Assignment: Introduction to Microeconomics

Question 1: The Production Possibility Frontier

Table 1 - Production Capacity of Newland

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)

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.

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).

Question 2: Part I: Tax Incidence

Suppose the demand for and supply of pizza functions are:

Q^D = 20 - 2P (1)
Q^S = P - 1 (2)

Where, Q^D is the quantity demanded; Q^S is the quantity supplied and P is the price. Suppose the, government imposes $3 tax per pizza purchased. Calculate the incidence of the tax and deadweight generated by the tax. Show all working steps and indicate your results on a correctly labelled demand and supply diagram.

Part II. Price Regulation

a. The US Farm Bill 2012 indicates that the domestic price of wheat is set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. On a graph, show and explain the impact on the equilibrium quantity and price of wheat.

b. On a graph, explain the change the consumer surplus, producer surplus and the deadweight loss in the domestic wheat market. Assume that the US does not trade wheat internationally.

c. Calculate the changes in consumer surplus, producer surplus and deadweight loss. (Remember 1 kilo tonne = 1,000 tonnes)

d. Is the outcome of the US Farm Bill fair? Critically discuss. Your discussion should reflect the fair rules and fair results notions of fairness.

Question 3: The Impact of Natural Disaster

Bush fires and drought have destroyed coffee plantations in Brazil, the world's leading producer of coffee. Manufacturers of coffee products are discussing ways of averting a projected shortfall in coffee in the next five years. Nestle, manufacturer of Nescafe and Nespresso, is teaming up with Brazil to trial plantations of new coffee specie that could mature in twelve months.

With the aid of the demand and supply diagram, answer the following questions:

a. Analyse the impact of the drought and bush fires on the supply of coffee.

b. Suppose worldwide demand for coffee products increases soon after the drought and bushfires. Analyse the effect on the world equilibrium quantity and price of coffee.

c. Analyse the effect on the world equilibrium price and quantity of coffee, if the trial of the new specie is successfully. Clearly state any assumptions you make.