Topic
Four Problem-Solving Questions that require written answers
1. General information
1.1 This group assignment is worth 20 per cent of total assessment and is to be submitted to librarian in Kent street campus by 7.00pm, Monday 4 May 2015.
• There are 3 questions and each question will be marked out of 10 marks, consisting total of 30 marks. Then the marks will be converted to total of 20 mark scale for 20 per cent of your total course assessment.
• The marks that will be uploaded in Moodle later will be out of 20 marks (that is, 20 per cent of total assessment).
• Late submission by 1 day will attract loss of 2 marks (10 per cent) each day until 7.00pm Wednesday 6 May 2015.
• Assignment submitted after 7.00pm Wednesday 6 May 2015 will not be accepted and marked zero.
1.2 Each group should form a group of three (3) students. One-person, two people or more than three-people group assignment is NOT allowed.
1.3 Each student name in the group and student ID number must be clearly printed on the Assignment Cover Sheet.
1.4 If one-person or two people (or more than three-people group) assignment, it will be marked out of 15, not 20. This means a loss of 5 marks for not forming a proper group.
1.5 You need to follow an appropriate format explained below. Not following appropriate format will cause loss of some marks.
• All written answers must be clearly typed and printed. Hand-written answers will NOT be accepted.
• All assignment questions and sub-questions should be typed in order at the heading.
• Separate each main question by different page. For example, if Question 1 (a) (b) (c) and (d) are answered on pages 1-2, then start Question 2 on page 3, etc.
1.6 The answers should be written clearly and concisely with the main points only, and avoid irrelevant points. In your answers,
• You should analyse, explain and show how and why you draw your answers. Providing just answers without explanation will not receive full marks.
• You should also include appropriate and relevant diagrams, charts and tables together in your explanation. Draw them using Microsoft Word/Excel/Power Point tools, NOT hand drawn.
1.7 Copying the assignment contents from other group(s) is a serious violation of copy right. It will be penalized and attract a VERY heavy loss of marks.
• Please remember that it is not difficult to identify the contents that are copied from other group(s). Write the answers in your own English words.
• Please make sure that nobody in your group shows your group assignment to other group members. Otherwise, both who show the assignment and who copy the assignment will lose their marks heavily.
1.8 Each group needs to have a group coordinator, who will submit only one copy of the assignment for the group to librarian.
• Indicate the group coordinator when you type student names on the Assignment Cover Sheet.
• Each group must submit one HARD COPY of the assignment to the Librarian at KOI.
1.9 Make sure all group members discuss and work together for all questions, and EVERYBODY in the group MUST read and check the assignment before submission, once completed!!
2. Assignment Questions
Question 1 – 10 marks
The table sets out the demand and supply schedules for banana.
(a) Suppose a cyclone destroyed some banana farms in QLD and the quantity of banana supplied decreased by 50 boxes a week at each price. Explain what would happen to the market supply and supply curve. Would the change in supply cause a shortage or surplus of banana at the initial equilibrium price? If so, by how many boxes? What would be the new equilibrium price and quantity after the adjustment? Draw a graph and illustrate the changes on your graph. (3 marks)
(b) Suppose a cyclone decreased banana supply by 50 boxes a week at each price. But at the same time the demand for banana increased by 50 boxes a week at each price. What would happen to the market supply and demand curves? How and why would the market equilibrium price and quantity adjust at the end? What would be the new equilibrium price and quantity? Draw a graph and illustrate the changes on your graph. (3 marks)
A tour agency’s demand schedule for hotel rooms is given in the table.
(c) What happens to total expenditure of the tour agency if the price falls from $400 to $350 per night per room? Calculate the demand elasticity of the hotel room. Is the demand for hotel room elastic, inelastic, or unit elastic? (2 marks)
(d) What happens to total expenditure of the tour agency if the price falls from $250 to $200 per night? Calculate the demand elasticity of the hotel room. Is the demand for hotel room elastic, inelastic, or unit elastic? (2 marks)
Question 2 – 10 marks
Answer the following questions.
When Hana’s income was $3,300, she bought 5 kgs of rice and 2 kgs of beef a month. Now her income is $2,200 and she buys 5.25 kgs of rice and 1.3 kgs of beef a month.
(a) Calculate Hana’s income elasticity of demand for beef. Show your calculation. Is beef income elastic or inelastic? (2 marks)
(b) Calculate Hana’s income elasticity of demand for rice. Show your calculation. Is rice income elastic or inelastic? Is rice normal good or inferior good? (2 marks)
Suppose a flood cuts the quantity of sugar cane grown by 6 per cent.
(c) If the price elasticity of demand for sugar cane is –0.6, by how much will the price of sugar cane rise? Show your calculation. (2 marks)

(d) If syrup makers estimate that the change in the price of sugar cane will increase the price of sugar by 20 per cent and increase the quantity demanded for syrup by 5 per cent, what is the cross price elasticity of demand for syrup respect to the price of sugar? Does the elasticity indicate that sugar and syrup are substitutes or complements? (2 marks)
(e) If coffee makers estimate that, with the change in the price of sugar, the quantity of coffee demanded will decrease by 6 per cent, what is the cross elasticity of demand for coffee with respect to the price of sugar? Does the elasticity indicate that sugar and coffee are substitutes or complements? (2 marks)

Question 3 – 10 marks
The table shows the demand and supply schedules for US wheat market. The US Farm Bill 2012 indicates that the domestic price of wheat will be set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. At the market equilibrium, 1,000 kilo tonnes (Kt) are supplied.
(a) If the US government sets a price floor of $200 a month, what is the price of wheat paid and how many tones of wheat are sold? Explain why? (2 marks)
(b) The US Farm Bill 2012 indicates that the domestic price of wheat is set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. On a graph, show if it creates a shortage or a surplus in the market for wheat, and explain why and by how much. (2 marks)
(c) On a graph, explain how the price control in the US would change the consumer surplus, producer surplus, and deadweight loss in the domestic wheat market. Assume that the US does not trade wheat internationally. Also, calculate the changes in consumer surplus, producer surplus and deadweight loss. (Remember 1 kilo tonne = 1,000 tonnes) (6 marks)
Question 4 – 10 marks
The price of rice in Japan is $5 per kilogram and Japan produces 40 million tonnes of rice a year. Suppose now that Japanese government provides production subsidy of $2 per kilogram to domestic rice farmers.
(a) Draw a graph and analyse what would happen to the domestic supply of rice and supply curve, consumer price of rice and domestic demand for rice, and cost of rice production. Also explain why such a production subsidy is likely to be troublesome. (3 marks)

Korea imports a large quantity of beef. With no beef trade, Korea’s equilibrium price for beef was $8 million per kilo tonne and equilibrium quantity was 375 kilo tonne. If Korea opens its beef market to trade with no tariff, domestic demand would be 625 kilo tonne and domestic supply would be 125 kilo tonne at the world price of $4 million per kilo tonne. However, Korea currently imposes 40 per cent tariff rate on all imported beef. With 40 per cent tariff, Korea’s domestic supply and domestic demand were 250 kilo tonne and 500 kilo tonne respectively in 2013. Assume that intercept of supply curve is $2 million and demand curve is $15 million per kilo tonne.
Yeon Kim 2015
(b) Analyse the effects of 40 per cent tariff rate on the price of beef in Korea and Korea’s beef imports in comparison with no tariff case. Provide numeric details. (2 marks)
(c) Draw a graph and clearly show how the areas of gains and losses from the trade with 40 per cent tariff rate would change before and after the tariff with brief explanation. Then, calculate the actual values of change in consumer surplus, producer surplus, tariff revenue and the amount of deadweight loss. Show your calculation. (5 marks)