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BUS102 Introduction to Microeconomics

Notes and Guidelines for Group Assignment

Due 14 May 2014

1. Assignment Questions

Question 1 – 10 marks

Part A

 Ethanol (barrels per day) Food crops (tonnes per day) 70 0 64 1 54 2 40 3 22 4 0 5

Australia produces ethanol from sugar cane, and the land used to grow sugar cane is used to grow food crops. Suppose that Australia’s production possibilities for ethanol and food crops are as in the table.

• If Australia increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost of an additional barrel of ethanol? (1 mark)
• Does Australia face an increasing opportunity cost of ethanol? What feature of Australia’s PPF illustrates increasing opportunity cost? (1 mark)

Part B

The table sets out the demand and supply schedules for banana.

 Price (dollars    per box) Quantity demanded Quantity supplied (boxes a week) 6 500 4000 5 1000 3500 4 1500 3000 3 2000 2500 2 2500 2000 1 3000 800

• Draw a graph of the market for What are the equilibrium price and quantity? Explain why.  (1 mark)
• If the price of banana was \$1.50 a box. What would be the situation in the banana market (shortage or surplus)? Explain why and how the price and quantity would adjust. (1 mark)
• Suppose a cyclone destroyed some banana farms in QLD and the quantity of banana supplied decreased by 500 boxes a week at each price. Explain what would happen to the market supply and demand and how would the equilibrium price and quantity adjust? Illustrate the changes on your graph. (3 marks)
• Suppose a cyclone decreased banana supply by 500 boxes a week at each price. But at the same time the demand for banana increased by 500 boxes a week at each price. Explain what would happen to the market equilibrium price and quantity? Illustrate the changes on your graph. (3 marks)

Question 2 – 10 marks

Part A

 Price (dollars per night per room) Quantity demanded (no. of rooms per night) 200 10 250 9 300 8 350 400 6 4

A tour agency’s demand schedule for hotel rooms is given in the table.

• What happens to total expenditure of the tour agency if the price falls from \$400 to \$350 per night per room? Is the demand for hotel room elastic, inelastic, or unit elastic? (1 mark)
• What happens to total expenditure of the tour agency if the price falls from \$300 to \$250 per night? Is the demand for hotel room elastic, inelastic, or unit elastic? (1 mark)
• Calculate the demand elasticity of the hotel room, when the price falls from \$400 to \$350 per night per room and when the price falls from \$300 to \$250, respectively. (1 marks)

Part B

When Hana’s income was \$3,300, she bought 5kgs of rice and 2kgs of beef a month. Now her income is \$4,400 and she buys 4.5kgs of rice and 2.75kgs of beef a month.

• Calculate Hana’s income elasticity of demand for Show your calculation. (1 marks)
• Calculate Hana’s income elasticity of demand for Is rice normal good or inferior good? Show your calculation. (2 marks)

Suppose a flood cuts the quantity of sugar cane grown by 4 per cent.

• If the price elasticity of demand for sugar cane is 0.5, by how much will the price of sugar cane rise? Show your calculation. (1 marks)
• If sugar makers estimate that this change in the price of sugar cane will increase the price of sugar by 15 per cent and decrease the quantity demanded for sugar by 3 per cent, what is the price elasticity of demand for sugar? Show your calculation. (1 marks)
• If coffee makers estimate that, with the change in the price of sugar, the quantity of coffee demanded will decrease by 6 per cent, what is the cross elasticity of demand for coffee with respect to the price of sugar? (1 marks)

Question 3 – 10 marks

Part A

 Rent (dollar per room) Quantity demanded (rooms) Quantity supplied (rooms) 500 2,500 1,500 550 2,250 1,750 600 2,000 2,000 650 1,750 2,250 700 1,500 2,500

The table shows the demand and supply schedules for low-cost housing.

• If the government puts a rent ceiling of \$650 a month, what is the rent paid and how many rooms are rented? Explain why? (1 mark)
• Now the government strictly enforces a rent ceiling of \$550 a month. How many rooms are rented? Is the low-cost housing market efficient? Explain why. (1 marks)
• If the government strictly enforces a rent ceiling of \$550 a month, what happens to consumer surplus and producer surplus? Using the table information, draw a diagram to explain. Also, calculate total housing search costs and deadweight loss. Show your calculation. (3 marks)

Part B

The US Farm Bill 2012 indicates that the domestic price of wheat will be maintained at \$350 per tonne, which is above the market equilibrium level of \$300 per tonne, in order to support for domestic wheat growers.  At the market equilibrium, 100 tonnes are supplied.

• Is the wheat price control in the US a price floor or a price ceiling? (1 mark)
• On a graph, show and explain if the price control in the US creates a shortage or a surplus in the market for wheat. Assume that the US does not trade wheat internationally. (2 marks)
• Show on a graph and explain how the price control in the US changes consumer surplus, producer surplus, and deadweight loss in the domestic wheat market. (2 marks

Question 4 – 10 marks

Part A

South Korea is one of the major beef importing countries. With no international trade, Korea’s equilibrium price for beef was \$10 million per kilo tonne and equilibrium quantity was 30 kilo tonne. If Korea opens its market to international trade with no tariff, domestic supply would be 10 kilo tonne and domestic demand would be 50 kilo tonne at the world price of \$5 million per kilo tonne. However, Korea currently imposes 40 per cent tariff rate on all imported beef. With 40 per cent tariff, Korea’s domestic supply and domestic demand are 20 kilo tonne and 40 kilo tonne respectively. Assume that intercept of supply curve is \$3 million and demand curve is \$15 million per kilo tonne.

<Yeon Kim 2009>

• Analyse the effects of 40 per cent tariff rate in Korea on the price, domestic supply and demand, and beef imports in comparison with no tariff case. (2 marks)
• Draw a graph to identify the areas of gains and losses from the trade with 40 per cent tariff rate with brief explanation. Then, calculate the actual values of change in consumer surplus, producer surplus, tariff revenue and the amount of deadweight loss. Show your calculation. (3 marks)
• Suppose that Korea does not impose tariff any more but instead imposes an import quota of 20 kilo tonne. Draw a graph to identify the areas of gains and losses from the import quota, importers’ profit, and the deadweight loss. Provide your explanation. (2 marks)

Part B

The figure illustrates the market for tomatoes. A small town is surrounded by a large tomato farm. The tomato grower sprays the plants with chemicals to control disease and the chemical waste flows into the river passing through the town. The marginal external cost of the chemical waste is equal to the marginal private cost of producing tomatoes.

• Draw a graph that shows marginal social cost (MSC) curve together with the marginal private cost (= S) and marginal social benefit (= D) curve. (1 mark)
• If no one owns the river and the town takes no action to control the waste, what is the quantity of tomatoes, and the deadweight loss created? (1 mark)
• If the town owns the river and makes the tomato grower pay the cost of pollution, how many tomatoes are produced? What does the grower pay the town per tonne of tomatoes produced? (1 mark)