Question 1: Answer the following questions – 15 marks
Table 1 – Production Capacity of Newland. Cars Bicycles 30,000 0 28,000 1,000 24,000 2,000 18,000 3,000 10,000 4,000 0 5,000
Use information in Table 1.1 above to answer the following questions:
a. Using the above figures, map out the Production Possibilities Frontier (PPF) for the production of the Cars and bicycles (Hint! Use Microsoft Excel, for accuracy) (3 marks)
b. In your own words, while making use of the graph that you have created in part a, explain what the PPF is. Cleary state all assumptions and properties of the PPF. (6 marks)
c. Newland usually has a demand of 3,000 bicycles and 18,000 cars. Suddenly Newland receives notice that the demand has increased to 4,000 bicycles and 20,000 cars. Discuss and explain at least three possibilities of how Newland could meet that demand. (Hint: State any appropriate assumptions made). (6 marks)
Question 2: Answer the following questions – 25 marks Table
2: Demand schedule for computer chips Price (dollars per chip) Quantity demanded (millions of chips per year) 200 50 250 45 300 40 350 35 400 30
Part I: Use the demand schedule for computer chips in Table 1 to answer parts (a) and (b) below.
a. What happens to total revenue if the price falls from $400 to $350 a chip and from $350 to $300 a chip? (4 marks)
b. At an average price of $300, is the demand for chips elastic, inelastic, or unit elastic? Explain your answer using the total revenue test. (4 marks)
Part II. Use the demand and supply functions expressed by equations (1) and (2) below to answer parts (c) – (f). Consider the demand and supply functions for widgets to be: Q D = 100 – 5P (1) Q S = 5P. (2)
c. What is the market equilibrium? (3 marks)
d. Calculate the consumer and producer surplus at the market equilibrium. What is the total surplus? (4 marks)
e. Now assume that the government sets a rule that the maximum quantity that can be sold is 25 units. If the price in the market is $15, what is the consumer surplus, producer surplus and the deadweight loss? If the price is $5 what is the CS, PS and DWL? (5 marks)
f. Using equations (1) and (2), sketch the demand and supply diagram and indicate your results from parts (d) – (e). Correctly label the diagram. (5 marks)
Question 3: Answer the following questions – 20 marks In 2010, the Australian government imposed a tax on Alcops to reduce teenage binge drinking and alcohol-related harms and hospitalization, and also to raise tax revenue. However, by the end of the financial year no reductions in teenage binge drinking and alcohol-related harm were recorded and, moreover, the revenue raised from the tax was 6% less than predicted.
a. As an economist, are you surprised about the outcome of the government’s tax policy? Critically discuss. Use the demand and supply model and other appropriate microeconomic tools you have learned in this unit to illustrate your argument. (10 marks)
b. Who bore a greater burden of the tax, the buyers or sellers of Alcops? Was the outcome of the tax efficient? Explain. (5 marks)
c. What other policy could the government implement to reduce teenage binge drinking and alcohol-related harm and hospitalization? Briefly explain.