# Group assignment- 0213 bus102 introduction to microeconomics

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Group Assignment- 0213

BUS102 Introduction to Microeconomics

Notes and GuidelinesforGroup Assignment

Due14May2014

Topic

•FourProblem-Solving Questions that require written answers

2.Assignment Questions

Question 1– 10 marks?

Part A

Ethanol
(barrels per day)

Food crops
(tonnesper 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.(a)If Australia increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost ofanadditionalbarrel ofethanol?(1 mark)(b)Does Australia face an increasing opportunity cost of ethanol? What feature ofAustralia’s PPF illustrates increasing opportunity cost?(1 mark)

Part B

The table sets out the demand and supply schedules forbanana.

Price

(dollars per box)

Quantity
demanded

Quantity
supplied

(boxesa week)

6

500

4000

5

1000

3500

4

1500

3000

3

2000

2500

2

2500

2000

1

3000

800

(c)Draw a graph of the market forbanana. What are the equilibrium price and quantity?Explain why.(1mark)(d)Ifthe price ofbananawas \$1.50abox.What would bethe situation in thebananamarket (shortage or surplus)?Explainwhy andhow the priceand quantity wouldadjust.(1mark)(e)Suppose acyclonedestroyedsomebanana farms in QLDand the quantity ofbananasupplied decreasedby500boxesa week at each price. Explain whatwouldhappentothe marketsupply and demand and how would the equilibrium price and quantity adjust?Illustrate the changes on your graph.(3marks)(f)Suppose acyclonedecreased bananasupplyby500boxesa week at each price.But at the same time the demand for banana increased by 500 boxes a week at each price.Explain whatwouldhappentothe marketequilibrium price and quantity?Illustrate the changes on your graph.(3marks)

Question 2– 10 marks?

Part A

Price
(dollars
pernight per room)

Quantity demanded
(no.ofrooms
pernight)

200

10

250

9

300

8

350

400

6

4

A tour agency’sdemand schedule for hotel rooms is given in the table.(a)What happens to totalexpenditure of the tour agencyif the price falls from \$400 to \$350pernight per room? Is the demandforhotel roomelastic, inelastic, or unit elastic?(1 mark)(b)What happens to totalexpenditure of the tour agencyif the price falls from \$300 to \$250pernight? Is the demandforhotel roomelastic, inelastic, or unit elastic?(1 mark)(c)Calculate the demand elasticity of the hotel room, whenthe price falls from \$400 to \$350pernight per roomand when the price falls from \$300 to \$250, respectively.(1marks)

Part B

WhenHana’s income was \$3,300,she bought5kgs of riceand 2kgsof beefa month. Nowherincome is \$4,400 andshe buys4.5kgs of riceand2.75kgs of beefa month.

(d)CalculateHana’s income elasticity of demand forbeef.Show your calculation.(1marks)(e)CalculateHana’s income elasticity of demand forrice.Is rice normal good or inferior good? Show your calculation.(2marks)

Suppose afloodcuts the quantity ofsugar canegrown by4per cent.

(f)If the price elasticity of demand forsugar caneis 0.5, by how much will the price ofsugar canerise?Show your calculation.(1marks)(g)Ifsugarmakers estimate that this change in the price ofsugar canewill increase the price ofsugarby15per cent and decrease the quantity demandedforsugarby3per cent, what is the price elasticity of demand forsugar?Show your calculation.(1marks)(h)Ifcoffeemakers estimate that, with the change in the price ofsugar, the quantity ofcoffeedemanded will decrease by6per cent, what is the cross elasticity of demand forcoffeewith respect to the price ofsugar?(1marks)

Question 3– 10 marks?

Part A

Rent

(dollarper 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.(a)If the government puts a rent ceiling of \$650 a month,whatisthe rentpaidandhow many rooms are rented? Explain why?(1 mark)(b)Nowthe government strictly enforcesa rent ceiling of \$550 a month.How many rooms are rented?Is the low-cost housing market efficient?Explain why.(1marks)(c)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.

(a)Is the wheatprice controlin the US aprice floor oraprice ceiling?(1mark)(b)On a graph, show and explainiftheprice controlin the UScreatesashortage orasurplus in the market forwheat. Assume that the US does not trade wheat internationally.(2marks)(c)Show on a graph and explain howthe price control in the USchangesconsumer surplus, producer surplus, anddeadweight loss in the domestic wheat market.(2marks)

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.

(a)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.(2marks)(b)Draw agraph toidentify the areas ofgains and losses fromthe 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.(3marks)(c)Suppose that Korea does not impose tariff any more but instead imposes an import quota of 20 kilo tonne.Draw a graph toidentify the areas ofgains and losses from the import quota,importers’ profit,and the deadweight loss.Provide your explanation.(2marks)

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. Themarginal external costof the chemical wasteis equal to the marginal private costof producing tomatoes.(d)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)(e)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)(f)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 pertonneof tomatoes produced?(1 mark)

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