Analysis of the Impact of COVID 19 to the Economy Economics Essay

- The final cumulative assignment includes both problem set questions and essay questions.
- Only the knowledge learned in ECO206 (Microeconomics Theory) can be used for analysis, otherwise, the professor may have concern with the academic integrity.
- I attached the content of the assignment, and all of ECO206 course materials.

ECO206Y1Y L5101,L5201,L5301: Microeconomic Theory, Fall 2019-Winter 2020 Prof. Freitas, Department of Economics, University of Toronto Final Cumulative Assignment Logistics Due date Time Weight Location Cumulative Assignment April 15 6:00 PM EST 20% Crowdmark AND Quercus A late penalty of 20% of the assignment score will apply per 24 hours after the deadline. No exceptions for illness, computer problems etc. THIS WILL BE STRICTLY ENFORCED. You have two weeks, do not wait till the last minute. Your work needs to be submitted on BOTH, Crowdmark AND Quercus by the due date to be considered submitted. The late penalty will continue to apply till then. Time-zone differences is not an excuse. Use a world clock app. This is an individual assignment. Collaborating, providing or receiving answers from someone else on this assignment violates Academic Integrity. Purpose To apply the concepts you have learned over the year to a real-world situation. In problem sets, we make model choices to help you learn the concepts. In this assignment, you show your learning by making those choices to answer questions. Who you will write for You are writing for someone who has taken ECO 206. You can assume course knowledge, and jargon is allowed, as long as you use it correctly. Jargon can hide incomplete understanding. Challenge yourself to use jargon just for the purpose it was intended–a way to convey specific information concisely. What you will write about We want to examine the effect of COVID-19 using the tools of ECO206. What you will write Answer the questions below. For questions 1,2,3 and 5 you will create something similar to a problem set. The goal is to clearly define your setup and the main economic channels. You will use these answers to conduct your analysis in Q4 and Q6 and communicate it in writing. Format/Notes • Each question is to be answered on a separate page(s) and uploaded in the correct place on Crowdmark. • Combine (only) Q4 and Q6 into one file and upload it onto Quercus. This file should be a Word or pdf document. We will treat any other formats as a late submission. • For Q4 and Q6, put the word count at the end of your answer. For example, “(428 words)” • At the top of every page write/type your full name and student id number. • Some answers will need to be handwritten, and some typed out. If not specified in the question, either is fine. •Quantity 6= quality. We are looking for 206 level analysis. That said, the goal is to explore a real-world problem and not everything fits neatly into a 206 model. Noticing the limitations of our models is a learning goal. • Footnotes should be used mostly for references and minor comments. If you use footnotes as a way around the word-limit, we will ignore any content there. • Include a reference section at the end that includes all the sources you cite. This does not count toward the word limit. Use the APA formatting and Style Guide ECO206Y1Y, Fall 2019 1 of 6 Prof. Freitas Advice I’ve structured the task by having you choose your framework first. This will give focus and depth to your analysis. Do NOT start by reading up on the topic. Once you have a rough framework, then read. See if your framework captures the broad insights you want. If not, adjust it. Starting without this is a recipe for disaster. You can end up down many rabbit holes and do a lot of research that will not translate into higher grades. Academic Integrity Academic Integrity is central to an UofT education. We take it seriously and so should you. Properly acknowledge other people’s ideas. You’d want the same for your ideas. Do your own work. We design these assignments to develop skills useful in the job market. This is an individual assignment. Collaborating, providing or receiving answers from someone else on this assignment violates Academic Integrity. You can discuss broad ideas with classmates and us, but the work has to be yours. If you have questions or need clarification, please ask. Better safe than sorry. I will report all suspected cases of academic dishonesty to the Department of Economics and OSAI and the consequences can be severe. Being unaware of the policies or what is considered plagiarism is, unfortunately, not a defense. Read the University of Toronto’s Code of Behavior on Academic Matters. See: http://www.artsci.utoronto.ca/osai. The University disclaimer on Turnitin.com “Normally, students will be required to submit their course essays to Turnitin.com for a review of textual similarity and detection of possible plagiarism. In doing so, students will allow their essays to be included as source documents in the Turnitin.com reference database, where they will be used solely for the purpose of detecting plagiarism. The terms that apply to the University’s use of the Turnitin.com service are described on the Turnitin.com web site.” Grading The grading for each part will be based on the quality of your economic analysis, not on your writing. However, if we can’t understand the economic argument because of your writing, then you will lose points. ECO206Y1Y, Fall 2019 2 of 6 Prof. Freitas Notes • Questions 1, 2, 3 and 5 set-up the framework to analyze the given scenario. Points are mostly for completion with effort, unless you make errors in your derivation or diagrams or are inconsistent. Complete them properly because without them your analysis in Q4 and Q6 (most of the points for this assignment) will be superficial and/or incorrect and will harm you there. • Treat each big question (i.e. Q1, Q2...) as a separate self-contained unit. For example, the grader should NOT have to look at Q1 to understand your analysis in Q2. A different TA will grade each question, and they will not refer to other answers when grading their question. If we have concerns about your assignment or if there are regrade requests, we will look at the entire assignment. • Do not introduce something in your COVID-19 setting that is not there in your initial setting. For example, in WA1 students introduced GPA as a condition for a scholarship without GPA in their initial setting. Without a reason GPA should be relevant in the initial setting it makes little sense with the scholarship and those students got points off. If you consider something important in your COVID-19 setting, then it should be represented in your framework. Otherwise it is not relevant. Questions Q0) Write out the statement below on a piece of paper. Sign your name below it. Put your T-card next to the writing. Take a picture that includes both, the writing and your T-card. Upload that. If you do not upload this, we will not grade your assignment. “The work I have submitted on this assignment is my work alone. I understand that receiving or providing answers or collaborating with anyone on this assignment is an academic offense.” Q1 In this question, you will examine the effects of COVID-19 on demand for a particular industry. You will choose an industry, derive consumer demand and then finally, derive market demand. 1a) [1 point] Pick a Canadian industry to analyze. Tell us what it is. Hint: This is the hardest part of the assignment as everything else follows from this choice. My advice is to go narrow enough so you can represent the industry output on one axis of an ECO 206 diagram. E.g. You could focus on service industries and choose restaurants. 1b) [2 points] Pick a representative consumer in this industry. For that consumer, answer the questions below. i) What two goods they are choosing between? Hint: When choosing your goods, make sure one of them is related to the industry and is something that a consumer chooses. E.g. if your industry is restaurants, then your good could be “number of meals eaten out”. ii) What is the consumer’s income? Exogenous or endogenous? Specify income source and explain your reasoning. Write a budget constraint equation that captures this. Hint: It may be easy to assume that income is $I and leave it at that. However, if you will argue later that COVID-19 reduces incomes, describe where that income comes from, even if you assume it is constant for the purpose of deriving demand in this question. iii) What are the consumer’s preferences? (1) Describe them in a few sentences and (2) capture them in a utility function. Explain the reasoning behind your choice. Hint: Don’t choose something because you think it will be easy to deal with. E.g. in WA1 most students choose Cobb-Douglas preferences but could not justify why they chose them apart from that they were easy. Think about what the different patterns mean for choices, MRS etc. Can you find some evidence to justify your choices? For your analysis to be useful, your assumptions should reflect, as much as possible, reality. Don’t get too complicated, choose from our set of ECO206 preferences. iv) Derive a demand curve for the representative consumer given the information you have chosen in the earlier parts. 1c) [2 points] Use your work in 1b to derive an industry demand equation. Note: your work in 1b is only a simple way to capture some broad insights. If you think something is missing from this representative consumer simplification, you can add it in (using words if you can’t do it with equations). For example, maybe rich consumers behave differently from poorer consumers, and that dimension is important for your analysis later. ECO206Y1Y, Fall 2019 3 of 6 Prof. Freitas 1d) [3 points] In this setting, what will be the impact of COVID-19 on industry demand? Is this a long-run or short-run effect? Explain your reasoning. Be specific about the channels. What changes because of the situation caused by the virus and then trace through the impact on industry demand. E.g. exogenous income falls, which leads to a decrease in demand. For each, explain the intuition moving from the consumer to the industry. Hint: Do a 206 level analysis by thinking of all the individual elements in 1b, how they change, why and then work slowly to the effect on industry demand. Q2) In this question, you will examine the effects on supply due to COVID-19 for the same Canadian industry you chose in Q1. You will set up and solve the firm’s problem, derive firm supply and then build up to market supply. 2a) [4 points] Pick a representative firm in this industry. For this firm, answer the questions below. i) What good does the firm produce? Hint: How would you relate it to the goods the consumer chooses in Q1? ii) What two inputs does the firm use? Hint: It doesn’t have to be capital and labor. When choosing your inputs, think about whether they will be important for the impact of COVID-19. iii) Write an equation that captures the firm’s production function. Explain your reasoning briefly. Hint: Think carefully about your choice here. Motivate it, to the extent you can with your 206 knowledge, by something realistic. E.g. don’t choose Cobb-Douglas because it is easy, choose it because you can explain why it is a good choice for your industry. iv) What is the market structure? Is the firm a price-taker or a price setter in the output and input markets? Explain your reasoning briefly. Hint: Choosing perfect competition for simplicity is ok. v) Derive the firm’s cost function. Explain your reasoning briefly. vi) Derive a supply curve for the representative firm given the information you have chosen in the earlier part. 2b) [2 points] Use your work in 2a to derive an industry supply equation. Does it differ in the long-run or short-run? Note: your work in 2a captures some broad insights. If you think something is missing from this representative firm simplification, you can add it in (using words if you can’t do it with equations). For example, maybe firms with different productivities is important for your analysis. 2c) [3 points] In your setting, what will be the impact of COVID-19 on industry supply? Is this a long-run or short-run effect? How do you define long-run here? Be clear and specific about the channels. What changes because of the situation caused by the virus and then trace through the impact on industry supply. E.g. labor supply falls by half, which decreases supply in a particular way... For each, explain the intuition moving from the firm to the industry. Hint: How do your answers to 2a change, why? Then work through the impact from firm to industry supply. Q3) [2 points] Summarize your analysis in Q1 and Q2 in clearly labeled diagram(s) of the MARKET (i.e. combine industry demand and supply curves). What is your prediction about market price and quantity in the industry due to COVID-19? In case you can’t tell based on shifting curves, make your best prediction about the net effect and explain the reasoning behind it briefly. Differentiate between long-run and short-run effects. Make your diagrams as self-explanatory as possible. Your diagrams should be hand drawn and must fit on one page of paper. Q4) [35 points] Assume your setting is given by your choices in questions 1-3. If the government wants to minimize the impact of COVID-19 on your chosen industry, what policy would you recommend and why? Explain using only words–no tables, equations or bullet points. Do not explain equations/derivations, focus on the intuition behind them. Limit your answer to a maximum of 500 words (excluding sub-headings and references), typed, double spaced with a font size of 12. Organize your answer using the subheadings below (in bold for each bullet point). Remember, the grader will not see your answer to Q1-3 so can’t assume knowledge of that here. • Objective: What should the government’s objective be with this proposal? E.g. The government should minimize the impact on consumer well-being or employment or ... ECO206Y1Y, Fall 2019 4 of 6 Prof. Freitas • Proposal: What exactly is your proposal? Be specific, e.g. give people money vs. give everybody a certain fixed amount of cash every month. • Mechanism: Explain what it would affect in your framework and why. E.g. which side of the market would it affect–demand or supply or both, and why? • Impact on Equilibrium: How will this proposal affect market equilibrium? Long-run or short-run? • Pros and Cons: Why do you think this is the best proposal given your setup? Overall Hint: Pretend you are in a problem-set where the earlier parts are given by questions 1-3 and answer in that context. If you don’t, the questions become too big and too overwhelming. Your analysis will be superficial and won’t provide much value added. That said, there is a lot you can do within this framework. It is a good way for you to see how a 206 framework can generate interesting economic analysis. I understand that the problem set framework is constraining, but it allows you to go deeper and show-off your 206 skills. As you progress in Economics, you can and will do more sophisticated analysis with proper data. Q5) The world needs a vaccine for COVID-19. Many firms are trying to invent one right now. Let’s use the 206 framework to think about how firm competition could affect this. Note: • Vaccine research involves a lot of risk. You can put lots of money into R&D and get nothing. We don’t (yet) have a way to incorporate risk into Oligopoly. The way around it is to assume NO risk. Assume that if any firm makes a large enough investment into R&D, then, they will invent the vaccine and be able to produce it. • Once they produce it, they have to compete in a market with other firms in an Oligopoly setting. You choose the type of competition and timing in 5a. You can experiment with the timing to capture the idea that some firms develop a vaccine earlier than others. • Assume only two firms because that is the simplest way to capture the intuition. You can discuss how the analysis extends to more than two firms, but it is unnecessary. • Global politics can get complicated. Narrow your setting down to a vaccine produced by Canadian companies for the Canadian market. 5a) [4 points] Choose the details of your framework by answering the questions below. i) Are the vaccines by different companies considered identical by consumers or not? Why? Hint: this is the equivalent of the identical goods assumption. i) What is the cost structure of each firm engaging in vaccine R&D and eventually vaccine production? Write an equation. Explain your reasoning. Are the firms different? Why or why not?. Hint: There is an implicit production function assumption here, that will help you figure out the cost structure. Use evidence to see if it makes sense. ii) Price competition or quantity competition? Explain your reasoning. Hint: Bertrand, Cournot or Stackelberg? iv) What is the timing you are considering? Draw a game tree to illustrate it. Explain your reasoning behind this choice. Hint: Is this a simultaneous or sequential game? Who moves first and why? How to model the entry decision? 5b) [2 points] Solve the problem you have set up in 5a. What is your prediction in the market you have described in 6a? Show your working. Explain your reasoning. Hint: You can treat this like a 206 problem set and solve it like one using equations, words, diagrams, etc. Q6) [40 points] What role should the government play in the setting of Q5? Answer the questions below. Limit your answer to a maximum of 750 words (excluding sub-headings and references), typed, double spaced with a font size of 12. Organize your answer using the subheadings below (in bold for each bullet point). Remember, the grader will not see your answer to Q5 so can’t assume knowledge of that here. • Objective: What should be the government’s objective with this intervention? Why? Hint: maximize number of people vaccinated because... ECO206Y1Y, Fall 2019 5 of 6 Prof. Freitas • Intervention: What exactly is your proposed intervention? Be specific. E.g. should it subsidize vaccine R&D or should it impose price controls or something else? Why? • Mechanism: How this proposal would affect the market equilibrium? Hint: What does it affect, timing, costs, payoffs... and how does this affect the equilibrium? • Funding: How should the government fund any intervention you propose? Hint: You can speculate a little here as it is not directly in your framework choices. Would it raise it through labor taxes? Why? etc. • Pros and Cons: Why do you think this is the best proposal given your setup? Hint: Go back to your objective and see if you can find another way to achieve this goal. Overall Hint: Same as with Q4 for the same reasons. ECO206Y1Y, Fall 2019 6 of 6 Prof. Freitas