Assignment 1 - Part 1 Questions
QUESTION 1
The market for bananas has the following demand and supply functions
Qd = 10 – 2P + Y
Qs = 2 + P + 0.5W
where Q is quantity, P is price, Y is income and W is an index of weather.
a) Suppose Y = 1 and W=2, specify the demand and supply curves, show them on a graph,
and derive the equilibrium price, quantity and producer revenue [7marks]
b) Assume that production is negatively affected by a cyclone. Generate a new supply
function accounting for the cyclone shock and assess the effects of poor seasonal conditions
on the market outcomes P, Q and revenue. [4 marks]
c) Assess the effects of a doubling of income on market outcomes [4 marks]
QUESTION 2
Assume that the market for cotton clothing is perfectly competitive. WeaveLand is a net
exporter of cotton clothing.
Assume that the world price for cotton clothing decreases by $20 per unit, from WP1 to
WP2, because producers in SpinLand have developed a more efficient way of producing
cotton clothing. Suppose WeaveLand continues to be an exporter of cotton clothing after
the change.
a) Use a graph and explain how this decrease in the world price will affect the equilibrium
outcome in the market for cotton clothing in WeaveLand (indicate new price, new quantity
supplied, new quantity demanded, new exports). [9 marks]
b) How will the well-being of WeaveLand consumers of cotton clothing and WeaveLand
suppliers of cotton clothing be affected? What is the effect on total surplus in the market for
cotton clothing in WeaveLand? [6 marks]
c) The government of WeaveLand announces that it will introduce an export subsidy per
unit of cotton clothing exported by WeaveLand suppliers. The per-unit export subsidy
amount will be $10 per unit of production that is exported to the international market.
Will the new subsidy offset the effect of the decrease in world price? Will well-being in
WeaveLand be the same as before the world price decrease?
Explain by calculating the change in consumer surplus, producer surplus, and total surplus
relative to WP2.
[10 marks]
d) Would domestic consumers in WeaveLand pay the subsidy-inclusive price or
internationally at the lower world price, WP2? Does the government subsidise the units of
clothing sold to the domestic market?
[5 marks]
QUESTION 3
Assume that OzStan uses child labour in the production of tennis balls. Given the following
labour demand and supply functions
Qd=10-4w
Qs= 2+¼ w
a) Draw a graph of the labour market of tennis balls [2marks]
b) At equilibrium Q* w*, are demand and supply price elastic? [4marks]
c) A new policy is implemented with the aim of reducing child labour wages. What type of
policy would be more effective: a demand-side (ban on child labour) or a supply-side policy
(providing monetary incentives for parents to keep children at school)? Why? Explain your
answer by providing a hypothetical new demand and a hypothetical new supply and
calculating the new equilibrium price and quantity traded. [9marks]