Income elasticity of demand

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Reference no: EM13715470

Assignment Questions

Question 1

The table sets out the demand and supply schedules for banana.

(a)

Price (dollars per box)	Quantity demanded	Quantity supplied
	(boxes a week)
6	50	400
5	100	350
4	150	300
3	200	250
2	250	200
1	300	150

Suppose a cyclone destroyed some banana farms in QLD and the quantity of banana supplied decreased by 50 boxes a week at each price. Explain what would happen to the market supply and supply curve. Would the change in supply cause a shortage or surplus of banana at the initial equilibrium price? If so, by how many boxes? What would be the new equilibrium price and quantity after the adjustment? Draw a graph and illustrate the changes on your graph.

(b) Suppose a cyclone decreased banana supply by 50 boxes a week at each price. But at the same time the demand for banana increased by 50 boxes a week at each price. 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.

Price (dollars per night per room)	Quantity demanded (no. of rooms per night)
200	100
250	90
300	80
350 400	70 60

A tour agency's demand schedule for hotel rooms is given in the table.

(c) What happens to total expenditure of the tour agency if the price falls from $400 to $350 per night per room? Calculate the demand elasticity of the hotel room. Is the demand for hotel room elastic, inelastic, or unit elastic?

(d) What happens to total expenditure of the tour agency if the price falls from $250 to $200 per night? Calculate the demand elasticity of the hotel room. Is the demand for hotel room elastic, inelastic, or unit elastic?

Question 2

Answer the following questions.

When Hana's income was $3,300, she bought 5 kgs of rice and 2 kgs of beef a month. Now her income is $2,200 and she buys 5.25 kgs of rice and 1.3 kgs of beef a month.

(a) Calculate Hana's income elasticity of demand for beef. Show your calculation. Is beef income elastic or inelastic?

(b) Calculate Hana's income elasticity of demand for rice. Show your calculation. Is rice income elastic or inelastic? Is rice normal good or inferior good?

Suppose a flood cuts the quantity of sugar cane grown by 6 per cent.

(c) If the price elasticity of demand for sugar cane is -0.6, by how much will the price of sugar cane rise? Show your calculation.

(d) If syrup makers estimate that the change in the price of sugar cane will increase the price of sugar by 20 per cent and increase the quantity demanded for syrup by 5 per cent, what is the cross price elasticity of demand for syrup respect to the price of sugar? Does the elasticity indicate that sugar and syrup are substitutes or complements?

(e) If coffee makers estimate that, with the change in the price of sugar, the quantity of coffee demanded will decrease by 6 per cent, what is the cross elasticity of demand for coffee with respect to the price of sugar? Does the elasticity indicate that sugar and coffee are substitutes or complements?

Question 3

Price (dollar per tonne)	Quantity demanded (Kt tonnes)	Quantity supplied (Kt tonnes)
100	2,000	0
150	1,400	600
200	1,200	800
250	1,000	1,000
300	800	1,200
350	600	1,400
400	0	2,000

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.

(a) If the US government sets a price floor of $200 a month, what is the price of wheat paid and how many tones of wheat are sold? Explain why?

(b) The US Farm Bill 2012 indicates that the domestic price of wheat is set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. On a graph, show if it creates a shortage or a surplus in the market for wheat, and explain why and by how much.

(c) 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)

Question 4

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.

(a) 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.

Korea imports a large quantity of beef. With no beef trade, Korea's 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, Korea's 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.

(b) Analyse the effects of 40 per cent tariff rate on the price of beef in Korea and Korea's beef imports in comparison with no tariff case. Provide numeric details.

(c) 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 tariff with brief explanation. Then, calculate the actual values of change in consumer surplus, producer surplus, tariff revenue and the amount of deadweight loss. Show your calculation.

Reference no: EM13715470

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