Reference no: EM133853700

Intro to Markets and the Economy

Question 1 - Analytical Reasoning using a Supply and Demand Model
Answer all parts of this question. The question involves a series of statements that require you to use the analytical tools and models you have developed to assess. For each statement you must provide arguments in support or arguments refuting the statement. You must use the appropriate theory supported with the appropriate model to support your arguments. Answers that are not supported with theory will receive a mark of zero.

Evaluate the statement: "A positive production externality necessarily results in an allocation in which too much output is consumed relative to the social efficient output."

Evaluate the statement: "Rent control policies are often used to help low income households afford suitable housing. Rent control polices necessarily improve the welfare for consumers compared to an equilibrium allocation with no rent control.

Evaluate the following situation: "Suppose that consumer preferences are such that pizza and a pint of beer are complements. If the consumption tax placed on alcohol increases the price of a pint of beer, then the price of a pizza would increase."

Hastings caves in Southern Tasmania are renowned for their stalactites and stalagmites. The warden of the caves offers a tour every day at 2 pm. The caves can be shown to only 5 people without disturbing their fragile ecology. However, more than five people want to see the caves on the same day. The table lists the people who wanted to see the caves on the particular day. The table reports their arrival time and their reservation price for taking the tour.

Consider two possible mechanisms that the warden can implement to restrict entry to the caves to 5 people.
The warden operates on a first-come-first-served basis.

Suppose that the warden asks for volunteers to postpone their tour by offering increasing amounts of cash compensation until only five people still wish to see the caves that day (similar to an auction). The warden gives each volunteer the same compensation payment.

Which policy should the warden implement it the goal is to maximise economic efficiency?

Use a supply and demand analysis to predict what will happen to the equilibrium price and quantity of wine if wine is discovered to increase certain cancers AND excellent weather has increased the number and quality of grapes used to make wine. You must provide clearly labelled supply and demand diagrams. You must also provide well-written economic arguments supporting your diagrams.

You are currently building a house in a local community. The construction of the house emits noise pollution. Assume existing laws are such that you are not allowed work on your house after 6:00pm unless you get permission from the community association in which your house is begin built. The relevant total costs and benefits of continuing to build after 6:00pm or shutting down production at 6:00pm are shown in the table.

Suppose you are currently negotiating with the community association. Is there a deal in which you are allowed to continue construction after 6:00pm? If so, provide the details of a contract allowing you to build after 6:00pm. If a deal cannot be reached, explain why.

Question 2 - Application of Supply and Demand in Agricultural Markets
The excel sheet called Demand_and_Supply.xlsx contains supply and demand data for Tasmanian produced hops. The first column consists of prices, the second column reports demand, and the last column is supply. Use this data to study price support policies in agricultural markets.

Use excel to plot supply and demand. Illustrate the equilibrium price and quantity in the market. Be sure to report the equilibrium price and quantity. Label all elements of the diagram.

Compute consumer and producer surplus. Illustrate these on the diagram created in part a).

Suppose the government wants to support farmers. The government proposes different policies.

Use the supply and demand data to explore these policies. The first policy the government proposes is to impose a price floor equal to $8.

Compute the quantity supplied and the quantity demanded at this price floor.

What is the effect of this policy on consumer surplus and producer surplus. Illustrate your solution in part c) and pat d) in a diagram. Analyse who benefits and who loses from this policy.

Is there any deadweight loss associated with this policy? If so, compute the deadweight loss and illustrate the loss on the diagram in part d)

The Second policy is for the government to impose a price support at price equal to $8 using a deficiency payment program. A deficiency payment program involves letting market prices clear the market and then the government makes payments to farmers equal to the different between the market price and the support price.

Compute the quantity supplied and the quantity demanded under the deficiency payment program. Compute the total deficiency payments made to the farmers.

What effect does this program have on consumer and producer surplus compared to part b) (no intervention equilibrium)? Is there a deadweight loss? If so compute the deadweight loss from this policy.

Based on your work on parts a) through g), which policy would you advocate the government should implement? You must use arguments supported with your analysis in the previous parts of the question.

Question 3 - Applying Marginal Analysis
You work for Tasmania in the public transportation department. You oversee pricing and revenue strategies for bus routes from rural communities into Hobart. You have been studying the data from the route between Cygnet and Hobart. You know that each round trip between Hobart and Cygnet costs $100 plus $5 for each passenger. For example, a round trip with 3 passengers would cost $115 and a trip with 1 passenger would cost $105. The data from the last 6 months of service are reported in the table below.

Use marginal analysis to determine the price you would set per round trip if you wanted to maximise net benefit (profit)? Explain your reasoning using marginal analysis. Show any calculations or tables you made to determine your answer. (You only need to analyse the prices in the table)

Of course, public transit has a positive externality associated with it. For example, the more people that use public transport the less people use their own vehicles resulting in less emissions and less congestion. What price would you set if your objective is to maximise the number of passengers while still covering costs. (You only need to analyse the prices in the table)

Explain why the two prices are different. You must use marginal analysis in your explanation.

Question 4 - Comparative Advantage
You own a small business selling native plants. You employ two employees: Tom and Brooke. There are two group of tasks each can perform. The first is transplanting and potting new plants, and the second is delivering plants to customers. It takes Tom 30 minutes to finish transplanting and potting new plants, and it takes him 40 minutes to make one delivery. It takes Brooke 10 minutes to finish transplanting and potting one plant, and 30 minutes to make one delivery.
Who has the absolute advantage in each task?

Which employee has the comparative advantage in transplanting and potting new plants? Which employee has the comparative advantage in completing deliveries? You must explain your results.

Initially you assign Tom and Brooke each 4 hours a day transplanting and potting news plants and two hours each doing deliveries. Is this the best use of your employees? Can you devise an alternative task schedule that will result in more transplants and more deliveries? Report the new schedule and report how much more you are producing under the new schedule compared to the previous one.

Question 5 - Policies to Address Pollution

Suppose there are two coal generators producing electricity, call them Gen 1 and Gen 2. Their production currently emits greenhouse gases into the atmosphere. Each generator currently emits 5 units each pf GHG emissions per GWh. A study shows that total economic surplus can be increased by reducing the total level of emissions by 5 units. The marginal cost to each of the two generators of reducing their emissions is shown in the table below. The government has asked you to analysis the costs of three proposed policies: (1) direct regulation; (2) tax; (3) cap and trade.

Direct regulation (command-and-control) involves requiring that each generator reduce their emissions by 3 units. What is the cost to each generator from this policy? What is the total cost from this policy?

Design a tax policy that would achieve the target amount of pollution (reduce emissions by 5 units in total) at the least cost possible. What tax level would you impose? By how much does each firm reduce their pollution? What is the cost to each firm and what is the total cost? Provide an explanation for all your results.

The last policy is a cap-and-trade system based on pollution permits. In this policy, a generator is required to have a permit for each unit of emissions. For example, if a generator wants to emit 3 units of emissions per GWh it most have three permits. This policy must result in 5 units reduction in emissions at the lowest cost possible.

The policy involves assigning each generator permits. Therefore, only 5 units of emissions can be emitted, the rest must be abated. Suppose that Gen 2 initially gets 4 permits and Gen 1 gets 1 permit.

What is the final distribution of permits between the two generators? How many permits does Gen 1 keep or sell? How many permits does Gen 2 sell or keep? What is the total abatement cost of this policy.

Which of the three polices would you advise the government to implement? Be sure to support you conclusion with evidence from parts a) to c).

Question 6 - More on Supply and Demand Theory

Suppose the supply curve in a market can be described by the supply function
p = 4Q
and demand in the market can be described by the demand function
P = 20,
Note that p is price in dollars per unit and Q is units of output per week.

Sketch the market supply and demand in and diagram. Illustrate the market equilibrium. Explain the role of the law of supply and the law of demand for this market.

Calculate the equilibrium price and quantity.

Suppose that the government imposes a new per unit tax on the firms equal to t = $4.
There, the new supply function is
p = 4Q + t.
Illustrate these changes in a supply and demand diagram. Illustrate the changes to the equilibrium price and quantity. Explain your results.

Compute the new equilibrium price and quantity. Are they consistent with your model in part c ?

Use a new diagram to illustrate and describe how the tax affected both consumers and the firms. Explain the economics of your results. (hint: think about the law of demand and the law of supply).