ECW1101: Introductory Microeconomics Assignment, MUM, Malaysia A price ceiling that is below the perfectly competitive equilibrium price creates a deadweight loss because it leads

• Question 1

State whether the following statements are true, false, or uncertain, and briefly justify your answers.

1. A price ceiling that is below the perfectly competitive equilibrium price creates a deadweight loss because it leads to reduced supply and excessive consumption.
2. Suppose that wool and acrylic are substitutes for many consumers so that a rise in the world wool price leads to a rise in the price of acrylic. This means that a rise in the world wool price will tend to lead to a fall in the sales of acrylic.
3. The consumption of cigarettes in public places creates a negative externality. So a policy that bans all cigarette smoking will maximize social welfare.
4. The Melbourne flower market is perfectly competitive and the equilibrium price is $8 per bunch of flowers. If the government introduces a price ceiling of $10 per bunch on flowers then this will not affect the flower market.
5. If the elasticity of demand for cocaine is -0.2 and the government succeeds in reducing supply substantially. As a result, buyers will now spend more on cocaine.
6. Farmers suffer declines in their total revenues when they become more productive as a group.
7. The world’s poorest nations will have nothing to export as they are not productive in producing anything.
8. Economics is the study of how fairly goods and services are distributed within society.
9. Aunty Grace operates a business in a competitive market. The current market price is RM10. At her profit-maximizing level of production, the average variable cost is RM8 and the average total cost is RM12. Aunty Grace should continue to operate in the short run. Roads are considered public goods.

• Question 2
  Suppose that the market for laptops is perfectly competitive. The long-run
  the equilibrium price is $3000 for a laptop. Suppose that the laptop market is initially in long-run equilibrium. Assume that all businesses that make laptops are identical.

1. On a diagram, illustrate the market demand for laptops, the short-run and long-run market supply of laptops. The government decides to impose a $500 tax for each laptop sold by the firm.
2. Using an appropriate diagram, explain how the introduction of the tax will affect laptop producers in the short run and in the long run. Also, explain how the tax will affect the market price of laptops and the total number of laptops sold in the short run and the long run. Will the tax lead to a larger change in equilibrium quantity in the short run or in the long run? Fully explain your answer.
3. Donald, a politician, says that the introduction of a tax on laptops will make consumers worse off but will not lead to any deadweight loss in the laptop market in the long run. Could Donald be correct? If so, explain how and when Donald could be correct. If not, explain why Donald could not be correct. Fully explain

• Question 3
  Suppose the mango market in Malaysia is perfectly competitive. The cross-price elasticity of demand for mango with regard to the price of bananas is 0.4. Other things being equal, critically analyze the effects each of the following situations will have on the equilibrium price and quantity of mango if:

1. researchers found that bananas have cancer-fighting properties (use an appropriate diagram).
2. the price of fertilizer used for mango rises (use an appropriate diagram).
3. both events in (a) and (b) happen simultaneously (no diagram is required).

• Question 4

Farmers who grow apple trees provide a benefit to the beekeepers in Australia. The beekeepers get a good source of nectar to help make more honey. Suppose that the external benefit created by growing apple trees is $0.20 per apple. The perfectly competitive equilibrium price of an apple is $1.

1. On an appropriate diagram, label the equilibrium quantity in the Australian apple market as Qmarket Also show the quantity of apple that would maximize social surplus from the apple market as Qoptimum. Does Qmarket equal to the perfectly competitive equilibrium quantity? Fully explain your answer and label the area of deadweight loss
2. An economics student in the ECW1101 class suggests an alternative policy. She says that if the government sets a price floor of $1.20 per apple then this will maximize social surplus. Is she correct? If she is correct, show the social gain under the student’s policy compared to the perfectly competitive equilibrium. If the student is incorrect, show the deadweight loss under her policy.

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• Question 5
  Suppose initially Malaysia does not trade shuttlecocks. The market for shuttlecocks in Malaysia is perfectly competitive. The domestic demand curve for shuttlecocks is downward slopping. The domestic supply curve is perfectly elastic at a price of RM3 per shuttlecock, up to a quantity of 5000 shuttlecocks. Then the domestic supply curve is perfectly inelastic at the
  quantity of 5000 shuttlecocks. The perfectly competitive market price for shuttlecocks in Malaysia is RM5 per unit.

1. Using an appropriate diagram, illustrate the market for shuttlecocks in Malaysia without international trade. In your diagram, indicate the area of consumer surplus, producer surplus, and social surplus.
2. Suppose Malaysia starts to trade shuttlecocks with the rest of the world. The world price of shuttlecocks is RM8 per unit. Using a diagram, illustrate the market for shuttlecocks when Malaysia trades with the rest of the world, show any imports or exports of shuttlecocks. Who gains and who loses from Malaysia’s international trade in shuttlecocks and why?
3. Suppose the government decides to impose an RM2 tax per shuttlecock on the domestic production shuttlecocks whether they are sold domestically or overseas. Are Malaysian consumers or producers worse off due to the tax? How much revenue will the government make from the tax? What is the effect on social surplus? Explain your answer fully using an appropriate diagram

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