BUSINESS ECONOMICS (BUECO XXXXXXXXXXMICROECONOMICS ASSIGNMENT Semester 2, (9), XXXXXXXXXXInstructions: 1. You must attempt five (5) of the following eight (8) questions; 2. Each question is worth ten...

BUSINESS ECONOMICS (BUECO XXXXXXXXXXMICROECONOMICS ASSIGNMENT Semester 2, (9), XXXXXXXXXXInstructions: 1. You must attempt five (5) of the following eight (8) questions; 2. Each question is worth ten (10) marks. Therefore the assignment totals to fifty (50) marks; 3. These fifty (50) marks will be converted to a mark out of ten (10) as the assignment is worth ten (10) per cent of your assessment; 4. Please attempt to type your solutions for submission; 5. The due date for this assignment is specified in your Course Description; 6. Prepared by Paul McPhee (Course Coordinator) and David Spiers Question 1: (10 marks total) A group of rogue French farmers has gone on a furious egg breaking rampage, destroying tens of thousands on roads and pledging to smash many more in protest against low egg prices. “More than 100,000 eggs were destroyed in the Cotes d’Armor (a division of Northwest Brittany) a spokesman for the unnamed collective of angry poultry farmers told AFP. Poultry farmers in France have for months complained of rock-bottom egg prices due to overproduction – a problem that also affects other countries in the European Union. They say that current prices do not compensate for a rise in production costs or investments that they made as part of an EU directive of January 2012 to protect the well-being of laying hens. Their spokesman said that masked farmers had broken the 100,000 eggs overnight from Tuesday to Wednesday near Lidl supermarket and on a roundabout as reported in local media. “We will continue to destroy 100,000 eggs a day until Sunday and become more radical with inevitable collateral damage if the group’s demands are not met” said their spokesman”. He also said that destroying 100,000 eggs a day equated to “five per cent of the production” of poultry farmer members of the collective. The group called for France’s entire production to be reduced by five per cent to help raise prices, and asked the government to set up a specific area for eggs to be destroyed. According to Yves-Marie Beaudet of the egg section of the union that represents poultry farmers in Brittany, producers currently get paid 75 cents ($1.12 AUD) for a kilogram of eggs whereas the cost price is 95 cents. The UGPVB union says that the EU has “15 to 20 million” excess laying hens out of a total of approximately 350 million. (a) Explain and illustrate with a suitable diagram the cause(s) of low egg prices in France. (2.5 marks) (b) Explain and illustrate with a suitable diagram how the egg breaking rampage affects egg prices? (1.5 marks) (c) Explain and illustrate with a suitable diagram the impact on egg prices if demand fell by 5% (1 marks) (d) Would you consider the demand for eggs to be elastic or inelastic? Explain your reason. (2.5 marks) (e) Illustrate and explain with a diagram how can the Government intervene and correct this situation? XXXXXXXXXXmarks for diagram plus 1.25 marks for explanation XXXXXXXXXXQuestion 2: (a) Explain the concept of a concentration ratio. Is the concentration ratio in a monopolistically competitive industry likely to be higher than for a perfectly competitive industry? Explain your answer (6 marks) (b) Suppose the minimum point on the Long-run Average Cost (LRAC) curve of a soft drink firm’s lemonade is $1 per litre. Under conditions of monopolistic competition, will the price of a litre bottle of lemonade in the long-run be above $1, equal to $1, less than $1 or impossible to determine. Illustrate your answer using a diagram (2 marks for diagram plus 2 marks for explanation) Question 3: What will happen to the equilibrium price and quantity of butter in each of the following cases? Illustrate with a diagram and explain whether demand or supply (or both) have shifted and in which direction. (In each case, assume ceteris paribus). (a) A rise in the price of magarine; (1 mark) (b) A rise in the demand for yoghurt; (1 mark) (c) A rise in the price of bread; (1 mark) (d) A rise in the demand for bread; (1 mark) (e) An expected rise in the price of butter in the near future; (1 mark) (f) A tax on butter production; (2.5 marks) (g) The invention of new, but expensive, process for removing all cholesterol from butter, plus the passing of a law which states that all butter producers must use this process. (2.5 marks) Question 4: The diagram below illustrates a firm under monopolistic competition (a) Label the following curves: Curve I, Curve II, Curve III, Curve IV (1 mark) (b) Does the diagram represent the short-run or long-run position? (1 mark) (c) Is P3 the long-run equilibrium price? Explain your answer.( 1 mark) (d) What are the profit maximising output and price? (1 mark) (e) On the diagram, shade in the amount of profit made at the maximum-profit output (2 marks). (f) Draw new average and marginal revenue curves on the diagram to illustrate the long-run equilibrium that will occur after the entry of new firms into the industry (2 marks) (g) Explain the relationship between the AC, MC, AR and MR curves at this long-run equilibrium position? XXXXXXXXXXmarks) Question 5: (a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks) (b) Why are public goods not produced in sufficient quantities by private markets? (2.5 marks) (c) Which of the following are examples of public goods (or services)? Delete the incorrect option (1 mark each). (i) The Judicial system Yes/No (ii) Pencils Yes/No (iii) The quarantine service Yes/No (iv) The Great Wall of China Yes/No (v) Contact lenses Yes/No Question 6: (a) Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income elasticity of demand for a cabinet maker’s work is +0.4. Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a recession that reduces consumer incomes by 10 per cent. (2 marks) (b) How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other? (2 marks) (c) Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior; (3 marks total, 1.5 marks per part) YED= +0.5 and YED= XXXXXXXXXXd) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. (3 marks total, 1.5 marks per part) XED= XXXXXXXXXXand XED= XXXXXXXXXXQuestion 7: You are given the following data about two firms: FIRM A Quantity XXXXXXXXXXTotal revenue ($ XXXXXXXXXX60 Average revenue ($) ___ ___ ___ ___ ___ ___ ___ Marginal revenue ($) ___ ___ ___ ___ ___ ___ Total cost ($ XXXXXXXXXX 140 Marginal cost ($) ___ ___ ___ ___ ___ ___ Average cost ($) ? ___ ___ ___ ___ ___ ___ FIRM B Quantity XXXXXXXXXXTotal cost ($ XXXXXXXXXX XXXXXXXXXXAverage cost ($) ? ___ ___ ___ ___ ___ ___ Marginal cost ($) ___ ___ ___ ___ ___ ___ Price ($ XXXXXXXXXX XXXXXXXXXXMarginal revenue ($) ___ ___ ___ ___ ___ ___ Total revenue ($) ___ ___ ___ ___ ___ ___ ___ (a) Complete the two tables above. (4 marks) (b) Are these firms operating in the short or the long run? (1 mark) Firm A: short run / long run Firm B: short run / long run (c) Are these firms operating under perfect or imperfect competition? Firm A: perfect / imperfect (1 mark) Firm B: perfect / imperfect (c) What level of output will these firms produce in the short run? Firm A: (2 marks) Firm B: (d) How would you describe their profit positions? (2 marks) Firm A: Firm B: Question 8: (a) Discuss the following statement: ‘In the real world there is no industry which conforms precisely to the economist’s model of perfect competition. This means that the model is of little practical value’. (2.5 marks) (b) Illustrate with a diagram and explain the short-run perfectively competitive equilibrium for both (i) the individual firm and (ii) the industry; (2.5 marks for diagram and 2.5 marks for explanation) (c) Illustrate with a diagram and explain the long-run perfectly competitive equilibrium for the firm (2.5 marks).