Group Assignment T316

BUS102 Introduction to Microeconomics

Questions, Notes & Guideline for Group Assignment
Due 10 January 2017

Topic

Three Problem-Solving Questions that require written

answers

1. General information
1.1This group assignment is worth 20 per cent of total assessment and is to
be submitted by 5.00pm, Tuesday 10 January 2017.

There are 3 questions and answer all 3 questions. Question 1 is worth 20

marks, and Question 2 and Question 3 are worth 15 marks each, consisting
total of 50 marks all together. Then the marks will be converted to a total
of 20 mark scale to be uploaded in Moodle for 20 per cent of your total
course assessment.
A hard copy of the assignment must be submitted to KOI Librarian in Kent
street campus by 5.00pm, Tuesday 10 January 2017. You must keep the
copy of receipt after the submission for your own record. You are also
required to upload an electronic copy of the assignment in Moodle
Turnitin by 5.00pm, Tuesday 10 January 2017.
Late submission will attract loss of 5 marks out of 20 marks (25 per cent),
and the assignment submitted after 5.00pm Thursday 12 January 2017 will
not be accepted and marked zero.

1.2This assignment is a group assignment and each group must form a

group of three (3) people. Less than three or more than three-people
assignment will not be accepted, unless permission is granted by lecturer
for special circumstances.

1.3Names and ID numbers of students in the group must be clearly printed on

the Assignment Cover Sheet. A member, who has not contributed to
the discussion and assignment, must be marked as Not contributed
in a bracket following the students name and ID.

1.4You must follow an appropriate format explained below. Not following

appropriate format will cause a loss of some marks.
All written answers must be clearly typed and printed. Hand-written
answers will NOT be accepted.
All assignment questions and sub-questions must be typed in order
at the heading.
Separate each main question by different page. For example, if
Question 1 (a) (b) (c) and (d) are answered on pages 1-2, then start
Question 2 on page 3, etc.

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 1

 Group Assignment T316

You must analyse, explain and show how and why you draw your
answers. Providing just answers without explanation will not receive
full marks.
You must also draw and include appropriate and relevant graphs and
tables together in your explanation. Draw them using Microsoft
Power Point/Word/Excel, NOT hand-drawn.
1.5Copying the assignment contents from other group assignment is a serious
violation of copy right. It will be penalized and attract a VERY heavy loss of
marks Fail.
It is not difficult to identify the contents that are copied from other
group(s). Write the answers in your own English words.
Make sure that nobody in your team shows your assignment to other
group(s). Both who show the assignment and who copy the assignment
will lose their marks heavily and fail in the assessment.

1.6Each group must have a coordinator, who will submit a hard copy of the
assignment to the KOI librarian and upload an electronic copy of the
assignment in Moodle Turnitin. Only ONE COPY of the assignment from
each group is required to be submitted (& uploaded).

1.7Make sure you discuss and work together for ALL THREE questions and
MUST read and check the assignment before submission, once completed.

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 2

 Group Assignment T316

Ethanol Food
(barrels crops
2. Assignment Questions per day) (tonnes
per day)
Question 1 20 marks 70 0
64 1
Part A: Answer the following questions. 54 2
40 3
Australia produces ethanol from sugar cane, and the 22 4
land used to grow sugar cane is used to grow food 0 5
crops. Suppose that Australias production possibilities
for ethanol and food crops are as in the table.

(a) If Australia increases its production of ethanol from 40 barrels per day to
54 barrels per day, what is the opportunity cost of an additional barrel of
ethanol? (2 marks)

Since, Australia increased its production by 14 barrels per day, the cost forgone
by not producing food crops is 1 ton per day or 0.01714 ton of food crop per 1
ethanol barrel increment.

(b) Does Australia face an increasing opportunity cost of ethanol? What

feature of Australias PPF illustrates increasing opportunity cost? Explain.
(2 marks)

Ethanol vs Food crops

6

Food Crops 3
2

0
0 10 20 30 40 50 60 70 80

Ethanol

Depending on Australias choice on what to produce more, opportunity cost on

the product foregone is incurred. This cost can go either way since Australia cant

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 3

 Group Assignment T316
produce the maximum output for the two given products. This increasing
opportunity cost is shown in the graph as the curve (negative relationship)
between ethanol and food crops.

Price Quantity Quantity

(dollars supplied
per demand
box) ed
The table sets out the demand and
(boxes a week)
supply schedules for banana.
12 100 800
(c) Suppose a cyclone destroyed some 10 200 700
banana farms in QLD and the 8 300 600
quantity of banana supplied 6 400 500
decreased by 100 boxes a week at 4 500 400
each price. But at the same time the 2 600 300
demand for banana increased by 100 boxes a week at each price. Explain
what would happen to the market supply and demand curves? How and why
would the market equilibrium price and quantity adjust at the end? What
would be the new equilibrium price and quantity? Draw a graph and illustrate
the changes on your graph. (4 marks)

Banana Demand and Supply Curve

15 D1 D2 S2 15 S1

10 10
E2
5 5

-
- 100 200 300 400 500 600
E1 700 800 900
-

Quantity supplied (kilo tonnes)

Quantity demanded (kilo tonnes)
Linear (Quantity demanded (kilo tonnes))
Increase in Quantity supplied (kilo tonnes)
Increase inQuantity demanded (kilo tonnes)

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 4

 Group Assignment T316

Suppose a cyclone damaged some banana farms, it would result to an increase in

demand (right-shift movement of the demand curve D1 D2). On the other hand,
supply of bananas would diminish causing is supply curve to shift to the left (S1
S2). Since the demand and supply curve shifted, the equilibrium point shifted as
well. The change in both demand and supply does not affect the equilibrium
quantity since a quantity increase in demand is coupled with an equal decrease in
quantity supplied. This situation only increases the equilibrium price which is the
result of a high demand but low market supply.

Equilibrium Quantity = constant at 450 boxes a week

Equilibrium Price = 7 dollars per box (increase of $2 per box)

Part B: Answer the following questions.

(d) When Yeons income was $2,200, he bought 5 kgs of rice a month. Now his
income is $3,300 and he buys 4.75 kgs of rice a month. Calculate Yeons
income elasticity of demand for rice. Show your calculation. Is rice income
elastic or inelastic? Is rice normal good or inferior good? (3 marks)=

Income elasticity = (4.75 kg 5 kg)/ [(4.75 + 5 kg)/2]

($3,300 - $2,200)/ [($3,300 + $2,200)/2

= - 0.1282

A negative income elasticity of demand is associated with inferior goods; an

increase in income will lead to a fall in the demand and may lead to changes
to more luxurious substitutes. Based on the situation given, rice is an
inferior good and elastic.

Suppose an outbreak of mad cow disease cuts the quantity of beef demand by 10
per cent.

(e) If the price elasticity of demand for beef is 1.25, by how much would the
price of beef have fallen if the demand for beef increased by 10 per cent?
Show your calculation. (3 marks)

Where, x is the % change in price of beef.

-1.25 = .10 (-.10)

X
-1.25x = .10

X = -.16

Answer: Price of beef decreased by 16%.

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 5

 Group Assignment T316
(f) Market analysts estimate that the change in the price of beef will decrease
the price of pork by 20 per cent and decrease the quantity demanded for
beef by 10 per cent. What is the cross price elasticity of demand for beef
with respect to the price of pork? Does the elasticity indicate that beef and
pork are substitutes or complements? (3 marks)

Cross-price elasticity = -.10

-.20

Cross-price elasticity of beef with respect to the price of pork is 0.50 thus,
making the beef and pork as substitute products.

(g) Market analysts estimate that, a 10 per cent increase in the change in the
price of pasta sauce will decrease the quantity of spaghetti noodle
demanded by 6 per cent. What is the cross elasticity of demand for
spaghetti noodle with respect to the price of pasta sauce? Does the
elasticity indicate that spaghetti noodle and pasta sauce are substitutes or
complements? (3 marks)

Cross-price elasticity = -.06

.10

Cross-price elasticity of noodle with respect to the price of sauce is -0.06 thus,
making the pasta sauce and spaghetti noodle as complementary products.

Question 2 15 marks

Part A: Answer the following questions.

The table shows the demand and supply schedules for US wheat market. The US
Farm Bill 2012 indicates that the domestic price of wheat will be set at $300 per
tonne, which is above the market equilibrium level of $250 per tonne, in order to
support for domestic wheat growers. At the market equilibrium, 1,000 kilo
tonnes (Kt) are supplied.

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 6

 Group Assignment T316
(a) The US Farm Bill 2012 indicates Price Quantity Quantity
that the domestic price of wheat (dollar demande supplied is
set at $300 per tonne, which is
above the market equilibrium per d (kilo
level of $250 per tonne, in order tonne) (kilo tonnes) to
support for domestic wheat tonnes)
growers. On a graph, show if it 100 2,000 0
creates a shortage or a surplus 150 1,400 600 in
the market for wheat, and 200 1,200 800
explain why and by how (2 250 1,000 1,000
mark 300 800 1,200
350 600 1,400

Wheat Grass Demand and Supply Graph

600 600

400 400

200 200

- -
- 500 1,000 1,500 2,000 2,500
Quantity supplied (kilo tonnes)
Quantity demanded (kilo tonnes)

Based on the graph shown, a $300 per tonne wheat price will create a surplus of
400 kilo tonnes of wheat. A product surplus will occur since the US wheat
markets quantity supplied exceeded the quantity demanded.

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 Group Assignment T316

(b) On a graph, explain how the price control in the US would change the
consumer surplus, producer surplus, and deadweight loss in the domestic
wheat market. Assume that the US does not trade wheat internationally.
Also, calculate the changes in consumer surplus, producer surplus and
deadweight loss. (Remember 1 kilo tonne = 1,000 tonnes) (8 marks)

Wheat Grass Demand and Supply Graph

450 450
400 400
350 350
300 300
250 250
200 200
150 150
100 100
50 50
- -
- 500 1,000 1,500 2,000 2,500

Quantity supplied (kilo tonnes) Quantity demanded (kilo tonnes)

P2 E1
P1
P3
BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 8
 Group Assignment T316

Q2 Q1 Q3

Since US government implemented a price floor of $300 per tonne of wheat,

consumer surplus will decrease in relation to the price control (yellow area). On
the other hand, producer surplus is increased (blue area). As a result of that
government economic intervention, a deadweight loss is incurred which is
illustrated in the above graph as the black triangular area. This is in comparison
to the equilibrium price of $250 per tonne.

Calculation:
Price @ $300 Price @ 250
Producer surplus = (Q3 * (P2 A))/2 Producer surplus = (Q1 * (P1 A))/2
Producer surplus = $120 million Producer surplus = $75 million
Net increase of $45 million producer surplus
Consumer Surplus = (Q2 * (B P2))/2 Consumer Surplus = (Q1 * (B P1))/2
Consumer Surplus = $40 million Consumer Surplus = $75 million
Net decrease of $35 million of consumer surplus
Deadweight loss = .5 (P2 P1) * (Q1 Q2)
Deadweight loss amounted to $10 million

Part B: Answer the following question.

The price of rice in Japan is $5 per kilogram and Japan produces 40 million tonnes
of rice a year. Suppose now that Japanese government provides production
subsidy of $2 per kilogram to domestic rice farmers.

(c) Draw a graph and analyse what would happen to the domestic supply of
rice and supply curve, consumer price of rice and domestic demand for
rice, and cost of rice production. Also explain why such a production
subsidy is likely to be troublesome. (5 marks)

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 9

 Group Assignment T316

Effect of Production Subsidy

7 7

6 6

5 5

4 4

3 3

2 2

1 1

- -
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

Supply Curve 1 Supply Curve 2

Q S1 S2
Ps
E1
P
Pc E2

Qc Q Qs

As shown in the graph above, the government initiated production subsidy will
decrease the cost to produce a specific product thus, enabling suppliers to
produce more due to lesser cost (Q - Qs). In effect, market prices will go down (P
Pc), which will result to higher consumer demand for that product.

Depending on the elasticity of the product, both parties may benefit from the
subsidy. Since lower cost is required to produce more, the profit that the suppliers
will make is higher than a nonsubsidized market (P Ps). On the other hand,
consumers will also benefit since low production cost will lower market prices (P
Pc)

But a major economic risk is imminent if inefficient and ineffective subsidization

is implemented. In the case given above, Japan is a non-rice dependent country.
In that geographical area, rice is not treated as a necessity. An increase in rice
production and decrease in its market price does not necessarily be followed by
an increase in demand and an increase in profit. This is an economic risk since
government funds used in that subsidy might be worthless. Also, product surplus

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 10

 Group Assignment T316
may occur since the quantity supplied is way more than what is demanded in
that market. In worst cases, this can result to government overspending.

Question 3 15 marks
Part A: Answer the following questions.
Korea imports a large quantity of beef. With no beef trade, Koreas equilibrium
price for beef was $8 million per kilo tonne and equilibrium quantity was 375 kilo
tonne. If Korea opens its beef market to trade with no tariff, domestic demand
would be 625 kilo tonne and domestic supply would be 125 kilo tonne at the
world price of $4 million per kilo tonne. However, Korea currently imposes 40 per
cent tariff rate on all imported beef. With 40 per cent tariff, Koreas domestic
supply and domestic demand were 250 kilo tonne and 500 kilo tonne respectively
in 2013. Assume that intercept of supply curve is $2 million and demand curve is
$15 million per kilo tonne.

(a) Analyse the effects of 40 per cent tariff rate on the price of beef in Korea
and Koreas beef imports in comparison with no tariff case. Provide
numeric details. (2 marks)

The 40% tariff rate imposed by Korea on its beef imports directly affected its
market price from $4 million per kilo tonne (no tariff) to $5.6 million per kilo
tonne (w/ tariff). Prior to imposition of tariff, quantity demanded and supplied
in the market are 625 kilo tonne and 125 kilo tonne respectively. In
comparison to the after-tariff market, quantity demanded is 500 kilo tonnes
and quantity supplied amounted to 250 kilo tonnes. This decreased the
demand by 125 kilo tonnes while increasing the supply by 125 kilo tonnes.

(b) Draw a graph and clearly show how the areas of gains and losses from the
trade with 40 per cent tariff rate would change before and after the tarif
with brief explanation. Then, calculate the actual value of change in
consumer surplus, producer surplus, tariff revenue and the amount of
deadweight loss. Show your calculation. (8 marks)

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 Group Assignment T316

Consumer Surplus

With Tariff

Consumer surplus = ((15 5.6) * 500) / 2) = $2, 350 million

No Tariff

Consumer surplus = ((15 4) * 625) / 2) = $3, 437.50 million

Net decrease of $1, 087.50 million

Producer Surplus

With tariff

Producer surplus = ((5.6 2) * 250) / 2) = $450 million

No Tariff

Producer surplus = ((4 2) * 125) / 2) =$125 million

Net increase of $325 million

Deadweight Loss = 1, 087.50 325 = $762. 50 million

Tariff Revenue = (1.6 * 250) = $400 million

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 Group Assignment T316

Part B: Answer the following question.

(c) ProPainters hires students at $250 a week to paint houses. It leases

equipment at $500 a week. The table sets out its total product schedule.
Calculate and construct ProPainters cost schedules that is, total cost (TC),
average fixed cost (AFC), average variable cost (AVC), average total cost
(ATC) and marginal cost (MC) per house painted. Briefly explain how you
calculate each cost schedule and show your calculation. (5 marks)

Labour Output TC AFC AVC ATC MC

(worker (houses (dollars) (dollars (dollars (dollars (dollars
s painted per per per per
per per house) house) house) house)
week) week)
1 2

2 5

3 9

4 12

5 14

6 15

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 Group Assignment T316

Answer:

BUS102 Microeconomics T316, Group Assignment due 10 January 2017 Page 14