Trine University Micro and Macro Economics Price Elasticity Questions

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Microµ economics Assignment Semester 2, 2019 Micro eco: Business Economics BUECO 5903 Instructions for Candidates: 1. Choose any five (5) of the following nine (8) questions; 2. Each question is worth ten (10) marks; 3. Please type your assignment; 4. All diagrams and direct quotations must be referenced as per the course description specified method. 5. Please use the numbering system as provided on this document to identify the questions. Question 1: Explain the meaning of market equilibrium for the market for rental accommodation show your answer with a diagram If the government decided to impose rent control in Australia’s capital cities as a way to prevent rising rents what might happen. Use a supply and demand diagram to show the effects of this action. What would landlords do as a response? Is rent control a valid solution? (Diagram essential 2 marks and 8 marks to answer the two set questions) Question 2 Explain the impact of the following events on the peanut industry (Use Supply and demand diagram in your answer): a) The price of fertilizer used in growing peanuts rises b) Consumers’ tastes change so that they now prefer popcorn to peanuts c) A drought reduces the productivity of land used to produce peanuts d) Doctors find that peanuts are bad for the overall general health (2.5 marks per each part) Question 3 Suppose the price elasticity of demand for railway travel is elastic. If the rail authority wants to raise revenue from fares, should it raise them or lower them? You might illustrate your answer with a diagram (10 marks for comprehension of the question along with a diagram) Question 4 3 Using diagrams in your answer what are the possible circumstances under which the burden of an excise tax would be borne i) entirely by consumers ii) entirely by producers. ( 5 marks per each part including diagrams) Question 5 How do the diminishing marginal returns to scale differ from diseconomies of scale? What is the difference between a firm’s explicit costs and implicit costs? (5 marks per each part) Question 6 What is the difference between the price elasticity of demand and the income elasticity of demand? What does the cross elasticity of demand measure? Why should a firm or business know the difference between each of the three concepts? (2 marks per definition and 4 marks for why firms need to know their importance) Question 7 (a) Illustrate and explain using diagrams how a single seller within the market causes an inefficient allocation of resources and why that is bad; (2.5 marks for the diagram plus 2.5 marks for the explanation) (a) What market structure is used to benchmark allocative efficiency and why do we use it? Illustrate and explain using a diagram (2.5 marks for the diagram plus 2.5 marks for the explanation) 4 Question 8: Illustrate and explain using diagrams, two (2) market mechanisms that can be used for controlling pollution as a negative externality. [2.5 marks for each diagram (total of 5 marks) plus 2.5 marks for each explanation (total of 5 marks)] Macro Eco: same 5 out of 8 questions. Question 1: Consider a macroeconomy was initially at equilibrium. Using an aggregate demand and aggregate supply diagram model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy: (a) The imposition of a carbon tax upon local big polluting companies. (b) An appreciation in the foreign exchange rate value of the economy’s currency. (c) The European economies all fall into recession (d) The country’s main exports fall in price while the goods the country imports from abroad rise in price (2 marks) Question 2: 2a. State the difference (IN YOUR OWN WORDS) between: -absolute advantage and comparative advantage. -between the terms of trade and the exchange rate - between a demand side shock and a supply side shock -between a trade surplus and a budget surplus (2.5 marks each) OR 2b. State the difference between: (2.5 mark per question) -uncertainty and risk. -between the interest rate and the exchange rate - between a supply side shock and a demand side shock -between a trade deficit and net foreign debt (2 marks) Question 3 Use the Australian Bureau of Statistics website and perhaps the Reserve Bank of Australia website to answer the following questions: What are the current levels of the following economic indicators in the Australian economy? (Remember these should be expressed in annual terms) Inflation Unemployment Economic growth rate The cash rate The Australian dollar exchange rate (2 marks each) Question 4 Use the aggregate demand- aggregate supply diagram model to explain the consequences in terms of price level and real GDP of a decline in aggregate demand as shown by: (a) Classical economics (b) Keynesian economics Why did the classical economists believe the economy would always find equilibrium at full employment and the Keynesians did not? Question 5 Assume an economy operates on the middle part of its aggregate supply curve. State the direction of effect on aggregate demand or aggregate supply for each of the following changes in conditions. What is the effect on the price level, real GDP and employment? Use diagrams in your answer. (a) The price of crude oil rises significantly (b) Spending on welfare and aged pensions doubles (c) The value of the currency falls on the foreign exchange market. i.e the currency depreciates (d) The Government halves the goods and services tax (GST) on all consumer goods (e) The Government announces rises in company tax. (2 marks per part) Question 6 If you wanted to increase aggregate demand how would you do it for the following: Consumption demand Investment demand Net exports Which of the three components also has an impact upon the Aggregate supply side of the economy? Question 7 Consider a macroeconomy was initially at equilibrium level of real GDP. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run consequences of the following events upon an economy: (a) The Central Bank within the economy lifts interest rates. (b) There is an increase in private domestic investment spending. (c) An increase in the good and services tax (GST) (d) An appreciation or rise in the foreign exchange rate value of the economy’s currency. (e) A fall in real estate prices in the capital cities of the country (hint: think of the effect upon people’s wealth level) (2 marks each) Question 8 Why are quarterly movements in a country‘s GDP measure so important? What is it called when a country has two successive negative quarters of economic growth? When the economy is heading into a recession what economic policy instruments can the government and the central bank use to prevent this from occurring? Will these instruments work to prevent the onset of recession ...
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Tutor Answer

Kevins_Jr
School: University of Virginia

Attached.

Running head: MICRO AND MACRO ECONOMICS

Your name
Instructor’s name
Course
Date of submission

1

Running head: MICRO AND MACRO ECONOMICS

2

MICROECONOMICS
Question 3
Should the rail authority raise revenue for fares in rail travel when the price elasticity of
demand is elastic?
To raise the revenue in railway transport the prices need to be lowered. This is because
the consumers are very sensitive to the prices when the demand is elastic. Customers tend to
travel more when the fare process is lowered. Some of the customers will even leave their private
means of transport to enjoy the lower prices of railway transport. When the rail authority raises
the prices of transport the number of customers decreases. Others will tend to use other means of
transport which might be cheaper such as road transport. The demand for rail transport will be
higher when the prices are lowered.
The graph below illustrates the changes in quantities when the prices of fares are increased.

Running head: MICRO AND MACRO ECONOMICS

P2

3

b

Price

P1

Gain in Revenue

c

a

D

Loss in Revenue
Common Area
O

Q2

Q1
Quantity

The graph shows that the price was been increased to P2 from P1 which affected the
demand by decreasing it to Q2 from Q1. The graph represents three areas which are Loss in
revenue, common area and gain in revenue. The common area is represented by O, Q2, c, and
P1. The loss in revenue is represented by Q2, c, a, Q1. The gain in revenue area is represented by

Running head: MICRO AND MACRO ECONOMICS

4

P1, P2, b, and c. According to the graph, the area showing the loss of revenue is greater
compared to the area showing revenue gain. The graph illustrates that the quantities decrease
with the increase in fare prices and this leads to a loss in revenue. The graph also shows that the
lowering of prices the quantities are increased leading in revenue gain. Customers will always
benefit from low prices and travel in large numbers (Gamble, 2015).
Question 4
Using diagrams in your answer what are the possible circumstances under which the
burden of an excise tax would be borne
i) Entirely by consumers
ii) Entirely by producers
Entirely consumers
The tax burden is being carried by the consumers when the demand is inelastic and the
supply is elastic. There is an increase in the prices of the goods so as the consumers may bear the
tax burden there are many factors that contribute the imposing the tax burden on the consumers.
The government may impose the tax burden to the consumers to prevent the consumption of
some of the goods. The government may be willing to protect the consumers from harmful
products that affect their health and the environment as well. This will reduce the number of
consumers who takes the product and also prevent the entry of other consumers. An example is
an alcohol and tobacco. Secondly, the government may impose the burden of tax on consumers
to raise government revenue. When the prices of the products are being raised the government
will collect more revenue from the highly-priced goods. This includes fuels, alcoholic drinks and
among others.

Running head: MICRO AND MACRO ECONOMICS

5

The diagram below illustrates the tax burden is being carried by the consumer.

According to the graph, there is an increase in the prices of the goods that are purchased
decreasing the number of goods being purchased. This is when the tax burden is imposed on the
consumers. This graph shows that consumers bear the burden of tax when the prices are high at
P1 leading to the purchase of low quantities at Q1. This is because consumers will not be willing
to pay more for a product and they may find an alternative good or lower their consumption rate
for the product lowering the quantity being purchased (Dutkowsky & Sullivan, 2014)..
Entirely by producers.
When the burden of tax is being carried by the producers the consumers pay less for the
product. There are many reasons why the government imposes the burden of tax to the
producers. One of the factors is to increase government revenue to promote development
projects. Secondly, the government may shift the burden of tax to the producers aiming at
environmental conservation. Industries are highly taxed to generate funds for the compensation
of the environment that is been destroyed. The revenue may help in supplying clean water to the

Running head: MICRO AND MACRO ECONOMICS
locals when their wastes of the industries are directed on the rivers. The government may also
impose the burden of tax on the producers to control the importation of goods from other
countries promoting the local industries. High pricing of the imported goods will discourage
consumers from purchasing them increasing the demand for the locally produced goods.

According to the graph, there is a decrease in the prices of the goods that are purchased
increasing the number of goods being purchased. This is when the tax burden is imposed on the
producers. This graph shows that producers bear the burden of tax when the prices are low at P,
leading to the purchase of high quantities at Q (Dutkowsky & Sullivan, 2014).

6

Running head: MICRO AND MACRO ECONOMICS

7

Question 5
How do the diminishing marginal returns to scale differ from diseconomies of scale?
The diminishing marginal return implies the decrease of the average output produced as a
result of a more added factor of production when the variable factors of input are being kept
constant. The added factors of production may include raw materials as well as labor. The
margin...

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