Assignment: Introduction to Microeconomics

Question 1:

1. Australia has signed a free trade agreement with Canada in which Australia would export beef to Canada.

(a) Suppose that the government decides to subsidise exports of beef by paying a certain amount for each kg sold overseas. How does this export subsidy affect the domestic price of beef, the quantity of beef produced, the quantity of beef demanded, and the quantity of beef exported?

(b) How does it affect consumer surplus, producer surplus, total surplus and government revenue? Illustrate your answer with a supply and demand diagram.

(c) Suppose Canada imposed an import quota on Australian beef. Draw a graph and explain how this quota would influence the consumer prices of beef in Canada, consumer surplus (CS) and producer surplus (PS), benefits of beef importers, and the amount of deadweight loss in Canada.

(d) State and discuss two arguments that could be advanced in support of trade protection.

Question 2:

Table 1: Production and Marginal Cost

Use the production and marginal cost information in table 1 of a firm in a competitive industry to answer the following questions.

(a) If the market price is 40, calculate the producer's surplus when Q = 2
(b) If the market price is 60, calculate producer's surplus when Q=3

Question 3

Use the demand and supply functions expressed by equations (1) and (2) below to answer parts (a) - (d).

The orange market is perfectly competitive, and the demand and supply functions are:

QD = 200 -2P (1)
QS = -10 + P (2)

where P is price dollars ($) and Q is the quantity kilogrammes

(a) Write down the inverse demand and inverse supply curves.
(b) Using your results in part (a) draw the supply and demand diagram. Correctly label the diagram.
(c) Calculate the equilibrium quantity and price of oranges, and indicate your results on the diagram in part (b).
(d) Calculate consumer surplus, producer surplus and total surplus, and indicate your results on the diagram in part (b).

Question 4:

In 2010, the Australian government imposed a tax on Alcopops 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.

(b) Who bore a greater burden of the tax, the buyers or sellers of Alcopops? Was the outcome of the tax efficient?

(c) What other policy could the government implement to reduce teenage binge drinking and alcohol-related harm and hospitalization? Explain.