Treated pine timber is commonly used to build house frames in Australia. Use separate demand and supply diagrams to illustrate and explain the following impacts on the market equilibrium price and quantity of treated pine timber in each of two periods, ceteris paribus. Your diagrams should show a net increase in the price of treated pine timber in both periods.
Period 1- Use one diagram only (7.5 marks)
Government incentives lead to large tracts of pine forest plantations being used for carbon sequestration instead of being harvested for timber.
The price of iron ore used in producing steel house frames decreases.
Period 2- Use one diagram only (7.5 marks)
The average square metre size of new house constructions decreases due to an increasing trend of “downsizing”.
The First Home Owner Grant for purchasing or building a new home increases.
Question 2 (15 marks)
Hope U. Bounce operates a sky diving business. Hope has estimated the monthly demand for tandem skydives to be P = 2,250 – 1.75Q, where P is measured in dollars.
Currently Hope charges $325 per tandem jump. How many tandem skydives does she sell per month? (2 marks)
Hope’s business advisor suggests increasing the price of a tandem skydive to $360 to increase total revenue. Do you agree? Justify your conclusion based upon your estimate of the own-price elasticity of demand (use the mid-point method to calculate the own-price elasticity of demand). (5 marks)
The skydiving business also sells videos of each tandem skydive for $100. When the price of tandem skydives was $325, Hope calculated that 80% of customers purchased a video of their jump. However, when the price of tandem skydives increased to $360 this figure fell to 75%. Specify and calculate the elasticity that Hope can use to explain this phenomenon (calculate at the midpoints). Interpret its value. What does this elasticity value tell Hope about the relationship between tandem skydives and videos? (5 marks)
Based on your answers to parts 1, 2 and 3 of Question 2, should Hope increase the price of a tandem skydive to $360 to increase total revenue? (3 marks)
Question 3 (30 marks)
The daily market for childcare in New South Wales (NSW) in Australia can be described by the following demand and supply curves:
Demand: Q = 400,000 – 3125P
Supply: Q = -10,000 + 2000P
where P is the day long cost per child and Q is the daily number of children attending childcare facilities.
Construct the demand and supply graph for daily childcare in NSW. What are the equilibrium price and quantity in the market? (5 marks)
At the market equilibrium price, what would be the total daily revenue from childcare services? (1 mark)
Calculate consumer surplus and producer surplus. (5 marks)
The NSW government wants to encourage more mothers to re-enter the workforce and sets a $55 price ceiling on daily childcare in an effort to make it more affordable. Does this policy get more or fewer people to take advantage of childcare facilities? How many children would attend childcare facilities on a daily basis? Depict this on your demand and supply diagram. (7 marks)
Calculate consumer surplus, producer surplus, changes in consumer surplus and producer surplus, any transfer of surplus between consumers and producers, and any deadweight loss associated with the $55 price ceiling. Indicate these surplus areas on your diagram. (Hint: substitute the quantity of tickets supplied in part 4 into the demand equation to find the corresponding price on the demand curve.) Explain what the deadweight loss represents. (9 marks)
Does a price ceiling create an efficient and fair outcome in the market for childcare? Explain why or why not. What type of activity might the price ceiling encourage? (3 marks)
Question 4 (20 marks)
In order to generate tax revenue, suppose the government of a country is trying to decide between putting a sales tax on luxury cars or putting a sales tax on milk. In both cases assume the tax would be imposed on the sellers of the good. Acting as the Prime Minister’s economic advisor, answer the following questions and explain your answers using diagrams.
Which tax will have a bigger relative effect on the market price and which tax will have a bigger relative effect on quantity demanded in each market (assume upward sloping supply curves with the same own-price elasticities of supply in both markets)? (6 marks)
Which tax is likely to be more efficient and create the smaller excess burden (deadweight loss)? (7 marks)
Who will bear the burden of the tax in each market, producers or consumers? (7 marks)
Question 5 (20 marks)
1. Vinnie’s vineyard was established in 1990. The original investment was $100,000. Vinnie is seriously considering an offer of $1 million to sell the vineyard. The prospective purchaser is willing to employ Vinnie for $50,000 per year if Vinnie sells out. Vinnie estimates that he could earn 10% on the $1 million if he makes the right investments and figures that he is cu