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Prices & Markets

Melbourne, Semester 1, 2016

ECON1020 ASSIGNMENT 1

Value: 15% of total course assessment.

Word limit: 500 words, across all questions.

Assignment due date: 5 pm, 1 st April 2016. Please be aware of RMIT’s penalties

for late submission, as they will apply to you.

Submission: This assignment must be submitted electronically via Blackboard.

As it is RMIT policy that all assignments be submitted electronically, hard copies or

emailed copies will not be accepted.

When submitting, please make sure you attach and upload your assignment as a

one file (either .doc, .docx or .pdf format). Please do not paste as text or upload a

folder or zipped file.

IMPORTANT: On the Blackboard system, you can only upload and submit the

assignment once. So, make sure you read and understand the student guide on

How to submit your assignment on Blackboard before you submit.

Marking: Marks will be awarded based on how well you: (a) understand the

economic concepts from the lectures; (b) apply the concepts to the question(s); (c)

conduct systematic economic analysis using the concepts (this includes the use of

appropriate graphs and diagrams); and (d) draw conclusions, if appropriate. Note

that general layman discussions do not constitute sufficient economic analysis.

Presentation: Assignments should be typed, using 10 – 12 sized font and 1.5 – 2

line spacing. Graphs and diagrams can be hand drawn and scanned in, but must be

clearly drawn and clearly labelled.

Answer all questions.

Question 1:

Assume that a severe heatwave destroys half of the world’s coffee crops. Assume

also that people use more sugar in a cup of coffee than they do in a cup of tea.

Drawing appropriate diagrams, perform a comparative statics analysis of this

phenomenon on each of the markets for coffee, tea and sugar. In your answer,

explain how these markets are related.

(4 marks)

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Question 2:

Market research conducted by the Melbourne Bus Co. reveals that the quantity

demanded for bus tickets will fall from 15 to 10 if consumer income increases from

$5000 to $5500.

(a) Using the midpoint formula, calculate the income elasticity of demand for bus

tickets. Show your calculation.

(1 mark)

(b) Based on your answer in (a) above, is bus service a normal or inferior good?

Explain.

(1 mark)

Question 3:

Suppose that the demand and supply for beer are represented by the functions

below (note that these functions have Q, instead of P, on the left side of the

equation):

Demand function: Q d = 15 – 1.5P

Supply function: Q s = - 6 + 2P

where: P is the price per litre measured in dollars;

Qd is the quantity demanded measured in ’00 litres; and

Qs is the quantity supplied measured in ’00 litres.

(a) In this market, what is the price above which consumers will no longer be

willing to buy? What is the price below which producers will no longer be

willing to supply? Show how you calculate your answers.

(2 marks)

(b) What is the equilibrium price in this market? What is the equilibrium quantity?

Show how you calculate your answers.

(2 marks)

(c) Sketch the demand and supply curves for this market (with P on the y-axis

and Q on the x-axis), clearly labelling the points in (a) and (b) above.

(3 marks)

(d) Explain the meaning of a producer surplus and calculate the value of the

producer surplus in your diagram in (c) above. Show your calculation.

(2 marks)