Opportunity cost of an additional barrel of ethanol

Reference no: EM13933577

Question 1:

Ethanol (barrels per day)	Food crops (tonnes per day)
70	0
64	2
54	4
40	6
22	8
0	10

Part A:

Australia produces ethanol from sugar cane, and the land used to grow sugar cane is used to grow food crops. Suppose that Australia's 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? If ethanol production increases from 54 barrels to 64 barrels, what happens to the opportunity cost of an additional barrel of ethanol?

(b) If Australia increases its production of food from 4 tonnes per day to 6 tonnes per day, what is the opportunity cost of an additional tonne of food?

Part B:

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

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

(c) If the price of banana was $1.50 a box. What would be the quantity demanded and quantity supplied? Is there a shortage or surplus and by how many boxes? Draw a graph and explain why and how the price and quantity would adjust.

(d) 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 how would the equilibrium price and quantity adjust? Illustrate the changes on your graph.

(e) 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. Explain what would happen to the market supply and demand and how would the market equilibrium price and quantity adjust? Illustrate the changes on your graph.

Question 2:

Price (dollars per night per room)	Quantity demanded (no. of rooms per night)
200	20
300	16
400	12
500 600	8 4

Part A:

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

(a) What happens to total expenditure of the tour agency if the price falls from $600 to $500 per night per room? Calculate the demand elasticity of the hotel room. Is the demand for hotel room elastic, inelastic, or unit elastic?

(b) What happens to total expenditure of the tour agency if the price falls from $300 to $200 per night? Calculate the demand elasticity of the hotel room. Is the demand for hotel room elastic, inelastic, or unit elastic?

Part B:

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.

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

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

(e) 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.

(f) If sugar makers estimate that this change in the price of sugar cane will increase the price of sugar by 20 per cent and decrease the quantity demanded for sugar by 5 per cent, what is the price elasticity of demand for sugar? Show your calculation.

(g) 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?

Question 3:

Rent (dollar per room)	Quantity demanded (rooms)	Quantity supplied (rooms)
600	2,000	1,000
650	1,750	1,250
700	1,500	1,500
750	1,250	1,750
800	1,000	2,000

Part A:

The table shows the demand and supply schedules for low-cost housing.

(a) If the government puts a rent ceiling of $750 a month, what is the rent paid and how many rooms are rented? Explain why?

(b) If the government strictly enforces a rent ceiling of $650 a month, what happens to consumer surplus and producer surplus? Using the table information, draw a diagram to explain. Also, calculate total housing search costs and deadweight loss. Show your calculation.

Reference no: EM13933577

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