ECON1001 Tutorial 3 S1 2014

Tutorial 3, Week 4
PART A Questions to be discussed in tutorial, NO answers are provided on BB. 1. Other things being equal, explain the effect each of the following situations will have on either the demand or supply of fish. Explain also what the effect will be on equilibrium price and quantity. In each case, draw a diagram and give some reasoning. a) The government is concerned about the sustainability of fish stocks and imposes limits on the number of boats that can fish. b) Scientists discover that Omega-3 Fatty Acids in fish reduce the risk of heart disease. c) The price of chicken increases due to an outbreak of bird flu. d) Low paid individuals (those earning less than $40,000 per annum) are given a tax cut that increases after tax income. e) A new, better net is designed for trawlers. 2. Consider the supply and demand curves for avocados. Supply curve: Demand curve:
b Where QD ( QSb

a = 2 p 20 QS
a = 100 p QD

) is the market demand (supply) for (of) avocados and P is price

of avocados. a) In a clear well labelled diagram, draw the supply and demand functions for this market. Find the equilibrium market price and quantity and indicate in the diagram. Note for later reference, we will simply refer to this equilibrium as A. b) Because of the dry winter, many avocadoes have failed to develop so the supply curve changes. Assume the new supply curve is given by the following:
a = 2 p 35 QS Supply curve: (i) Show the new supply curve and original demand curve in a new diagram. What changes have occurred in terms of demand and supply?

c) Assume now that scientists discover a new compound in avocados which they name Greeno. Greeno has anti-ageing properties when applied in copious amounts to the skin, absolutely no side effects and causes an increase in demand so the new demand curve is as follows:
a (ii) Demand curve: Q D = 130 p Show the new demand curve on a diagram and find the equilibrium in the market when the supply and demand curve is given y equations labelled (i) and (ii). Call this market equilibrium B.

d) Discuss what has happened between market equilibrium A and market equilibrium B. Relate this to the discussion in lectures.

ECON1001 Tutorial 3 S1 2014

3. Consider the following two demand curves:

Qd = 100 4 p Qd = 40 p
Draw both demand curves in price and quantity space. Which demand curve is steeper? For both demand curves calculate own price elasticity of demand when price increases from $20 to $21.

4. Discussion question. The case studies will help you understand how the concepts discussed in class are applicable to a range of real world issues and problems. The required case studies are part of the material examinable. (Required) Read CASE STUDY 2.5 Reducing child labour: which policy works best? and answer question 3 on p. 77 of the Case Studies text book. PART B some of these problems will be discussed in the tutorial, as far as time allows. Brief answers will be provided to students on BB.
5. Consider the following demand curve for flat screen televisions:

Qd = 10000 2 p
Draw this demand curve. Using the arc elasticity formula (or the mid-point formula), find the own price elasticity of demand when the price changes from: (i) $900 to $1000 (ii) $1900 to $2000 (iii) $2900 to $3000 (iv) $3900 to $4000 In each case, interpret what the elasticity measure means. How does elasticity change as you move up and to the left along the demand curve? What happens to the slope of the demand curve as you move up and to the left along the demand curve? 6. Consider the following demand curve for flat screen televisions:

Qd = 10000 2 p
Draw this demand curve. Using the point elasticity formula, find the own price elasticity of demand at the following price: (i) $1000 (ii) $2000 (iii) $2500 (iv) $3000 (v) $4000 In each case, interpret what the elasticity measure means. How does elasticity change as you move up and to the left along the demand curve? What happens to the slope

ECON1001 Tutorial 3 S1 2014

of the demand curve as you move up and to the left along the demand curve? Relate these to how revenue (or expenditure) is affected for a 1% change in price. 7. HGLO problem 2, p. 113. 8. HGLO question 10, p. 114.