Assessment task 2 – Market failure, elasticities and indirect taxes (20%)
Question 1
Part A
Product X has the following demand and supply functions:
Qd = 30 – 2p
Qs = -10 + 6p
The government does not cu
ently place indirect taxes on Product X. The production and consumption of Product X, however, is considered to be undesirable. The government subsequently places an indirect tax on the product which creates a producers price of $4. Product X also has a coefficient of income elasticity of +2
Use the above information to :
i. Draw a demand and supply graph illustrating the market for Product X both before and after the imposition of the indirect tax.
(2 marks)
ii. Calculate the tax per unit and total tax collected by the government.
(1 mark)
iii. Calculate and explain consumer surplus, producer surplus and deadweight loss before and after the imposition of the indirect tax.
(3 marks)
iv. Calculate the price elasticity of demand for Product X (use the arc method to calculate elasticity)
(1 mark)
v. Calculate and explain the burden of the tax. Discuss the relationship between the burden of the tax and the coefficient of elasticity calculated in part iv.
(2 marks)
XXXXXXXXXX = 9 marks)
Part B
vi. The government increases direct (income) tax by 10% and this decreases average disposable income by 3%. Use the above demand and supply functions as a guide to discuss the impact of this policy on the demand for Product X.
(1 mark)
vii. Explain whether the government is likely to reduce indirect taxes or increase direct taxes in order to discourage the consumption of Product X.
(2 marks)
(1 + 2 = 3 marks)
( 9 + 3 = 12 marks)
Question 2
Small Scale Solar Power Energy
The average price of a 4KW solar panel system is approximately $4500 in Victoria. The Victorian Government has introduced the “Solar Homes Program” which provides eligible households with a government rebate of approximately $2300 to install a home solar system. This rebate is paid to the installer of the solar system. Households with solar panels can, in addition, receive a feed-in rebate (or cash return) of approximately 12 cents per kilowatt hour for any unused solar energy which is returned to the state electricity grid or supply.
Sources: Department of the Environment and Energy, Australian Energy Statistics, Table O, March 2019 and The Clean Energy Council of Australia
Use the above information to:
I. Discuss the market failure evident in this industry. Your answer should include a discussion of the most significant economic concepts relating to this market failure. Concepts that should be included but not limited to are: allocation of resources, type of externalities, co
ective measures by the government, how market failure arises.
(4 marks)
II. Draw a graph for the market for solar systems and energy which demonstrates and illustrates the market failure discussed in part (i) and the intended effect of the government policy outlined in the above question.
(2 marks)
III. Discuss and graphically illustrate how the above government policies are likely to affect the market for non-renewable sources of electricity, such as coal fired power (fossil fuels). In your answer you should identify two relevant conditions (determinants) of demand and two relevant conditions (determinants) of supply in the market for non-renewables.
(2 marks)
XXXXXXXXXX = 8 marks)
Total Assessment 2 marks = 12 + 8 = 20 marks
Prices and Markets Econ1275 – Spring 2019 XXXXXXXXXXpg. 2
ASSESSMENT 2 – PART 1 – DEMAND, SUPPLY AND EQUILIBRIUM
1. Match the scenario below with the co
ect graph and identify the condition (determinant) of demand or supply that changes.
(i) Market for Volkswagen cars. Volkswagen is caught manipulating emissions data from some of their vehicles to boost “green” credentials.
(ii) Market for Normal potatoes. Sweet potato crops are wiped out in the Queensland floods.
(iii) Market for Gold. Several companies set up operations to find gold following the growth in gold prices.
XXXXXXXXXX = 3 marks)
2. (a) Assume Mr Gazelakis’ income is $1,000 a week and he has the demand schedule in the table below for goods X and Y. The demand schedule for good X is shown in columns 1 and 2 and for good Y in columns 4 and 5 respectively. Assume the price of X is $3 and the price of good Y is $9.50.
(i) How much X and Y will Mr Gazelakis buy?
XXXXXXXXXX = 1 mark)
(b) Suppose that as a result of a $100 weekly pay rise, Mr Gazelakis’ quantities demanded for good X become those shown in column 3 and for good Y those shown in column 6.
(i) How much X and Y will he buy now, assume ceteris paribus?
XXXXXXXXXX = 1 mark)
(c)
(i) What type of good is X? Explain.
(2 marks)
(ii) What type of good is Y? Explain.
(1 marks)
(d) Consider now another scenario, goods A and B. The price of good A rose and as a result, the demand for good B also rose. What type of goods are A and B? Explain
(1 mark)
Demand for X (per week)
Demand for Y (per week)
1
2
3
4
5
6
Price (in $)
Quantity demanded
Quantity demanded
Price
Quantity demanded
Quantity demanded
4.00
10
0
10.00
4
6
3.50
20
10
9.50
5
7
3.00
30
20
9.00
6
8
2.50
40
30
8.50
7
9
2.00
50
40
8.00
8
10
1.50
60
50
7.50
9
11
1.00
70
60
7.00
10
12
XXXXXXXXXX = 7 marks)
3. In July 2018, vandals in Farmland poisoned ten million tomato seedlings by putting he
icide into the i
igation water. The seedlings were killed. These seedlings would have produced many of the tomatoes that were planned to be sold in Farmland in October 2018. For each of your answers below, identify the condition (determinant) of demand and/or supply and the impact on the equili
ium price and equili
ium quantity of the product.
(a) Using a demand and supply diagram, consider the effect of the poisoning of the tomato seedlings on the market for tomatoes in Farmland in October 2018.
(2 marks)
(b) Do you believe there would be any effect on the market for salads? How may restaurant owners respond with regards to the price of salads? Explain.
(2 marks)
(c) Do you believe there would be any effect from the poisoning of tomato seedlings on the price and quantity of lettuce? Explain.
(2 marks)
(d) News reports suggested that the price of tomatoes would only rise in October. There would not be an effect in August. Do you think this is co
ect? Explain.
(2 marks)
(e) Suppose now that as a result of the poisoning scare, people also prefer to buy less tomatoes. How would your answer be different to (a) above? Consider the impact on the equili
ium price and quantity of tomatoes.
(2 marks)
XXXXXXXXXX = 10 marks)
XXXXXXXXXX = 20 marks)
Introduction to Microeconomics and Markets
Topic 2: Markets in operation - demand, supply and equili
ium
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Topic 2
The Elementary Theories of Demand, Supply and Equili
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ECON 1247
Topic 2: Markets in operation - demand, supply and equili
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1
Topic 2: Markets in operation - demand, supply and equili
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Textbook References for topic 2
Hu
ard, Garnet, Lewis and O’Brien, Microeconomics,
Chapter 3
ECON 1247
Topic 2: Markets in operation - demand, supply and equili
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Learning Objectives:
Discuss the variables that influence the demand for goods and services.
Discuss the variables that influence the supply of goods and services.
Explain how equili
ium in a market is reached, and use a graph to illustrate equili
ium.
Use demand and supply graphs to predict changes in prices and quantities.
Distinguish between a change in quantity demanded and a change in demand.
Distinguish between a change in quantity supplied and a change in supply.
Source: Objectives 1- 4 from Hu
ard et al, Microeconomics 3rd Edition, Pearson, 2015
ECON 1247
Topic 2: Markets in operation - demand, supply and equili
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Topic 2: Markets in operation - demand, supply and equili
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Topic 2: Markets in operation - demand, supply and equili
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Demand relates to the behaviour of consumers or buyers in the market.
Demand theory is the study of :
which goods & services consumers purchase
the quantity of goods & services consumers purchase
the factors which determine consumer behaviou
how consumers react to changes within the market
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Topic 2: Markets in operation - demand, supply and equili
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The Definition of Demand
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The Law of Demand reflects
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The Income Effect
Diminishing Marginal Utility
The Substitution Effect
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Three reasons why demand slopes downwards
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Topic 2: Markets in operation - demand, supply and equili
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The Demand Schedule
A table showing the quantity demanded of a product at various prices ( ceteris paribus )
Demand Schedule for Chocolate Bars
Price Qty demanded
$1 500