Econ6000 Economic Principles And Decision Assessment Answers

Problem A:

The Board of Schmeckt Gut was interested in the demand for our energy bars in Atollia. Therefore,the Board instructed the Research Department of Schmeckt Gut to conduct a survey in Atollia.

1. Using the results of the survey provided by the Research Department, see Table 1, the Boardwould like you to investigate the demand for our energy bars in Atollia in more detail. Morespecifically the Board is interested what the impact of offering our products at another storemight have on the demand.

Hint A:

You should make use of Microsoft Excel tools discussed in the Module EndLearning Activities of Modules 1 to 3.

Hint B:

You should run a linear regression analysis to investigate the potential impactof offering our product at another store.Module 5 - Assessment 2: Short written assessment

Problem B:

The members of the Board of Schmeckt Gut are scheduled to meet with the Trade Minister of Industria. The Board is interested in convincing the Government of Industria to establish closer economic links with Atollia.

1. Based on the regression results that you have estimated as part of Problem A, what can we tell the Trade Minister about the impact of the tariff?

1. Use an applicable diagram discussed in Module 4 to explain the impact of the tariff on our energy bars.

Problem C:

The Board of Schmeckt Gut wants to convince the Government of Industria that a Free Trade Agreement with Atollia would be beneficial for Industria’s economy.

1. Develop a brief for the Board on the benefits of Free Trade for both countries and industria in particular. Incorporate the results of your regression analysis and use theory and graphical support.

Answer A

The report analyzes demand for energy bars at Atollia based on the survey data on average income per person, tariff rate on imported energy bars and number of stores where energy bars are offered for sale. The regression result shows the relation between each of these variables and demand for energy bars. The sign of the coefficient indicates the direction of relationship and the value of the coefficient shows the intensity of the effect. The board is interested to evaluate the how the demand for energy bars affected when energy bars the offered to additional stores. The estimated coefficient for number of store is 4.072. This shows positive relation between number of stores and demand. For unit increase in the number of stores, demand increases by 4.07%. The P value of the coefficient is 0.047. This implies the variable is marginally significant at 5% level of significance and significant at 10% level of significance. The other two variables affecting demand are average income and tariff rate. The former shows a significant positive relation with demand while the later shows a significantly negative impact on demand.

Answer B

1. The impact of tariff on demand for energy bars can be traced from the regression result. The result shows the estimated coefficient for tariff rate is -6.457. This signifies an inverse relationship between the energy demand and tariff rate. Therefore, as the tariff rate increases demand for energy bars go down. With increase in the tariff rate, the demand for energy bars decreases by 6.45%. The variable is statistically significant as implied by a significant P value of 0.000. The trade minister should be informed regarding the adverse impact of the tariff on demand and sales of energy bars of Schmeckt Gut.

2. Tariff is the tax imposed on imported goods. The above figure shows the effect of tariff in the market for energy bars. Before tariff, equilibrium in the market occurs at the point A as obtained from the intersection of demand and supply. Price before imposition of tariff is obtained as P₁and the corresponding quantity is Q₁. An import tariff reduces the supply in the import market, as the importers have to pay a tax in the form of import tariff. This is shown by a leftward shift of the supply curve from SS to S’S’. The new equilibrium point is at B. The price is at P₂ and the corresponding equilibrium quantity is Q_2.The high price has an adverse effect on demand for energy bars.

Answer C

Free trade is beneficial for both the country and the industry as well. The following figure shows the distortionary effect of tariff.

Without protectionism measure the energy bars are traded at world price given as P^World. The area under the demand curve above the world price measures the consumer surplus. The area above the supply curve and below the world price shows producer surplus. Now, with imposition of tariff price raises and becomes P^Tariff. In the post tariff, situation consumer surplus reduces, as the consumer now has to pay a high price. The producers receives a high price and this raises the producer surplus. However, the entire reduced consumer surplus is not transformedinto producer surplus. Government receives a tariff revenue as shown by the shaded region. There is loss of economic resources because of distortion effect of tariff (Irwin, 2015). When price of the imported goods increase, then demand for energy bars reduces in the domestic market. In the importing country, people demand less of the Schmeckt Gut’s energy bar and switch their demand to local brand. The local brand may not be as good as Schemeckt Gut and affect people health.

The result is supported from the regression result. The regression gives a negative coefficient for tariff rate implying a negative relation between tariff and Schmeckt Gut energy bar demand. The statistically significant negative coefficient for tariff reflects the dampening effect of tariff on average demand of energy bars.

References

Irwin, D. A. (2015). Free trade under fire. Princeton University Press.

Matusz, S. J., & Tarr, D. G. (2017). Adjusting to trade policy reform. In Trade Policies for Development and Transition (pp. 77-114).