Question 1.

Using the same amount of resources, Australia and New Zealand can both produce apples and orangesas shown in the following table, measured in thousands of tonnes.

i. Does either country have an absolute advantage in producing both goods? Explain your answer.

ii. Who has a comparative advantage in producing apples? Who has a comparative advantage in producing oranges? Explain your answer.

iii. Suppose that both countries are currently producing 3000 tonnes of apples and 3000 tonnes of oranges.

Show that both can be better off if they specialize in producing one good and then engage in trade. Explain your answer, with the aid of diagrams.

Question 2.

The Olympic legend, Ian Thorpe, decided to retire from swimming to undertake a double degree in linguistics and psychology at Macquarie University. To concentrate on his university studies, he pulled out of lucrative sponsorship work. In 2010, after realising that he might be close to bankruptcy, Thorpe returned to swimming championship training and sponsorship work in the hope that he might be able to slowly rebuild his financial and celebrity status whilst remaining a high grade point average (GPA) at university. He can only
dedicate 40 hours a week on either study or sponsorship. If he dedicates the entire 40 hours on study a week, he will maintain a GPA of 4.0. If he dedicates the entire 40 hours on sponsorship a week, he will earn $40,000 weekly. Thorpe's achievement in terms of GPA and sponsorship money according to the time he dedicates to each are provided below.

i. Construct Thorpe's production possibility frontier with grades (in terms of GPA) on the horizontal axis and sponsorship (in terms of money earned) on the vertical axis. Explain why his PPF takes this shape.

ii. What is Thorpe's marginal cost of GPA? Show and explain how his MC curve is derived.

iii. Above is the table of the swimmer's marginal benefit from an increase in grade. If Thorpe uses his time to achieve allocative efficiency, what is his GPA and how much sponsorship money will he earn?

iv. What would happen if Thorpe wins 2 Gold Medals in the London Olympics in 2012, thereby substantially increasing his sponsorship income? Explain what happens to his PPF, MC curve, MBcurve, and efficient time allocation?

Question 3.

Calvin Harris is planning a concert in Sydney. Harris's manager (Mark Gillespie) is considering changing the way the artist's concert tickets are priced. You are the head economist of the consulting firm, E2C (Economists to Celebs) Gillespie hired to estimate the demand for Harris's concert tickets. You classified people who go Harris's concert into two groups, and discovered two different demand: the demand curve for the general public (QP = 500 - 5P) and the demand curve for students (Q = 200 - 4P).

i. Graph the two demand curves on one diagram. If the current price of tickets is $35, identify the quantity demanded by each group.

ii. The manager wants to increase price by $10 a ticket. What is the price elasticity of demand for each group? You must explain the meaning of these elasticity values to Gillespie.

iii. You need to explain to the manager that charging a price of $35 for each ticket will not maximise the revenue for the artist from ticket sales. Gillespie understands you better if you use diagrams.

iv. Suggest what price the manager should charge if he wants to maximize total revenue collected from ticket sales? The manager will appreciate if you use the same diagram (drawn part iii) to explain. Suppose Mark Gillespie discovers that the group, 30 Seconds to Mars, is selling concert tickets at an adjoining venue. You subsequently find out the general public prefers Calvin Harris while the group is more popular with students. The students' demand curve for 30 Seconds to Mars is QS = 200 - 2P and there is no demand from the general public.

v. What quantity is demanded of the group's concert tickets if the price is set at $35?

vi. Assume that Gillespie kept ticket prices for Calvin Harris's concert at $35 a ticket while he considered your earlier findings. You receive a call from the box office that quantity of tickets sold to students fell after the tickets for 30 Seconds to Mars went on sale. You
subsequently find out that when the group's ticket drops from $35 to $30 a ticket, Calvin Harris only sold 40 tickets to students. You must explain Gillespie (using the elasticity concept), how the group's pricing strategy affected Harris's revenue from ticket sales.

Question 4.

(A) The table provides information on the demand schedules for train travel for Ann, Brian and Mark. Assume they are the only buyers in the market.

i. Show using the appropriate number of diagrams, how the market demand curve is constructed using information about individual demand.

ii. What are the maximum prices that Ann, Brian, and Mark are willing to pay to travel 20 kilometres? Explain why?

iii. What is the marginal social benefit when the total distance travelled is 60 kilometres?

iv. What is the marginal benefit for each person when they travel a total distance of 60 kilometres. How many kilometres does each person travel?

v. What is each traveler's consumer surplus when the price is $4 a kilometre? What is the market consumer surplus when the price is $4 a kilometre?

(B) Chinese power plants have run short of coal, an unintended effect of government mandated price controls - a throwback to communist central planning...To shield the public from rising global energy costs...Beijing has also frozen retail prices of gasoline and diesel...Oil refiners say they are suffering heavy losses and some began cutting production last year, causing fuel shortages in parts of China's south. CNN, May 20, 2008

(Assume the market for various types of fuel are not affected by global prices or markets.)

i. Are China's price controls described in the news clip price floors or price ceilings? Explain how China's price controls have created shortages or surpluses in the Chinese markets for coal, petrol, and diesel, using the supply and demand model to illustrate.

ii. Show how China's price controls have changed consumer surplus, producer surplus, total surplus, and the deadweight loss in these markets, using the diagram(s) drawn in part i.

Question 5.

ITunes is rapidly dominating the global market for music sale. Assume that the download price for Dance artist Calvin Harris's single "Feel So Close" is $1.19 and the number of downloads per day world-wide is 3000. What will happen to the market for this single if the
following events occur:

(i) The population of Dance music fans decreases AND productivity in music production increases?

(ii) Dance fans switches away from Dance music to R&B music AND the price of MP3 players increases

(iii) The number of other Dance singles decreases on iTunes AND income increases

(iv) The artist is rumoured to have died AND the download price of Paul Simon's "You can call me Al" decreases substantially.

Each event (i, ii, iii and iv) occurs independently (ceteris paribus). For each of the following situations, explain what will happen to the equilibrium price and the equilibrium quantity for the download of "Feel So Close" on iTunes. For each part, you must:

I) draw an appropriately labeled diagram,
II) show the adjustment process from the original to the new equilibrium, and
III) a detailed written explanation of this adjustment process.

Question 6.

i. Explain the concept of externality in economics? Give one example of a positive and a negative externality in Australia.

ii. Why we need to distinguish between private cost and social cost?

iii. In regards to air pollution, use a diagram to show and explain how the existence of pollution can make the market equilibrium inefficient.

iv. Show on the same diagram (in part iii), how efficiency can be achieved with pollution tax

v. Briefly explain using a supply and demand model, how the carbon tax introduced by the Gillard Government will affect the market for a good that relies on products from the mining industry.

{A well-constructed answer for part v can earn you bonus marks. Hint: consider the theory of price elasticity of demand in your answer to part v.}