Reference no: EM132370894
Assessment Type: Economic Problem-solving Exercise
Subject Learning Outcomes
a) Describe the key fundamental principles of microeconomic and macroeconomic theory
b) Explain how different markets work to determine prices, demand and supply and analyse the efficiency of markets
c) Examine and explain the relationships between the national economy, GDP and economic growth and the key macroeconomic variables such as inflation, unemployment, interest rates and money supply, and exchange rates
d) Apply economic theory to analyse and evaluate topical micro and macroeconomic issues in real world events and communicate arguments effectively in writing.
Topic: Problem-solving exercises in microeconomics and macroeconomics
Task Details:
Question 1
There are many firms and buyers in the apricot market. The demand and supply functions are:
P = 200 – 0.4QD (1)
P = 20 + 0.5QS (2)
where P is price dollars ($) and Q is the quantity kilograms
(a) Calculate the equilibrium quantity and price of apricots.
(b) Using equations (1) and (2), draw the supply and demand diagram of apricots and indicate your results from part (a). Correctly label the diagram.
(c) Calculate the consumer surplus, producer surplus and total surplus, and indicate your results on the diagram in part (b).
(d) Calculate the price elasticity of demand at the equilibrium price and quantity.
(e) (i) Given the answer to part (d), if the price of apricots increased by 10% by how much would quantity demanded change? Show working steps
(ii) Would total revenue (TR) increase or decrease? Explain your answer.
Question 2
(a) China produces only clothing and rice. Draw China’s production possibility frontier showing the trade- off between the production of clothing and the production of rice. Label the horizontal axis, “Rice” and the vertical axis “Clothing”.
(b) Explain why the production possibility frontier (PPF) is concave.
(c) State all the assumptions underlying the construction of a PPF.
(d) In relation to the PPF, explain the terms ‘Production Efficiency’ and ‘Allocative Efficiency’.
(e) Suppose adoption of a new technology for growing rice lowers the cost of producing rice, allowing yields to increase by 100%. Show and explain the impact of this technological change on the initial production possibility frontier in part (a).
Question 3
“More than one billion of cups of coffee are consumed in Australia’s cafes, restaurants and other outlets each year, an increase of 65 per cent over 10 years.
People are drinking less ‘instant coffee’ as espresso becomes more popular and new speciality coffee shops have been popping up all over Australia to satisfy demand for daily caffeine fix. Not only are people drinking more coffee, they are becoming more coffee- savvy and want premium brew even if it costs more.”
Answer the following questions after reading the news clip above.
(a) Under what market structure would you classify the espresso coffee market, are firms price takers or price makers? Explain. [5 marks]
(b) With the aid of an appropriate economic model, explain why there has been such an explosion in the number of coffee chains in Australia over the past 10 years.
(c) Do you for see firms in the market making positive economic profit in the long run? Explain.
(d) Would the impact of government subsidy to each existing firm change your answer in part (c) in the short run? Explain.