Beo1105 : Economic Principle : Assessment Answers

1). The price of beef rises and yet it is observed that the sales of beef increase. Does this mean that the demand curve for beef is sloping upward? Explain. 

 

2). Suppose a news article reports, “Poor wine-grape harvests in France have brought financial gains to Australian winemakers. Sales of Australian wines in France are booming and wine prices are the best ever”

a) How has the market for French wines been affected by the poor harvest?

b) How has the change in the French wine market affect the market for Australian wines?

 

3. What is the effect on the equilibrium price and equilibrium quantity of orange juice if the price of apple juice decreases and the wage rate paid to orange grove workers increases? (Hint: Look at all possible outcomes. There is more than one) 

 

4. In Australia, governments set the fares that taxi owners/drivers can charge. At various times, taxi owners/drivers stage protests asking to be allowed to increase their taxi fares so that their total revenue will increase.

a) What are taxi owners/drivers assuming about the price elasticity of demand for taxi rides, given their confidence that an increase in price will increase their revenue?

b) Why do they have such an assumption? Is it a realistic assumption?

 

5. A monopolistically competitive firm is producing 50 units of output in the short run where marginal cost is $3.00, average total costs are $5.00, price is $4.50, average variable cost is $4.00 and marginal revenue is $3.00.

a) Represent the above in a graph and calculate how much profit is the firm making?

b) What output recommendation would you make for the firm?

Answer:

1). Price of the beef rises that means it will reduce the demand of the same as per the law of demand, however, considering the given case it can be seen that the demand of the beef has been increased. Rise in the demand with the rise in price inherently means that the demand curve need to be upward, however it cannot be feasible. There are various factors that can lead to the given situation. for instance, with the rise in the income of the consumer, now the people are able to pay more for the beef leading to shift of the negatively sloping demand curve rightward, which will lead to rise in the price as well as the quantity demanded. In other case, there is scope that price of the substitute products of the beef has also been increased with the rise in the price of the beef making beef a cheaper substitute. thus, under the ceteris paribus situation, with the rise in the price, there will be fall in the demand, and if the factors like income of the consumer as well price of the substitutes rise, then it will rather lead to rise in the quantity demanded of the beef.

 

 

                                                                                    Figure 1: Supply and demand framework of beef

                                                                                                 Source: (Created by Author)

Through the graphical representation of the phenomenon by the figure 1, it can be seen that, as the price of the rises, the demand curve can also shift rightward due to the rise in the income level or rise in the price of the substitutes. As the demand curve shift rightward from the D0 to D1, it will shift the demand of the beef as well from Q0 to Q1 proving the stated comment in the assignment wrong.

2).a. With the fall in the harvest of the wine grape in the France, there will fall in the supply of the French wine in the state. Fall in the production of the French wine will eventually lead to rise in the price of the same in the domestic market, which will cause fall in the demand, allowing the foreign traders to enter into the market. Poor condition of the wine grapes harvest in the domestic economy, French wine will eventually loose market in front of the market in the domestic region.

b). Due to fall in the production of the wine grapes, there will be fall in the production, which will lead to rise in the price. Considering this, to fulfil the market gap in production of wine, Australian wine firm will export wines to France, which will increase the supply of the wine in the French market. Under this situation, price will eventually fall and the revenue for the Australian firm will rise over the time with the rise in the market share of the Australian wine firms.

3). In order to answer the given question properly, it has to be assumed that the apple and orange juice are substitute product, which means, with the rise in the consumption of the apple juice there will be fall in the consumption of the orange juice and vis-à-vis. the same principle is followed in the production as well as employment situation of the orange and apple juice industry.

 

                                                                                             Figure 2: demand and supply framework of orange juice

Source:

Now considering the given information, fall in the price of the apple juice will eventually enhance the demand of the same and on the other hand it will reduce the demand of the orange juice. If it is considered as per the figure 1, the initial equilibrium occurs at E0, where the price of orange juice is 8 unit and the output is 70 unit, then the fall in the demand will lead to shift of the demand curve of the orange juice from the D0 to D1. This shift will eventually lead to fall in the price as well as the demand. Now, if the wage of the orange juice workers has been increased, then it will shift the supply curve from S0 to S1 as depicted in the figure 2. This second shift, will make the new equilibrium at 1’, where the price of the orange juice will be lower at P2 and the quantity demanded will be higher at Q2.

4). a As per the norm of the Australian government as they has decided pricing ceiling for the taxi ride, it can be said that the Australian taxi drivers are consuming price inelastic in demand. Which means, there will be no change in the demand of the taxi service, if the price of the service is increased. One of the basic things that has allowed the taxi drivers to think like this is the share of people who prefer to get taxi rather than waling or travelling buses taking advantage of the low price of the taxi service. As per the taxi drivers, if the market remains same, then the overall revenue of them will fall eventually making them out of money.

b). Considering the thinking of the Australian taxi drivers it can be said that the thinking is totally unrealistic. Demand of the taxi service is highly elastic in nature because as the price increases, historically it has been observed that there will be fall in the demand in case of Australia. On the other hand, if the price fell, then it will allow the consumers to ride more taxi. However, if the price is set by the government, then throughout the year, price will be almost same, which will eventually aid the taxi drivers to save themselves from the loss.

5). a

                                                                            Figure 3: monopolistically competitive firm

                                                                                   Source: (Created by Author)

Total profit = Total revenue – Total cost

= price * quantity – Average Total Cost * quantity

= 4.50 * 50 – 5 * 50

= 225 – 250

= - 25

From the above calculation it can be seen that the firm is facing loss of 25$.

 b). In order to gain normal profit the firm need to produce where the MC = MR

Therefore, the firm need to charge more than 4.5$ and the output need to be more than 50.

Reference:

Andreyeva, Tatiana, Michael W. Long, and Kelly D. Brownell. “The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food.” American Journal of Public Health 100, no. 2 (February 2010): 216–22. https://doi.org/10.2105/AJPH.2008.151415.

Babar, M, PH Nguyen, V Cuk - PowerTech, 2015 IEEE, and undefined 2015. “The Development of Demand Elasticity Model for Demand Response in the Retail Market Environment.” Ieeexplore.Ieee.Org, n.d.

Economy, L Robbins - Economic Science and Political, and undefined 1997. “On the Elasticity of Demand for Income in Terms of Effort.” Springer, n.d.

History, J Mokyr - The Journal of Economic, and undefined 1977. “Demand vs. Supply in the Industrial Revolution.” Cambridge.Org, n.d.

review, JCB Cooper - OPEC Energy, and undefined 2003. “Price Elasticity of Demand for Crude Oil: Estimates for 23 Countries.” Wiley Online Library, n.d.

Ruttan, V, and C Thirtle. The Role of Demand and Supply in the Generation and Diffusion of Technical Change, 2014.