because we have more confidence about how to deal with demand  (through monetary and fiscal tools) than with supply deficiencies. Changes in real goods prices can indicate whether COVID-19 is  causing major demand effects. Specifically, if aggregate supply effects  dominate demand effects, we should see prices going up as activity  goes down, in a kind of repeat of the stagflation of the 1970s. At that  time, central banks were in a dilemma about whether to increase rates  to fight inflation or to reduce rates to support economic activity. If prices  remain largely unchanged, we can conclude that aggregate demand  has also been substantially negatively affected by the spread of the  virus. 

Your Task:

Read the excerpt above (you may want to read the full article for  context or for your own interest, but you do not need to refer to the  additional content there). 

Use the AD-AS model, including your own diagram/s, to explain why  looking at prices would be a useful way to compare the relative  magnitudes of the supply shock and demand shock.

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