Reference no: EM1378427

1. In the coming week-long mid-term break, Toni has the option of either to work as an intern at the Asia Competitive Institute (ACI) for which he will be paid $600 or to take a holiday in Penang. Working at ACI is expected to be stressful and Toni is expected to spend $200 more to relax. The holiday in Penang will cost him $600 but Toni loves Penang and the trip is valued at $1100 by him.

a) What is Toni's opportunity cost of (i) working at ACI (ii) holidaying in Penang? Should Toni go for the trip to Penang?

b) Unfortunately, it has been reported that smoke from forest fires in Sumatra has created hazy conditions in Penang. As a result, Toni has revalued the Penang trip to be worth $900. Will Toni's decision be different?

c) Having decided to go to Penang, Toni has the option of either to take a coach or to fly there. The air ticket and associated taxi fares cost $300 and he will arrive in Penang 8 hours earlier compared to going by coach. An extra hour in Penang is worth $30 to Toni. Travelling by coach to the same Penang destination will cost $100 and Toni perceives that the scenic views and extra comfort associated with coach travel is worth $100. What are the opportunity costs of travelling by air and by coach? Which mode of travel will Toni choose?

2. The equilibrium wage rate in a competitive labour market for unskilled local workers was $6 per hour. With the inflow of migrant workers into this labour market, the equilibrium wage has been reduced to $4 per hour Using demand and supply analysis and appropriate diagrams (with the wage rate on the vertical axis and number of workers on the horizontal axis),
a) Illustrate the impact of the migration of workers on employment in the labour market.

b) What are the welfare gains and losses arising from the inflow of migrant labour? What determines the size of these gains and losses?

c) The government is considering the introduction of a minimum wage of $5 per hour in this labour market. Companies opposed to this move have argued that this will lead to higher unemployment in the country. Is the unemployment of local workers likely to increase? Who will gain and who will lose from this policy change?

3. At equilibrium in Kowland milk market, the quantity of milk transacted is 100 million litres at the price of $9 per litre. The price elasticity of demand for milk is -0.8 and the price elasticity of supply is 2.5. To raise the incomes of milk producers, the Kowland government imposes a minimum price floor of $9.90 per litre of milk and buys up any excess supply at this price.
a) What is the estimated budget that the government will need to set aside for this milk support programme?
b) What is the welfare loss to society of this programme?
c) If the government decides to impose a quota on milk production, what will be the required payout to the milk producers if their incomes were to be raised by the same amount?
d) If the government aims to minimise the efficiency losses from this programme, what would you recommend that the government do and what will be the required payout to the milk producers?

4. a) In January 2010, Joni, a new graduate signed a long-term contract with her employer which provides for automatic cost-of-living adjustments (COLA) to her salary. This COLA will adjust Joni's salary annually to ensure that she is able to purchase the same bundle of food and housing items in the face of price changes. Joni does not save but spends all her salary on food and housing rentals. The cost of living has risen by 10% in 2010 and hence Joni's salary has been increased by 10% in 2011.

Use indifference curve analysis to explain why Joni is better or worse off in 2011 compared to the year before? Under what circumstances will the COLA make Joni as well off as before?

b) To address the acute shortage of car park spaces, the government decides to impose a parking tax which effectively increases all non-residential parking charges by 25% island wide. The government pays back the additional parking revenues received in the form of a uniform percentage reduction in the annual road registration fees (road tax) paid by all car owners.

Use indifference curve analysis to explain how the new parking tax scheme will affect demand for parking and whether it will alleviate the parking shortage problem.