Question 1

A) Demand and supply analysis. the Australian government has proposed a stimulus policy for the Australian economy that includes subsidy payments to households to refit Australian homes with insulation in order to both stimulate economic activity and to increase the energy efficient of Australian homes. the outcome will depend on the response of households and Australian producers of insulation materials,( i.e. the demand and supply characteristic of the market of the market for insulation materials). using hypothetical demand and supply curves for insulation materials describe and comment on the implications of the following possible scenarios.

• Australian producers invest in new capacity to increase supply but they overestimate the household demand for their insulation materials flowing from the stimulus package.
• Households respond strongly to the stimulus package but the supply of insulation materials proves to be inelastic.

B) Explain cost-benefit analysis, outline the application of different steps in cost-benefit analysis.