Question 1. Explain why economic theory should never guide policy action. No citations are required for this answer.
A) The task is to describe multiplier effects in the Grapetown economy using three related industries. The first industry is Wine Manufacturing (ANZSIC Code 1214), for which the proportion of local consumption is 0.6. Total employment in metropolitan area is 20,000 in this industry and equilibrium wage is $7,000.
i. Select and define two additional related industries. Describe why they are related to Wine Manufacturing and define their proportion of local consumption in the language of economics [15 points].
ii. Describe the economic effects in dollars of the following changes: an increase in export income in Wine Manufacturing by $1,000,000, a $750,000 increase in export income for your second industry, and decrease of $300,000 in export income for your third industry [15 points].
iii. Using graphs demonstrate the multiplier direct and indirect effects for one of the two industries you have chosen [10 points].
B) You are a Ministerial Advisor on questions of economics in your local Department of Transportation. As a method of mitigating traffic congestion on your city’s motorway network, you have suggested to the Minister that a perkilometre congestion price be levied. Unsure, the Minister requests a memorandum discussing the supply and demand effects of implementing such a toll regime. The Minister’s main issue is that she perceives two groups of stakeholders: one that owns large cars that consume lots of petrol, and one that owns small, fuel-efficient cars. The Minister wants an explanation of how these two stakeholder groups will be impacted. In the initial equilibrium, there are 500,000 large, polluting vehicles on the roads, and 500,000 small, fuel-efficient vehicles on the road. For the small cars, the average cost per vehicle-kilometre is $0.30 (in direct fuel and maintenance costs). For the large cars, the average cost per vehicle-kilometre is $0.50.
1) Use supply-demand graphs to the show the effects of the taxes on the two stakeholder groups. Be sure to label your axes with appropriate labels [10 points].
2) Explain the direction and relative magnitude of the shifts in the demand and supply curves you depict [15 points].
3) Compare the effects on costs and quantities after systems have reequilibrated, for both stakeholder groups [15 points].