Introductory Microeconomics ECON102

Question1 Analytical Reasoningusing aSupplyand DemandModel (Total:20Marks)

Answer all parts of this question.The question involves a series of statements that require you to use the analytical tools and models you have developed to assess.For each statement you must provideargumentsinsupportorargumentsrefutingthestatement.Youmustusethe appropriate theory supported with the appropriate model to support your arguments.Answers that are not supported with theory will receive a mark of zero.An example is provided to illustrate the approach to answering each of the questions.

EXAMPLE:

Statement:

Demandcurveshaveapositiveslopebecauseofthelawofdemand.

IllustrativeSolution:

The statement is incorrect.The law of demand states that as prices increase, quantity demand decrease, and when prices decrease, quantity demanded increases. In the supply and demand model, law of demand is represented by movement along the demand curve.Therefore, demand curveshaveanegativeslopeasillustratedinthediagram.Movingfromprice????₁tothelowerprice

????₂resultsinanincreaseinquantitydemandfrom????₁to????₂.

P

????1

????2

EndofExample Questions:

Q

????1 ????₂

1. Evaluate the statement: A positive production externality necessarily results in an allocation in which too much output is consumed relative to the social efficient output.

{3marks}

1. Evaluate the statement: Rent control policies are often used to help low income households afford suitable housing. Rent control polices necessarily improve the welfare for consumers compared to an equilibrium allocation with no rent control.

{3marks}

1. Evaluate the following situation: Suppose that consumer preferences are such that pizza and a pint of beer areIf the consumption tax placed on alcohol increases the price of a pint of beer, then the price of a pizza would increase.

{3marks}

1. Hastings caves in Southern Tasmania are renowned for their stalactites and stalagmites.The warden of the caves offers a tour every day at 2 pm.The caves can be shown to only 5 people withoutdisturbingtheirfragileHowever,morethanfivepeoplewanttoseethecaves on the same day.The table lists the people who wanted to see the caves on the particular day. The table reports their arrival time and their reservation price for taking the tour.

{5markstotal}

Considertwopossiblemechanismsthatthewardencanimplementtorestrictentrytothe caves to 5 people.

1. The warden operates on a first-come-first-served

1. Suppose that the warden asks for volunteers to postpone their tour by offering increasing amounts of cash compensation until only five people still wish to see the caves that day (similartoanauction).Thewardengiveseachvolunteerthesamecompensation

Whichpolicyshouldthewardenimplementitthegoalistomaximiseeconomicefficiency?

1. Use a supply and demand analysis to predict what will happen to the equilibrium price and quantity of wine if wine is discovered to increase certain cancers AND excellent weather has increased the number and quality of grapes used to make wine.You must provide clearly labelledsupplyanddemandYoumustalsoprovidewell-writteneconomicarguments supporting your diagrams.

{3marks}

1. You are currently building a house in a localThe construction of the house emits noise pollution. Assume existing laws are such that you are not allowed work on your house after 6:00pm unless you get permission from the community association in which your house is begin built. The relevant total costs and benefits of continuing to build after 6:00pm or shutting down production at 6:00pm are shown in the table.

Supposeyouarecurrentlynegotiatingwiththecommunityassociation.Isthereadealinwhichyou are allowed to continueconstruction after 6:00pm?If so, provide the details of acontract allowing you to build after 6:00pm.If a deal cannot be reached, explain why.

{3marks}

Question2 ApplicationofSupplyand Demand inAgriculturalMarkets(Total:35marks.)

TheexcelsheetcalledDemand_and_Supply.xlsxcontainssupplyanddemanddataforTasmanian produced hops.The first column consists of prices, thesecond column reports demand, and the last column is supply.Use this data to study price support policies in agricultural markets.

1. Use excel to plot supply andIllustrate the equilibrium price and quantity in the market. Be sure to report the equilibrium price and quantity. Label all elements of the diagram.

(5marks)

1. Compute consumer and producerIllustrate these on the diagram created in part a).

(4marks) Suppose the government wants to support farmers.The government proposes different policies.

Usethesupplyanddemanddatatoexplorethesepolicies.Thefirstpolicythegovernment

proposes is to impose a price floor equal to $8.

1. Compute the quantity supplied and the quantity demanded at this price

(3marks)

1. What is the effect of this policy on consumer surplus and producerIllustrate your solution in part c) and pat d) in a diagram. Analyse who benefits and who loses from this policy.

(6marks)

1. Is there any deadweight loss associated with this policy? If so, compute the deadweight loss and illustrate the loss on the diagram in part d)

(4marks)

The Second policy is for the government to impose a price support at price equal to $8 using a deficiency payment program.A deficiency payment program involves letting market prices clear themarketandthenthegovernmentmakespaymentstofarmersequaltothedifferentbetween the market price and the support price.

1. Compute the quantity supplied and the quantity demanded under the deficiency payment program. Compute the total deficiency payments made to the farmers.

(3marks)

1. What effect does this program have on consumer and producer surplus compared to part b) (no intervention equilibrium)? Is there a deadweight loss? If so compute the deadweight loss from this policy.

(4marks)

1. Based on your work on parts a) through g), which policy would you advocate the government should implement? You must use arguments supported with your analysis in the previous parts of the question.

(6marks)

Question3-Applying MarginalAnalysis(Total:10marks)

YouworkforTasmaniainthepublictransportationdepartment.You overseepricingandrevenue strategies for bus routes from rural communities into Hobart.You have been studying the data from the route between Cygnet and Hobart.You know that each round trip between Hobart and Cygnetcosts$100plus$5foreachpassenger.Forexample,aroundtripwith3passengerswould cost $115 and a trip with 1 passenger would cost $105. The data from the last 6 months of service are reported in the table below.

1. Use marginal analysis to determine the price you would set per round trip if you wanted to maximise net benefit (profit)? Explain your reasoning using marginal analysis. Show any calculations or tables you made to determine your(You only need to analyse the prices in the table)

(3marks)

1. Of course, public transit has a positive externality associated with it. For example, the more people that use public transport the less people use their own vehicles resulting in less emissions and lessWhat price would you set if your objective is to maximise the number of passengers while still covering costs. (You only need to analyse the prices in the table)

(4marks)

1. Explain why the two prices areYou must use marginal analysis in your explanation.

(3marks)

Question4ComparativeAdvantage (Total:20Marks}

You own a small business selling native plants.You employ two employees: Tom and Brooke. Therearetwogroupoftaskseachcanperform.Thefirstistransplantingandpottingnewplants, and thesecond is delivering plants tocustomers.It takes Tom30minutes tofinish transplanting and potting new plants, and it takes him 40 minutes to make one delivery.It takes Brooke 10 minutes to finish transplanting and potting one plant, and 30 minutes to make one delivery.

1. Who has the absolute advantage in each task?

[3marks]

1. Which employee has the comparative advantage in transplanting and potting new plants? Which employee has the comparative advantage in completing deliveries? You must explain your results.

[5marks]

1. Initially you assign Tom and Brooke each 4 hours a day transplanting and potting news plants and two hours eachdoing deliveries.Isthisthebest useof youremployees?Canyou devisean alternative task schedule that will result in more transplants and more deliveries?Report the newscheduleandreporthowmuchmoreyouareproducingunderthenewschedulecompared to the previous one.

[12marks]

Question5 Policies toAddress Pollution(Total:15 Marks).

Suppose there are two coal generators producing electricity, call them Gen 1 and Gen 2. Their production currently emits greenhouse gases into the atmosphere. Each generator currently emits 5 units each pf GHG emissions per GWh. A study shows that total economic surplus can be increased by reducingthetotallevelofemissionsby5units.Themarginalcosttoeachofthetwogeneratorsof reducingtheiremissionsisshowninthetablebelow.Thegovernmenthasaskedyoutoanalysisthe costsofthreeproposedpolicies:(1)directregulation;(2)tax;(3)capandtrade.

MarginalCostofReducingEmissions($/GWh)

1. Direct regulation (command-and-control) involves requiring that each generator reduce their emissionsby3Whatisthecosttoeach generator fromthispolicy?Whatisthetotalcost from this policy?

{2marks}

1. Design a tax policy that would achieve the target amount of pollution (reduce emissions by 5 units in total) at the least costWhat tax level would you impose? By how much does each firm reduce their pollution? What is the cost to each firm and what is the total cost? Provide an explanation for all your results.

{5marks}

1. The last policy is a cap-and-trade system based on pollution permits. In this policy, a generator is required to have a permit for each unit of emissions. For example, if a generator wants to emit 3 units of emissions per GWh it most have threeThis policy must result in 5 units reduction in emissions at the lowest cost possible.

The policy involves assigning each generatorpermits.Therefore, only 5units of emissionscan beemitted,therestmustbe abated.SupposethatGen2initiallygets4permitsandGen1gets 1 permit.

Whatisthefinaldistributionofpermitsbetweenthetwogenerators?Howmanypermitsdoes Gen 1 keep or sell?How many permits does Gen 2 sell or keep?What is the total abatement cost of this policy.

{5marks}

1. Which of the three polices would you advise the government to implement? Be sure to support you conclusion with evidence from parts a) to c).

{3marks}

Question6Moreon SupplyandDemandTheory (Total: 20)

Supposethesupplycurveina marketcanbedescribedbythesupplyfunction

????=4????,

anddemandinthemarketcanbedescribedbythedemandfunction

????=20,

Notethat????is pricein dollars perunitand????is unitsofoutput perweek.

1. Sketch the market supply and demand in andIllustrate the market equilibrium. Explain the role of the law of supply and the law of demand for this market.
2. Calculate the equilibrium price and
3. Suppose that the government imposes a new per unit tax on the firms equal to ???? = $4.

There,thenewsupplyfunctionis

????=4????+ ????.

Illustratethesechangesinasupplyanddemanddiagram.Illustratethechangestothe equilibrium price and quantity.Explain your results.

{4marks}

1. Compute the new equilibrium price andAre they consistent with your model in part c ?

{2marks}

1. Use a new diagram to illustrate and describe how the tax affected both consumers and the firms. Explain the economics of your (hint: think about the law of demand and the law of supply).

{8marks}