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 aIDitional barrel of ethanol?  (2 marks)

• (b) Does Australia face an increasing opportunity cost of ethanol? What feature of Australia’s PPF illustrates increasing opportunity cost? Explain.  (2 marks)

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

• (c)

Price (dollars    per box)  Quantity demanded Quantity supplied   (boxes a week) 12 100 800 10 200 700 8 300 600 6 400 500 4 500 400 2 600 300

• Suppose a cyclone destroyed some banana farms in QLD and the quantity of banana supplied decreased by 100 boxes a week at each price. But at the same time the 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)

Part B:  Answer the following questions.  

• (d) When Yeon’s 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 Yeon’s income elasticity of demand for Show your calculation. Is rice income elastic or inelastic? Is rice normal good or inferior good?  (3 marks)

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)

• (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)

• (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)

Question 2– 15 marks

Part A:  Answer the following questions.

Price (dollar per tonne) Quantity demanded (kilo tonnes) Quantity supplied (kilo 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, 12,000 kilo tonnes (Kt) are supplied.

• (a) 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.  (2 marks)

• (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 = 12,000 tonnes)  (8 marks)

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)

Question 3 – 15 marks

Part A:  Answer the following questions.

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.

<Yeon Kim 2015>

• (a) 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.  (2 marks)

• (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 tariff 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)

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 (workers per week) Output (houses painted per week) TC (dollars) AFC (dollars per house) AVC (dollars per house) ATC (dollars per house) MC (dollars per house) 1 2                         2 5                         3 9                         4 12                         5 14                         6 15