Question 1

Australia and Canada have a free trade agreement in which, Australia exports beef to Canada.

a. Draw a graph and use it to explain and illustrate the impact of trade on consumers, producers and the Australian economy.

b. Now Canada imposes an import quota on Australian beef. Draw a graph and explain how this quota would influence the following factors in Canada: (i) price of beef; (ii) consumer surplus (CS) and producer surplus (PS); (iii) beef importers' gain; (iv) efficiency of the beef market.

c. The volume of import quota on Australian beef is less than Australia's total export volume of beef to Canada. Explain how this import quota would influence the following factors in Australia: (i) quantity of beef exported to Canada; (ii) price of beef; (iii), consumer surplus (CS) and producer surplus.

d. Suppose that the government decides to subsidise exports of beef by paying a certain amount for each tonne sold overseas. Explain how the export subsidy would affect the following factors in Australia: (i) domestic price of beef; (ii) the quantity of beef produced; (iii) the quantity of beef consumed, and the quantity of beef exported; (iv) consumer surplus, producer surplus, and government revenue.

Question 2
"More than one billion of cups of coffee are consumed in Australia's cafes, restaurants and other outlets each year, an increase of 65 per cent over 10 years. People are drinking less 'instant coffee' as espresso becomes more popular and new speciality coffee shops have been popping up all over Australia to satisfy demand for daily caffeine fix. Not only are people drinking more coffee, they are becoming more coffee-savvy and want premium brew even if it costs more."

Answer the following questions after reading the news clip above.

a. How would you classify the espresso coffee market; are firms price takers or price makers? Explain.

b. With the aid of an appropriate economic model, explain why there has been such an explosion in the number of coffee chains in Australia over the past ten years.

c. Would firms in the market making positive economic profit in the long run? Explain.

d. Would the impact of government subsidy to each existing firm change your answer in part (c) in the short run? Explain.

Question 3

Suppose the tea market can be described by the following equations:

Demand: P = 10 - Q
Supply: P = Q -4
where p is the price in dollars and Q is the quantity in kilograms.

a. What is the equilibrium price and quantity?

b. Suppose the government grants a subsidy of $1 per kilogram of tea produced. What will the new equilibrium quantity be? What price will the buyer pay? What amount per kilogram (including the subsidy) will the seller receive? What will be the total cost to government?

c. Draw the demand and supply diagram of the tea market and indicate the results in parts (a) and (b) on it.