ECON10004: INTRODUCTORY MICROECONOMICS

In-tutorial TASKS FOR TUTORIAL 4

(Week beginning March 25)

TASK 1

The table below shows the percentage change in quantity demanded of sending
regular mail, of sending parcels, and of home broadband service in Australia from
a one-percent increase in each specified price (holding all other prices constant):

Effect on quantity of:

Sending Sending Home
regular mail parcels broadband
Sending regular -1.5 0 +0.01
Change in
mail
price of:
Sending parcels 0 -1 -0.11
Home +0.05 -0.7 -0.5
broadband

a) For which services is quantity demanded price elastic? Or price inelastic?

b) Which services are substitutes and which are complements?
c) How would an increase in the price of sending regular mail affect total revenue
to Australia Post from that service? How would an increase in the price of home
broadband affect total revenue to suppliers of broadband?

a)
Elastic: sending regular mail
Unit elastic: sending parcels
Inelastic: home broadband
b)
Substitutes: sending regular mail and home broadband
Complements: sending parcels and home broadband
c)
Regular mail: TR= P x Q, P increases by 1%, Q decreases by 1.5%, TR decreases by
0.5%
Home broadband: TR=P x Q, P increases by 1%, Q decreases by 0.5%, TR
increases by 0.5%

TASK 2

‘Sales of nicotine patches and gum increased more than 30 per cent following the
federal government’s 25 per cent tax hike on cigarettes, pharmacists say. And
calls to Victoria’s Quitline doubled after the April 30 rise pushed the cost of a
pack up from $14 to $16.50.’ (Kate Hagan, ‘Cigarette tax rise sends puffers over to
patches’, The Age, 10 June 2010, p. 3). Assuming that the tax was imposed on
sellers, answer the following questions.
a) Use the demand/supply model to explain how the higher tax on cigarettes will
affect the market outcome (price and quantity) in the market for cigarettes?
b) Why has the higher cigarette tax caused sales of nicotine patches and gum to
increase more than 30 percent?

30 %
ε= =1.67
(16.50−14)/16.50
Cigarettes and gum are substitutes. Price elastic
TASK 3

Suppose demand for and supply of labour in Australia are

Demand: LD = 2000 – 50W
Supply: LS = 1000 + 50W,
where, Demand and Supply are expressed in total hours worked per week, and W
= hourly wage rate (dollars per hour).

a) What would be the equilibrium hourly wage rate and quantity of labour
employed in the absence of any government intervention in the market?
b) At the market equilibrium, what are the elasticities of labour demand and
supply?
c) Suppose that the Australian government introduces a wage subsidy of $2 per
hour for workers. What will be the effect on the market outcome?
d) Draw a graph to illustrate your answers to parts a) and c).

a)
LD = LS
2000 – 50W = 1000 + 50W
1000 = 100W
W=10
L=1500
dQ P 10 1
|
ε D= ||
× = −50×
dP Q
=
1 500 3|
dQ P 10 1
|
ε S= ||
× = 50 ×
dP Q |
1500 3
=
b)
WS=WD + 2
2000 – 50WD = 1000 + 50(WD+2)
2000 – 50WD = 1000 + 50WD + 100
100WD = 900
WD = 9
WS = 11
L = 1550

Before subsidy After subsidy Change

Consumer surplus A+B A+B+E+F +E+F
Producer surplus E+G E+G+B+C +B+C
Gov. Subsidy 0 -B-C-D-E-F -B-C-D-E-F
DWL -D

Before subsidy After subsidy Change

Consumer surplus 22 500 24 025 1 525
Producer surplus 12 500 14 025 1 525
Gov. Subsidy 0 3 100 3 100
DWL 50