MAE101 – Individual Assignment

MAE101 – Economic Principles

Individual Assignment

1. Opportunity cost is a key concept in Economics. The textbook defines the opportu-nity cost as the best alternative that must be given up to obtain some item. Use the opportunity cost concept to develop response to the following questions:

• Suppose you are a music fan. Lucky enough, you won a free ticket to see a local rock-band concert tonight (with no resale value). There are two other concerts on the same night: one for Taylor Swift and the other for Katy Perry. These two concerts are the only other activities you are considering. The ticket prices for Taylor Swift and Katy Perry’s concerts are $90 and $85, respectively. And on any given day you would be willing to pay up to $110 to see Taylor Swift or $100 to see Katy Perry perform. In other words, if Taylor Swift tickets sold for more than $110, you would pass on the opportunity to see her even if you have nothing else to do. Similarly, you will pass on the opportunity to see Katy Perry if her concert costs you more than $100. There is no other cost of seeing any of these three concerts. According to the information provided, what is your opportunity cost of attending the local rock-band concert? Briefly explain your answer.

• Sally owns a local souvenir store. One of the most popular items in her shop is the opal bracelet she made. An opal bracelet costs Sally $28 on average, and is sold for $45. She unfortunately accepted a traveller’s cheque of $100 from a tourist who purchased two bracelets and gave him $10 change. Sally then gave the cheque to her landlord but it bounced so she had to get $100 cash from her bank account to pay her rent. The ongoing interest rate is 3.5%.

1. How much money has Sally lost in this incident? Briefly explain your an-swer.

1. Would your answer to the last question change if the opportunity cost is considered? If so, what is the opportunity cost of this incident? Briefly explain your answer.

• Sally learns from this incident and decides to never accept any traveller’s cheques in the future. Is it a wise decision? Briefly explain your answer.

2. During 2010–2011, a series of floods hit Australia, primarily in the eastern coast areas including Queensland and Victoria. At least 70 towns and over 200,000 people were directly affected. The estimated damage in Australia’s GDP is about $30 billion (ABC News Online, 18 January 2011). The floods also took a toll on the potato industry. As a consequence, the potato market has received a lot of attention.

• According to a study on the Australian potato market, at the price of $2.99 per kilogram, a regular household consumes about 7.6 kilograms of potatoes per month. The consumption of potatoes drops to 6.5 kilograms per month when the price is at $4.99 per kilogram.

1. Based on this information, use the mid-point method to compute the price elasticity of demand for potatoes in a regular Australian household.
2. There are many ways to categorize the goods in the market. For example, there are normal goods and inferior goods, regular goods and Giffen goods, necessities and luxuries, etc. According to your answer in the last question, what type(s) of good does the potato belong to?

• Some scholars argue that the estimate of the elasticity calculated in (i) might be unreliable. Briefly explain why.

• Since potato is an important food for Australians, soaring potato prices could substantially affect the living standards of many households in Australia. In or-der to avoid the disastrous consequences, the Australian government can adopt some price control schemes. Suppose you have been provided with the follow-ing information regarding the demand and supply of potatoes:

Q_d   =  9  0:5P

Q_s  =    0:5 + 1:4P

where Q_d , Q_s and P are the quantity demanded (in kilograms), the quantity supplied (in kilograms) and the market price (in dollars), respectively.

1. Calculate the equilibrium price and quantity of potatoes.

4. Suppose the Australian government decides to impose a price ceiling of $4.00 per kilogram on potatoes, what will be the new market price and quantity?

• What will happen to the market price and quantity if the price ceiling is set at $6.00 per kilogram on potatoes?

• Starting from the equilibrium of the potato market given in the last question, use standard demand and supply analysis to answer the following questions:

1. If the Australian government subsidizes consumers and gives one dollar for every kilogram of potatoes purchased, what are the expected effects of such a scheme on the equilibrium price and quantity of potatoes? (See Page 137-140 of Gans et al., 2012, for a detailed discussion of subsidies).

1. If the Australian government subsidizes the potato-growers and gives one dollar for every kilogram of potatoes produced, what are the expected ef-fects of such a scheme on the equilibrium price and quantity of potatoes?

• Instead of subsidizing only consumers or growers, if the Australian govern-ment decides to evenly split the subsidy to both parties, i.e., give 50 cents for every kilogram of potatoes purchased by the consumers, and another 50 cents for every kilogram of potatoes produced by the growers, what are the expected effects of such a scheme on the equilibrium price and quantity of potatoes?

• Suppose an economist observes the following monthly data on the market price and quantity of potatoes purchased in Geelong during the year 2015:

 

Month	Jan.	Feb.	Mar.	Apr.	May	Jun.
Price ($ per kilo)	2.99	2.52	2.90	3.15	3.69	3.44
Quantity (tons)	342	357	345	321	300	334
Month	Jul.	Aug.	Sep.	Oct.	Nov.	Dec.
Price($ per kilo)	3.44	4.93	4.84	4.21	1.87	1.51
Quantity (tons)	346	208	233	289	427	475

Based on the data, the economist plots the observations on a graph below with quantity and price on the horizontal and vertical axis respectively. He claims this graph approximates the demand curve (the solid straight line) for potatoes in Geelong for 2015. Do you agree with the economist’s claim? Explain your answer in details.

 

3. A survey reported in 2009 reveals the following production conditions for Cyprus, Slovenia and Slovakia. An average Cypriot worker could produce either 5 units of wine or 12 units of rye in a year. An average Slovenian worker could make 7 unit of wine or 5 units of rye annually. In Slovakia, a typical worker could make 3 units of wine or 3 units of rye in a year.

• Draw the Production Possibilities Frontiers (PPFs) for Cyprus, Slovenia, and Slovakia in terms of units of wine and rye in year 2009, placing the number of wine units on the vertical axis and the number of rye units on the horizontal axis. (Hint: You need information about these three countries to transform the individual productivity into the national productivity.)

• After being accepted as members of the European Union (EU), Cyprus, Slove-nia, and Slovakia have joined a single market through a standardised system of laws that apply in all EU member states. Specifically, all three countries agreed to allow the free movement of people, goods, services, and capital. In other words, these three countries have become an economic community, with their individual markets for factors of production been integrated into a united one. Draw the community’s PPF, placing the number of wine units on the vertical axis and the number of rye units on the horizontal axis. Show your workings.

• Australia adopts an immigration policy that favors applicants of certain occu-pations, such as accountants, cooks, and hairdressers. This policy has been crit-icised by many politicians and scholars for being discriminating and inefficient. Justify this policy by using the tool of PPF and the example given in (a) and (b). Can you develop some policy proposals to promote the fairness and efficiency of this policy? Why do you think they will work better than the current policy?

• requirements:

Make sure that you are using correct referencing.

Read through your work prior to submission, checking your spelling and grammar. All content is to be electronically generated.

No more than 2000 words in total excluding the tables, diagrams, and references.

 

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