Format: XXXXXXXXXXwords (for the whole assignment excluding questions and
reference list)
Marks:40% of overall assessment
Question 1 (10 marks) -Short Answer Question (references not
needed)
Most cities and
towns in Australia and many other places around the world are facing severe
water shortages. One demand management approach that has been popular among
policy makers over the years is pricing the water. Using the price mechanism
can help ensure that the water is allocated to its best uses and the price of
water reflects its full cost.
The table below
sets out hypothetical data on total demand and supply of water for residential
consumption in a typical city:
|
Price ($ per 1000
litres)
|
Quantity demanded
(Million litres per day)
|
Quantity supplied
(Million litres per day)
|
|
0.50
|
24.00
|
22.00
|
|
0.55
|
23.50
|
22.25
|
|
0.60
|
23.25
|
22.50
|
|
0.65
|
23.00
|
22.70
|
|
0.70
|
22.00
|
23.00
|
|
0.75
|
18.50
|
23.50
|
|
0.80
|
17.00
|
24.50
|
Based on the above
data, answer the following questions:
(a) If the
residential demand for water increases, but the water supply authority in the
city is capable of supplying only 22.50 million litres of water per day,
describe the situation in the market for water. (2 marks)
(b) What are the
key influences on the elasticity of demand for residential water use that you
think make its demand elastic at certain price ranges? (3 marks)
(c) If the
government imposed a $0.05 per 1000 litres ‘excise tax’ on producers for their
water supplies over all price ranges, explain, with the help of a graph, how
you would expect this to affect the water market and tax incidence. (5 marks)
Question 2 (10 marks)-Short Answer Question
(references not needed)
(a) Complete the
following table of costsforthe Pizza Company. (4 marks)
(b) Draw the total
cost curve on one graph. On another graph, draw the marginal cost, average
total cost and average variable cost curves. (4 marks)
(c) Are there
output levels that exhibit increasing returns to scale? (1 mark)
(d) Are there
output levels that display decreasing returns to scale? (1 mark)
|
Pizzas
|
Fixed costs
|
Variable costs
|
Total costs
|
Marginal costs
|
Average total costs
|
Average variable costs
|
|
0
|
$1000
|
$-----
|
|
|
|
|
|
200
|
$1000
|
$360
|
|
|
|
|
|
400
|
$1000
|
$840
|
|
|
|
|
|
600
|
$1000
|
$1440
|
|
|
|
|
|
800
|
$1000
|
$2160
|
|
|
|
|
|
1000
|
$1000
|
$3000
|
|
|
|
|
|
1200
|
$1000
|
$3960
|
|
|
|
|
|
1400
|
$1000
|
$5040
|
|
|
|
|
|
1600
|
$1000
|
$6240
|
|
|
|
|
|
1800
|
$1000
|
$7560
|
|
|
|
|
|
2000
|
$1000
|
$9000
|
|
|
|
|
Question 3 (20 marks) - Extended Response Question (references needed)
Many governments
around the world have implemented heavy taxes on soft drinks and other sugary
products in order to reduce the level of obesity among people. You are required
to write an essay to critically evaluate the effectiveness of this policy. Make
sure that you clearly address the following questions in your analysis.
(a) Using the
supply and demand model explain how a sugar tax could reduce the sales of soft
drinks (8 marks)
(b) Explain whether
the demand for soft drinks is elastic or inelastic (4 marks)
(c) Compare the tax
to alternative policies such as awareness creation programs and education
campaigns (4 marks)
(d) Critically
evaluate the effectiveness of the sugar tax as a policy in reducing obesity
levels (4 marks)