MICROECONOMICS 

ASSIGNMENT 1

Question 1 - 40 marks (1-3 sentences per 5 marks and diagrams) 

Assume the demand curve for instant noodles in all countries is downward sloping and the supply curve is upward sloping. 

Read the following two news articles in order to answer the following questions.

https://www.pedestrian.tv/news/instant-noodle-prices-increase-russia-ukraine/

https://www.abc.net.au/news/2022-03-20/instant-noodles-price-increase-ukraine-russia-war/100896348 

a.       Draw a diagram showing the 2020 annual market for instant noodles in Australia if the average price was $1.00 per 100 grams. Include a title and label the demand curve, supply curve, equilibrium price and quantity.(10 marks)

b.       Explain why $0.60 per 100 grams is not an equilibrium price. If the market price were temporarily at $0.60 per 100 grams explain how the market through the price mechanism would return to equilibrium. (10 marks)

As long as a particular item is abundant, its price will fall until the excess supply is eliminated. Thus, when all surpluses are removed, supply and demand are not equal—that is, the quantity that producers want to sell does not match the amount that consumers desire.

c.       Assume the annual market for instant noodles in Australia in 2022 is initially the same as 2020. Explain why an increase in the price of wheat will affect either the demand or supply curves and how this will affect the price and the amount of instant noodles sold in Australia in 2022.  Draw and use a diagram to help explain your answer.(15 marks) 

The equilibrium price and the amount of wheat available for sale will rise when the grain supply is reduced. This will then negatively affect the number of noodles sold in Australia.

d.         Why did the price of instant noodles rise in Japan, even though any increase in the price of wheat has yet to flow onto minute noodle producers?

{You do not have to draw a diagram for this question}.(5 marks)

When the supply of wheat is reduced, both the equilibrium price and the amount of grain sold in Australia will decrease. As a result, Japan's noodle industry will suffer.

Question 2 - 60 marks (2-5 sentences + calculations per section) 

a.              Examine BTE (1986, table 4.2, p. 35) at https://www.bitre.gov.au/sites/default/files/2019-11/tedb-table1a02.pdf. 

i.           Interpret the real income elasticity of short-haul flights and explain why it is less than 1?(8 marks) 

When the supply of wheat is reduced, both the equilibrium price and the amount of grain sold in Australia will decrease. As a result, Japan's noodle industry will suffer.

ii.         Why are flights other than short-haul flights, considered luxuries?(6 marks) 

Those who fly on short-haul flights will note that plane seats are more diminutive. Most long-haul flights' seats are between 18 and 20 inches wide. Airlines have shortened the breadth of seats by at least two inches over several decades—at least 21-inch wide, the seats in first class. Some airlines are packing the Airbus A330 with seats as narrow as 16.7 inches.

iii.       Explain why the real airfare demand is elastic for ‘Summer holiday’ (Tasmania) and Winter sunspots’ (Queensland), but inelastic for short, medium and long haul flights?(6 marks) 

The empirical study in Tasmanian is based on the assumption that 'Summer holiday' and Winter sunspots' air service supply elasticity is high. Variables like income, the cost of alternative transportation, the population, and market concerns also account for route-specific submodels.

b.             The Tasmanian Minister for Infrastructure and Transport, Michael Ferguson, recently announced that bus travel would become free (see here for details). 

i.     Using the simple formula  to calculate the percentage change in the price bus fares if they fall to $0.  Use this with the Explicit short-run elasticity of bus travel reported in Goodwin (1992, table 3, p. 160)(https://www.bitre.gov.au/sites/default/files/2019-11/tedb-table1b03.pdf) to estimate the percentage change in bus travel in the short-run.(15 marks) 

Price Elasticity of Demand=  = x100% =−0.7

ii.       Why does the price elasticity of bus travel become more elastic in the long run?(5 marks) 

Prices have a slower immediate impact on the price elasticity of bus travel on supply and demand than long-term trends, although the latter is more sensitive to price swings. When this happens, short-term consumption and supply are inelastic, but they grow more elastic over time.

c.              Consider the following diagram.

i.           Use the mid-point formula to calculate the price elasticity of demand for blue berries in Tasmania over 2022 and 2023 for D₁ and D₂. Which demand curve is more elastic, D₁ or D₂? Explain what this result means.(15 marks) 

Due to the fall, demand has decreased by (540-125)/(540 + 125+2) = (540-125) / 250100 = 40.00 percent.

18.2 percent of the increase in the cost of goods has been accounted for by the increase in pricing from $4.50 to $5.50.

This means that the demand for the good at the given price is 40% less elastic than the supply at the same price. Using the formula D2, price elasticity of demand between locations.

(225 - 125) / ((225 + 125) / 2) = (225 + 125) / 212.5100 = 11.80 percent of the requested quantity has changed in percentage terms ($4.50 to $5.50)/(($ 4.50 to $5.50)/2) = ($4.50 to $5.50) / $2.75100 = 18.20 percent of the original price change.

When the price elasticity of demand is divided by 18.20 percent, the -0.65 percentage result is obtained. Demand curve D1 is, therefore, far more elastic than supply curve D2 due to a considerable divergence in quantity response and out price.

ii.       Explain whether sellers should raise or lower prices in order to maximise revenue if they are on D₂ and the price is $5.50 per punnet by using the elasticity you found in i.(5 marks) 

With each additional product sold, sellers should raise from $5.50 x 200. The demand curve's elasticity of demand increases revenue by $150. From $600 to $2.50 x 225, $562.50 is the increase in revenue. D2's inelastic price will result in a $37.50 increase in sales.

Question 3 - 40 marks (1-5 sentences + calculations per section) 

Consider the market for single bedroom rental apartments in Hobart in 2022 as shown in the diagram below. 

a.       What is the market equilibrium price and quantity of single bedroom apartments in Hobart?  Explain why it is an equilibrium.(5 marks) 

When a price ceiling is in effect, consumers' surplus increases and producers' excess diminishes, as shown in these two market scenarios. This is an equilibrium because when markets suffer as a result of this, society and the economy also suffer as a result of a loss of well-being and excess.

b.       Calculate the consumer, producer and total economic surplus for the market for single bedroom rental apartments in Hobart in 2022.(10 marks) 

To put it another way, because consumers can now rent flats at lower prices, producers cannot supply at their maximum capacity. Consequently, there is a lack of inventory available for purchase. Customers gained while suppliers lost, resulting in a net loss of well-being in the number of goods and services worth to society.

c.       Consider if the Tasmanian government were to introduce a legally enforced price ceiling of $300/week that the price (rent) of single bedroom apartments in Hobart can not be above. 

i.        Draw a diagram that that shows the effect of the price-ceiling on the single bedroom rental apartments in Hobart. Explain what would happen to the number single bedroom apartments supplied and demanded?(10 marks) 

As an example, take a look at the following: the figure shows that Hobart, Tasmania's single-bedroom rental apartment market, is predicted to hit $200 per week in 2022. S0 represents the supply curve, D0 represents the demand curve, and C represents the equilibrium point in a market with no price ceiling from the beginning. Alternatively, equilibrium has been shifted from A to B, meaning that the price and quantity of $200 per week is the new equilibrium price and quantity. Similar to ABC, P-A-B-200 and O-B-200 represent the new consumer surplus and the new producer surplus, respectively, in this equation.

ii.       Calculate the consumer surplus and producer surplus and compare it to the initial situation to determine who is better and worse off with a price ceiling of $300/week. Is there any deadweight loss from a price ceiling of $300/week?  If so calculate the size of the deadweight loss(15 marks) 

When there is no price cap, the three different types of market equilibrium points to supply and demand curves and equilibrium points (E0). Equilibrium price and quantity are depicted as $300 per week and 15,000 units per week, respectively, due to supply and demand convergence.

Question 4 – 50 marks (1-3 sentences per 5 marks + diagrams) 

Assume that supply curve for litres of petrol in the weekly retail market for petrol in Australia in 2022 is perfectly elastic and that demand is downward sloping. 

a.         Explain why in the retail petrol market in the absence of any taxes there is likely to be a negative consumption externality.(5 marks) 

In the absence of any taxes, the retail petrol market is a well-known detrimental externality. To save money, governments need to implement practices that harm the environment. However, even if expenses are not reduced, and revenues are not enhanced, this method negatively impacts the environment and the well-being of society.

b.         Suppose that the consumption externality is $0.44 cents per litre sold.  Explain and show by drawing a carefully labelled diagram, that without any government intervention the amount of petrol traded is higher than what is socially efficient and results in a dead-weight loss to Australia.(10 marks) 

The first welfare theorem does not hold up because of the private market's inefficiencies. A positive externality in the production process is to blame for underproduction. Overproduction is a byproduct of the production process's negative externalities. There are negative externalities linked with overconsumption. By not consuming enough, we miss out on all the benefits of deciding to do so.

c.         Explain and show by drawing a carefully labelled diagram how a Pigouvian tax on petrol consumers could reduce the amount of petrol bought and sold to the socially efficient level. {Recall a tax on demand, lowers the demand curve and where it intersects with supply gives the pre-tax price.  WS06-Qu8 demonstrates a tax on demand and Lecture05-Topic 4 Addendum page 11, shows a demand subsidy}(10 marks) 

Free market equilibrium is reached when SMB equals PMC1, making Pigouvian tax on petrol consumers lower than SMC because of the additional expenses spent by economic activity, and PMC1 is lower than SMC in the absence of externalities. Many times, inefficient market equilibrium is this norm.

d.         Explain and show by drawing a carefully labelled diagram how an excise tax of $0.44 per litre levied on petrol sellers could achieve the same result in b and also reduce the amount of petrol bought and sold to the socially efficient level.(10 marks) 

If petroleum is a homogeneous good, the equilibrium price and quantity are zero absent taxation. A tax of $X on Good A will only be sold for P1 + $X if the government decides to tax its supply.

e.         Why does the government collect excise tax from the sellers of petrol (petrol stations) rather than motorists who consume and burn the petrol in their cars?(5 marks) 

An explicit charge for greenhouse gas emissions is one of the goals that can be achieved through carbon taxes from the sellers of petrol, including a direct payment for greenhouse gas emissions in the product's final price. Combustion of fossil fuels releases large amounts of carbon dioxide into the atmosphere, contributing significantly to global warming. Transportation accounts for 31% of the total greenhouse gas emissions. The entire country bears the burden of this expenditure. The goal of raising the price of gasoline is to address the market failure that prevents the proper value of the negative impacts of carbon emissions from being accurately recognized promptly. For a price on carbon to be put in place, the social cost of carbon must be taken into account, which is the present value of the predicted environmental harm caused by rising CO emissions in today's society due to increased CO emissions.

f.          At the 2022 March Budget, the federal government reduced the petrol excise tax by half to $0.22 cents per litre to ease the pressure on the cost of living.  Explain why most economists said it would ease the cost of living and reduce the price of petrol by $0.22, but thought it was bad microeconomic policy?  Why might income handouts increase the cost of living, but from a microeconomic policy perspective not be so bad?

{You do not have to draw a diagram for this question}.(10 marks) 

Economists despise price caps because they affect the distribution of resources. Even if economists do not know much, they have the power to create shortages and surpluses whenever they choose to. Shortages occur due to price controls intended to maintain prices below a predetermined threshold by keeping costs below a certain point. The price of petroleum could be reduced if the government sets a lower maximum price if the current supply and demand are balanced. Despite a decrease in the supply of petrol, the demand will rise. Consequently, there will be an increase in demand and a reduction in stock. Many people will not be able to afford to buy petrol at all, even though the price has been reduced.

To limit the supply of goods and services, a different mechanism must be used then the price system. It was common practice in Eastern Europe's regulated economy to stand in line. Due to long lines at gas stations caused by government-imposed price caps on gasoline in 1973 and 1979, many Americans could not fill up their tanks on time. It was the first introduction to Soviet life for many Americans. As a result of price regulation, the actual cost of gasoline was often more than what would have been charged if the price was not regulated. At $1.00 a gallon in 1979, it was the lowest gasoline price ever set by the United States government. The driver who purchased 10 gallons of gas would have saved $2.00 if the market price had been $1.20 a gallon. Naturally, a certain amount of gas was set aside as a thank you for special people like long-term business clientele, well-known politicians, and others.

Question 5 - 40 marks (1-3 sentences + calculations per 5 marks) 

Consider a rock concert that is to be held at Cornelian Bay Oval in Hobart over 25-26 March 2022. The rock concert is estimated to contribute $300,000 in economic benefits, consisting of $200,000 in consumer surplus to those that attend and $100,000 in producer surplus to the firm organising the concert. However, the concert will also cause excessive noise that will impose a cost of $180 on each of the 500 residents in the area.  Assume there are no other external costs or benefits. 

a.              Is socially efficient for the concert to be held? Why?(5 marks) 

There are many ways to measure consumers' value from a transaction, such as using the consumer surplus. There are peaks at the top of a demand curve showing the perceived value that certain purchasers place on the concert. The concert is socially efficient because the demand curve represents customers' willingness to pay $180 for the show.

b.             If the rock concert had the right to excessive noise, would the concert be held?  Explain who would be the “winners” and “losers” in this situation.  (5 marks) 

The customers will be the winners here because amplifiers have replaced an audience's capacity to hear inaudible sounds with the ability for artists to monitor their own and each other's performances in real-time. Noise levels have altered over time due to various goals being achieved.

c.              If the locals had the right to no excessive noise, explain what the rock concert could do to get the locals to agree for the concert to be held.  Explain why the firm has an incentive to do this and why locals would agree, by examining their net benefits.   (10 marks) 

This country's health authority should establish guidelines for events, including concerts and festivals. In these recommendations, visitors must wear hearing protection at 99 decibels for 30 minutes and 130 decibels at the peak. There should be 30 minutes in which a concert is loudest also to benefit the producers and the firm.

d.             If there were costs involved with any payments of cash or tickets from the rock concert to each local or vice versa of $30, Explain who should be assigned the property rights to achieve the socially efficient outcome.(10 marks) 

Attendance at classical music performances is reduced due to the strategy, which lowers the cost of attendance. Tickets will be scarce if the $30 price cap is lower than the equilibrium price, indicating that demand will outstrip supply. Therefore, the local authority should be assigned property rights.

e.             Suppose that price of tickets to the concert are $120 (and can be re-sold at that price), but the marginal cost to the firm of each ticket is only $18 and the only transaction cost is a $2 fee the rock concert must pay to deliver the tickets to locals. Explain how the rock concert tickets could be used in Coasean Bargaining to increase the net or social, economic surplus.  Explain why this works even if a local doesn’t value going to the concert at $120(10 marks) 

This works even if a local doesn't value going to the concert at $120. Think of the night out as costing $120, including $18 for the entrance fee and $2 for tickets. Even though one should participate, they need to look at the financial ramifications thus far. This will result in explicit expense as it designates a payment made in money.

Question 6 - 40 marks (2-5 sentences + calculations per section) 

Currently, 6 fishers send one boat each week, to fish a stock of mackerel (blue mackerel, jack mackerel and red bait) off Tasmania’s east coast. Each boat returns with a catch worth $2,700.  It costs $2,000 per boat per week to send it out fishing.  Every additional boat beyond 6, that is sent to fish Southern Calamari results in the catch falling by $150 for every boat out fishing in Tasmania’s state waters.  Assume the Tasmanian mackerel fishery is not regulated. 

a.       Bill is one of the 6 fishers and is considering sending out additional boats each week.  If all other fishers continue to send one boat only, how many fishing boats should Bill send out to maximise profit? Explain why.(10 marks) 

Bill should send out four boats to bring $600 to maximize profit to keep their boats and crews afloat. Albeit at a slower rate and for less money, the pandemic's consequences and the subsequent disruption in the fishing system.

b.       Explain why Bill has an incentive to send an additional boat to fish for mackerel, but that this is not socially optimal.  Is there an externality when Bill sends out an additional boat?(10 marks) 

Bill has an incentive to send an additional boat to fish for mackerel because individual dealer landings and pricing for seven are federally controlled. Earlier pre-pandemic years were supplied by the Government department for Fisheries to understand regional patterns in fisheries better.

c.       If all other fishers of mackerel think the same as Bill, how many boats will fish for mackerel off Tasmania’s east coast each week?  How many $ of fish will be caught per boat?(5 marks) 

As cod, herring, and other species populations collapsed over five to ten years, ecosystem overfishing markers also fell. There were no losses in value or changes in ecosystem structure because it took all required efforts to prevent it.

d.       Explain why the unregulated Tasmanian mackerel fishery is a common resource and results in a “Tragedy of the Commons”.(10 marks)

Twenty-four boats will fish for mackerel off Tasmania's east coast each week. It is expected that $600 of fish will be caught per boat. 

e.       Suggest a policy that the Tasmanian Government could implement to reduce or eliminate the overfishing of mackerel and briefly why it would work. (5 marks)  

Tasmanian government should understand that fish contributes 20% of animal protein consumed by half the world's population. This means that the government should ban overfishing, like the one that occurred with cod, since it has enormous consequences for food security. It is environmentally unsustainable because deep-sea bottom trawling depletes habitats that are home to millennia-old deep sea corals, fish populations, and maybe even human food supplies.   

Question 7 - 50 marks (2-5 sentences + calculations per policy per section) 

Suppose there are two firms, A and B, that each currently release 4 tonnes of C0₂ emissions per week, resulting in 8 tonnes of C0₂ emissions per week. A study shows that total economic surplus can be increased by reducing the total level of emissions by 4 tonnes of C0₂ emissions per week. The cost to each of the two firms of reducing their emissions is shown in the table below. 

The government has proposed three policy options to reduce the total level of emissions by 4 tonnes of C0₂ emissions per week. 

a.       Introduce laws requiring all firms to reduce their CO₂ emissions by 2 tonnes per week. 

Yearly emissions must be 15 gigatonnes of CO2 equivalent lower than current unconditional predictions. Emissions should be reduced to 7.6% each year up to 2030, and a goal of 2.7% per year from 2030 to meet the two °C target.

b.       Introduce a carbon tax of $30 per tonne of C0₂ emissions. 

A price on carbon dioxide (CO2), which is often represented as a price per ton of CO2, is used to link greenhouse gas emissions to their sources. Crop damage, health care expenditures associated with heatwaves and droughts, and property damage caused by flooding and sea-level rise are all the costs related to greenhouse gas emissions that fall on the general public.

c.       The government will issue each firm with two permits. Each permit a firm holds allows it to emit 1 tonne of C0₂ emissions per week.  If a firm does not hold enough permits it must reduce its C0₂ emissions.  Firms can trade the permits with one another. 

Explain and evaluate each of the three policies. In particular 

i.                     Explain how each policy will work to reduce pollution. 

To reduce pollution, permits issued, which can subsequently be sold to other enterprises for additional profit, will eliminate air pollution using a market-based strategy is a realistic option. Incentives for businesses to reduce pollution are built into market-based pollution permits designed to do just that. Thus the government will encourage them to do just that. They are not meant to take the role of government rules.

ii.                   How much each policy will cost each firm and in total, less any government revenue. 

To meet the Sustainable Development Goals, the government should expect $2.5 million each year. A considerable number of governments are having problems collecting taxes as a result of this, particularly those in conflict zones. More private sector investment in sustainability will be needed, which will necessitate the implementation of tax policies that offer the pricing incentives essential for this investment.

iii.                 How successful each policy would be if the costs of removing each tonne of C0₂ per week twice as high as what was initially thought. 

To meet the Sustainable Development Goals, the government should expect $2.5 million each year. A considerable number of governments are having problems collecting taxes as a result of this, particularly those in conflict zones. More private sector investment in sustainability will be needed, which will necessitate the implementation of tax policies that offer the pricing incentives essential for this investment.