ECON6049 Economic Analysis
Session 2, 2020
Assignment 2
Due Date: 11.59pm Monday, 12 October 2020
Student Name:
Student Number:
Instructions: This assignment needs to be submitted via the Turnitin link on the unit iLearn page. The Turnitin link will only become available during week 6. The assignment must be converted and submitted as a PDF. To facilitate this I will upload the assignment as a Word document. Use this document as the master document that you will submit. Diagrams can be hand-drawn or created using software and inserted in to the master document. However, they can’t be taken from other sources and must be your own creation. When the master document is complete, convert it to a PDF by SAVING it as a PDF. Failure to follow these instructions may result in you receiving a mark of zero.
Submit the assignment by 11.59pm Monday, 12 October 2020 using the relevant Turnitin link for your class on the ECON6049 iLearn page. Your answers must represent your own work. Please note that no extensions will be granted. Late assignments will be accepted up to 96 hours after the submission deadline. There will be a deduction of 20% of the total available marks made from the total awarded mark for each 24 hour period or part thereof that the submission is late (for example, 25 hours late means a 40% penalty). The only exception are those students who experience illness or misadventure in relation to this task, they can apply for special consideration and if approved may be expected to undertake another assessment task.
Please note when using diagrams to illustrate answers you must still provide a written explanation of what your diagrams are showing. In addition, your diagram must be fully labelled and therefore you must label both axes, co
ectly determine the vertical axis and horizontal axis intercepts of lines, label the slope of lines.
1) (20 marks) Roberto works in a factory making electric cars. Cu
ently, his firm pays him $35 per hour and he works 35 hours per week. Each hour he works he experiences disutility of effort from working valued at $5 per hour. In addition, should Roberto lose his job the government will pay him an unemployment benefit of $15 per hour, for each hour he would otherwise work each week, for a maximum of 20 weeks. Prior to the coronavirus pandemic if Roberto lost his job the expected duration of unemployment before he would find another job is 10 weeks.
(a) (4 marks) Calculate Roberto’s (i) employment rent per hour and his (ii) total employment rent.
(b) (10 marks) With the advent of the coronavirus pandemic the economy has gone into recession causing Roberto’s expected duration of unemployment to increase to 30 weeks.
Furthermore, the dramatic increase in the expected duration of unemployment has resulted in psychological stress from unemployment valued at $3 per hour.
In the light of these developments re-calculate Roberto’s:
(i) Employment rent per hour (4 marks) and
(ii) Total employment rent (6 marks).
(Hint: It will be necessary for students to base their calculations on two periods, the first, covering weeks 1-20, when the unemployment benefit is available and the second, covering weeks 21-30, when the unemployment benefit is not available)
(c) (6 marks) Describe the relationship between the size of the employment rent and (i) the expected duration of unemployment (ii) the size of the unemployment benefit per hour and (iii) the size of the psychological cost of unemployment per hour.
2) (10 marks) Consider the Managing Director (MD) of a firm that produces a differentiated product which faces little competition from a few close substitute products. Recently, the Managing Director has been informed by government officials that a specific (per unit) tax will be levied on the firm’s product in the new financial year that is still 6 months away. The Managing Director during a consultation with you, his economic advisor, states that because the firm produces a product with few close substitutes it is a price-setter and thus will be able to pass on to its customers the full amount of the tax. He asks you to confirm whether his thinking on this matter is co
ect. Explain what you will tell the Managing Director.
3) (40 marks) Suppose that the market for cigarettes is a competitive market and is described by the following supply and demand functions:
Demand: QD = 100000 – 500P
Supply: QS = – XXXXXXXXXX2000P
Where Q is the number of packets and P is the price per packet of cigarettes.
(a) (6 marks) Calculate the equili
ium price and quantity and draw a diagram to illustrate your answer.
(b) (8 marks) Show on your diagram and calculate the size of the:
(i) Consumer surplus
(ii) Producer surplus
(iii) Total surplus
(iv) Deadweight loss
(c) (6 marks) Suppose the government wants to reduce the consumption of cigarettes to 50000 packets. What size specific (per unit) tax will the government impose on cigarette producers to achieve this outcome?
(d) (3 marks) What is the per unit incidence or burden of the tax experienced by consumers?
(e) (3 marks) What is the per unit incidence or burden of the tax experienced by producers?
(f) (10 marks) On a new diagram, show and calculate the size of the following after the introduction of the tax:
(i) Consumer surplus
(ii) Producer surplus
(iii) Tax revenue
(iv) Total surplus
(iv) Deadweight loss
(g) (4 marks) According to the supply and demand model is society worse off or better of as a result of the imposition of the per unit tax? Explain your answer.
4. (5 marks) Consider the following table from Unit 7 of the textbook. It shows the spending per week in each category of a US consumer whose total expenditure on food is $80, with typical spending patterns across food categories.
Suppose that the price of category 1, fruit and vegetable products, increased by 10%:
(a) By what percentage would he
his demand for fruit and vegetable products fall? (1 mark)
(b) Calculate the quantity she/he consumes, in kilograms, before and after the price change. (2 marks)
(c) Calculate his total expenditure on fruit and vegetable products before and after the price change. Has expenditure increased, decreased or not changed? (2 marks)