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MIcro Requirements
Kim can produce 40 pies or 400 cakes an hour. Liam can produce 100 pies or 200 cakes an hour.
(a) Who has a comparative advantage in producing pies and who has a comparative advantage in producing cakes? Explain why. (5 marks)
1. Assignment Questions
Question 1: Answer the following questions – 20 marks
Opportunity Cost and Comparative Advantage
Kim can produce 40 pies or 400 cakes an hour. Liam can produce 100 pies or 200 cakes an hour.
(a) Who has a comparative advantage in producing pies and who has a comparative advantage in producing cakes? Explain why. (5 marks)
(b) Initially, both Kim and Liam spent 30 minutes producing pies and 30 minutes producing cakes. However, they now decide to specialise in producing the product that they have a comparative advantage and trade their products in the market. What are the total gains from trade? Explain. (3 marks)
Demand and Supply
The table sets out the demand and supply schedules for potato chips.
(c)
Price
(cents per bag)
Quantity demanded
Quantity supplied
(million bags per week)
50
160
130
60
150
140
70
140
150
80
130
160
90
120
170
100
100
180
What are the market equilibrium price and quantity? Why? (3 marks)
(d) Suppose a new dip increases the quantity of potato chips that people want to buy by 30 million bags per week at each price. How the demand and/or supply of chips change? Also, explain how the price and quantity of chips change. Show the changes on a graph. (3 marks)
(e) The quantity of potato chips that people want to buy increases by 30 million bags per week at each price.
Now suppose, at the same time, a new breed of potato increases production of potato crops and the quantity of potato chips produced increases by 40 million bags a week at each price. Explain how the market equilibrium price and quantity of chips change. What are the new market equilibrium price and quantity? Show the changes on a graph. (6 marks)
Question 2: Answer the following questions – 20 marks
Elasticity of Demand and Supply, and Income
(a) When Judy’s income increased from $130 to $170 a week, she increased her demand for concert tickets by 15 per cent and decreased her demand for bus rides by 10 per cent. Calculate Judy’s income elasticity of demand for (a) concert tickets and (b) bus rides. Show your calculation. Are the concert ticket and bus ride income elastic or inelastic? Is the concert ticket normal good or inferior good to Judy? Is the bus ride normal good or inferior good to Judy? Explain. (4 marks)
(b) If a 5 per cent rise in the price of sushi decreases the quantity of soy sauce demanded by 2 per cent and decreases the quantity of sushi demanded by 1 per cent, calculate the price elasticity of demand for sushi and the cross price elasticity of demand for soy source with respect to the price of sushi. Does the elasticity indicate that sushi and soy source are substitutes or complements? (3 marks)
(c) Market analysts estimate that the price elasticity of demand for domestic beef is –1.30. How much would the price of domestic beef have fallen if the demand for domestic beef increases by 6.5 per cent? However, this price fall decreases the quantity demanded for imported beef by 4 per cent. What is the cross price elasticity of demand for imported beef with respect to the price of domestic beef? Does the elasticity indicate that domestic beef and imported beef are substitutes or complements? (3 marks)
Government Actions in Markets – Production Quotas and Subsidies
Price
(dollars per bag)
Quantity demanded
Quantity supplied
(bags per week)
1.20
3,000
1,500
1.30
2,750
2,000
1.40
2,500
2,500
1.50
2,250
3,000
1.60
2,000
3,500
The table sets out the demand and supply schedules for rice in Japan.
(d) Explain what will happen to the price, the marginal cost of rice, and the quantity produced if the government sets a production quota of 2,000 bags a week. Draw a graph and explain your answers. (5 marks)
(e) There is no production quota. Now explain what will happen to the price, the marginal cost of rice, and the quantity produced if the government introduces a subsidy of $0.30 a bag. Draw a graph to explain your answers. (5 marks)
Question 3: Answer the following questions – 20 marks
Government Actions in Markets – Price floor
Price
(dollar per tonne)
Quantity
demanded
(kilo tonnes)
Quantity
supplied
(kilo tonnes)
100
2,000
0
150
1,400
600
200
1,200
800
250
1,000
1,000
300
800
1,200
350
600
1,400
400
0
2,000
The table shows the demand and supply schedules for US wheat market. The US Farm Bill 2012 indicates that the domestic price of wheat will be set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. At the market equilibrium, 1,000 kilo tonnes (Kt) are supplied.
(a) On a graph, explain how the price control in the US would change the consumer surplus, producer surplus, and deadweight loss in the domestic wheat market. In your explanation, compare and show the changes in surpluses and deadweight loss before and after the price control. Assume that the US does not trade wheat internationally. (5 marks)
Global Markets in Action – International Trade Restrictions
Import Tariffs
Korea imports a large quantity of beef. With no beef trade, Korea’s equilibrium price for beef was $8 million per kilo tonne and equilibrium quantity was 375 kilo tonne. If Korea opens its beef market to trade with no tariff, domestic demand would be 625 kilo tonne and domestic supply would be 125 kilo tonne at the world price of $4 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 were 250 kilo tonne and 500 kilo tonne respectively in 2013. Assume that intercept of supply curve is $2 million and demand curve is $15 million per kilo tonne.
<Yeon Kim 2015>
(b) Based on the information given above, draw a graph to show the areas of gains and losses from the trade with 40 per cent tariff rate. Then, calculate the actual value of change in consumer surplus, producer surplus, tariff revenue and the amount of deadweight loss before and after the tariff. Show your calculation. (5 marks)
Import Quotas
With free trade between Australia and Canada, Australia would export beef to Canada. But Canada imposes an import quota on Australian beef.
(c) Draw a graph and explain how this quota would influence the consumer prices of beef in Canada, consumer surplus (CS) and producer surplus (PS), benefits of beef importers, and the amount of deadweight loss in Canada. (6 marks)
(d) The volume of import quota on Australian beef is less than Australia’s total export volume of beef to Canada. Explain how this import quota would influence Australia’s beef exports to Canada, consumer price of beef in Australia’s domestic market, consumer surplus (CS) and producer surplus (PS) in Australia. (4 marks)
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