BUS102 Introduction to Microeconomics Notes and Guidelines for Group Assignment Topic Four Problem-Solving Questions...

BUS102 Introduction to Microeconomics

Notes and Guidelines for Group Assignment

Topic

Four Problem-Solving Questions that require written answers

1. General information

1.1 This group assignment worth 20 marks of total assessment and is to be submitted through “Moodle”.

• There are 4 questions and each question will be marked out of 10 marks, consisting total of 40 marks. Then the marks will be converted to total of 20 marks scale for 20 per cent of your total course assessment.

• The marks that will be uploaded in Moodle later will be out of 20 marks (that is, 20 per cent of total assessment).

1.2 Each group should form a group of four (4) students. The number can be varied only with lecturer’s permission. One-person or two-people group assignment is NOT allowed.

1.3 Each student name in the group and student ID number must be clearly printed on the Assignment Cover Sheet and at the last page of the assignment paper.

1.4 In the case of one-person (or two-people group) assignment, it will be marked out of 12 (15), not 20. This means a loss of 8(5) marks for not forming a proper group.

1.5 You need to follow an appropriate format explained below. Not following appropriate format will cause loss of some marks.

• All written answers must be clearly typed and printed. Hand-written answers will NOT be accepted.

• All assignment questions and sub-questions should be typed in order at the heading.

• Separate each main question by different page. For example, if Question 1 (a) (b) (c) and (d) are answered on pages 1-2, then start Question 2 on page 3, etc.

1.6 The answers should be written clearly and concisely with the main points only, and avoid irrelevant points. In your answers,

• You should analyse, explain and show how and why you draw your answers. Providing just answers without explanation will not receive full marks.

• You should also include appropriate and relevant diagrams, charts and tablestogether in your explanation. Draw them using Microsoft Word/Excel/Power Point tools, NOT hand drawn.

1.7 Copying the assignment contents from other group(s) is a serious violation of copy right. It will be penalized and attract a VERY heavy loss of marks.

• Please remember that it is not difficult to identify the contents that are copied from other group(s).Write the answers in your own English words.

1.8 Each group needs to have a group coordinator, who will submit only one copy of the assignment for the group through “Moodle” in MS Word Doc(x) file format, not in PDF format.

• Indicate the group coordinator when you type student names on the Assignment Cover Sheet.

• Each group must also submit one HARD COPY of the assignment to Librarian in KOI.

1.9 Make sure all group members discuss and work together, and EVERYBODY in the group MUST read and check the assignment before submission, once completed!!

2. Assignment Questions

Question 1– 10 marks

Part A

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 of an additional barrel of ethanol?(1 mark)

The opportunity cost of an additional barrel of ethanol is 14.

(b) Does Australia face an increasing opportunity cost of ethanol? What feature of Australia’s PPF illustrates increasing opportunity cost?(1 mark)

Yes, Australia faces an increasing opportunity cost of ethanol.

Part B

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

(c) Draw a graph of the market for banana. What are the equilibrium price and quantity? Explain why.(1 mark)

(d) If the price of bananawas $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)

(e) Suppose a cyclone destroyed some banana farms in QLD and the quantity of banana supplied decreased by 500boxes 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)

(f) Suppose a cyclonedecreased banana supply by 500boxes 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

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

(a) What happens to total expenditure of the tour agency if the price falls from $400 to $350 pernight per room? Is the demand for hotel room elastic, inelastic, or unit elastic? (1 mark)

(b) What happens to total expenditure of the tour agency if the price falls from $300 to $250 pernight? Is the demand for hotel room elastic, inelastic, or unit elastic? (1 mark)

(c) Calculate the demand elasticity of the hotel room, when the price falls from $400 to $350 pernight per roomand when the price falls from $300 to $250, respectively. (1 marks)

Part B

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

(d) Calculate Hana’s income elasticity of demand forbeef. Show your calculation. (1 marks)

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

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

(f) 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)

(g) 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 forsugar by 3 per cent, what is the price elasticity of demand for sugar? Show your calculation. (1 marks)

(h) 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

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

(a) 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)

(b) 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)

(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 wheat price control in the US a price floor or a price ceiling?(1 mark)

(b) On a graph, show and explain ifthe price control in the US createsa shortage or a surplus in the market for wheat. Assume that the US does not trade wheat internationally. (2 marks)

(c) 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.

(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. (2 marks)

(b) 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)

(c) 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.

(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 per tonne of tomatoes produced? (1 mark)