1. A government subsidy programme lowers the price of food to poor consumers from $3 per unit to $2 per unit. Assume that food and "all other goods" (AOG) are both normal goods for the typical poor consumer, who has a budget of only $12. Let the price of AOG be $1.

1a). Draw a graph to show and explain the change in food consumption resulting from the programme. Place food (F) on the horizontal axis and all other goods (AOG) on the vertical axis. Use the information given above to graph two budget lines. Place appropriate indifference curves of your choosing to illustrate the decisions of a representative consumer. (8)

1b). On your graph show the change in consumption attributable to the income and substitution effects of the programme. (4)

1c) Indicate on your graph how much the program costs the government for the representative consumer. (2)

1d) An economist claims that a poor consumer can be made better off by a lump sum transfer than by subsidising food.With reference to suitable graph, explain how this is possible. (6)

2) Answer the following questions in relation to the information in the document Market study into the retail grocery sector Final report - Executive summaryof the Commerce Commission of New Zealand which is available in the Supporting Resources for this task on Canvas.

2a) On page 6, the report comments on the intensity of competition between the major grocery retailers in New Zealand. The models of oligopoly presented in this course make predictions about competition. Explain in your opinion which of the models best predicts the "muted" competition noted in this case. (5)

2b) Discuss the evidence presented in the report which, in your opinion, establishes the excessive market power of the duopolists. (5)

2c) Which practices of the duopolists identified in the report would you suggest should be illegal? Why? (5)

2d) Discuss the advantages and disadvantages of Recommendation 13(page 17). (5)