Question 1 - You have been hired as a business/economic analyst to help determine which suburb in your local city will exhibit the greatest demand for a new gym. Assume that gym memberships are a normal good. Use your knowledge of the determinants of demand to suggest four economic variables whose values could be collected from each suburb to help determine where gym membership would be greatest.

Question 2 - Assume the demand curve for two-litre bottles of Coca-Cola is downward sloping and the supply curve is upward sloping.

a. Draw a diagram showing the monthly metropolitan market for two-litre bottles of Coca-Cola in Australia in 2022 when the equilibrium price is $2.85 per bottle and 4 million bottles were bought and sold. Include a title and label the demand curve, supply curve, equilibrium price and quantity.

b. Explain why $2.00 per bottle is not an equilibrium price. If the market price were temporarily at $2.00 per bottle explain how the market through the price mechanism would return to equilibrium.

Read the following news article to answer the remaining questions.

https://7news.com.au/lifestyle/food/woolworths-and-coles-shoppers-irate-over-absolutely-outrageousprice-rises-on-pepsi-coke-and-kirks-buys-c-5631003

c. Draw a new diagram for the monthly metropolitan market for two-litre bottles of Coca-Cola in Australia in 2022. First draw the initial demand and supply curves, equilibrium price and quantity for January before the price increase. Explain whether the price rise in February in the news article is a result of a movement in the demand curve or the supply curve and why. Draw these changes in your diagram and explain the change in the equilibrium price and quantity after the price increase.

d. If Australian consumers of two-litre bottles of Coca-Cola believed that the price would fall and be lower in March than in February of 2022, would the February demand curve for twolitre bottles of Coca-Cola change? If so how and what would be the consequence on the equilibrium price and quantity in February 2022? {You do not have to draw a diagram for this question}.

Question 3

Use the estimates of elasticities for Australia in the table below which is a modified version of Table 4 from Ulubasoglu et al (2016) to answer the following questions.

Food Price Elasticity of Demand Income Elasticity of Demand Milk 0.233 0.371 Other Dairy products 0.999 1.004 Bread 0.733 0.449 Rice 2.657 1.196 Beef and veal 1.353 1.636 Mutton and lamb 1.420 1.637 Pork 2.203 1.592 Other meat 0.846 1.259 Poultry 1.388 1.381 Fresh fruit 1.049 0.755 Fresh vegetables 0.526 0.888 Preserved fruit 0.439 1.516 Preserved vegetables 1.383 1.230 Sugar and jam +1.018 1.187 Margarine 1.696 0.938 Source: Table 4 from Ulubasoglu, M., Mallick, D., Wadud, M., Hone, P. and Haszler, H., 2016. "Food demand elasticities for Australia". Australian Journal of Agricultural and Resource Economics, 60(2), pp.177-195

a. Which food listed in the table is least responsive to price changes? Interpret the good's price elasticity of demand. Why is the demand for this good not very responsive to price changes?

b. Given the range of values own-price and income elasticities can take, can you see any estimates in Table 4 that appear to be invalid? If so, explain why?

c. If the price of poultry were to increase by 20%, estimate the percentage change in the demand for poultry.

d. Which foods in the table are necessities? Use the income elasticity of demand to explain why these goods are considered necessities.

e. If the Australian economy enters a boom and incomes grow by 10%, which three goods in the table, would you expect to have the greatest increase in demand? Explain why.

Question 6 -

a. Excise tax on alcohol in Australia is collected from the alcohol producers who sell in the wholesale market for alcohol. The buyers in the wholesale market for alcohol are the sellers in the retail market and one of their primary input costs is the wholesale price of alcohol. Australian households are the buyers in the retail alcohol market.

i. Explain what determines whether it is sellers or buyers that effectively pay the excise tax in the Australian wholesale market for alcohol.

ii. Explain what determines whether it is sellers or buyers that effectively pay the tax in the Australian retail market for alcohol.

b. Why do most economists advocate only using the income tax or welfare system to address concerns about the increased cost of living rather than interfering in efficient markets for goods and services?

Question 7 -

Currently, 5 fishers send one boat each week, to fish the stock of Banded Morwong from St Helens in Tasmania. Each boat currently returns with a catch worth $2,200. It costs $1,500 per boat per week to send it out fishing. Every additional boat beyond 5, that is sent to fish Banded Morwong results in the catch falling by $150 for all boats for all Banded Morwong fishers. For example, if the 5 fishers send a total of 7 boats to fish, then each of the 7 boats returns with $1900 worth of catch. Assume the Tasmanian Banded Morwong fishery is not regulated.

a. Kylie is one of the 5 fishers and is considering sending out additional boats each week. If all other fishers continue to send one boat only, how many fishing boats should Kylie send out to maximise profit? Explain why.

b. Explain why Kylie has an incentive to send an additional boat to fish for mackerel, but that this is not socially optimal. Is there an externality when Kylie sends out an additional boat?

c. If all other fishers of Banded Morwong think the same as Kylie, how many boats will fish for Banded Morwong off Tasmania's east coast each week? How many $ of fish will be caught per boat?

d. Explain why the unregulated Tasmanian Banded Morwong fishery is a common resource and results in a "Tragedy of the Commons".

e. Suggest a policy that the Tasmanian Government could implement to red

QuesTION 8

a. Suppose that there are socially inefficient markets that have exhibited significant equilibrium price increases that have contributed to the cost of living in Australia. The government is keen to identify these markets and identify a policy that could bring price relief to consumers.

i. Explain what type of externalities: positive consumption, negative consumption, positive production or negative production, result in a market price that is higher than the socially efficient price.

ii. Suggest a policy the Australian government could enact that would assist socially inefficient markets, reduce or remove the externality in part i and provide price relief to consumers and explain how the policy would achieve this.

b. Suppose for every $1 of poppies grown in Australia that $0.05 of environmental damage is done from fertiliser entering river systems and other waterways.

i. Explain what type of externality growing poppies is causing.

ii. Explain why the social marginal cost of poppies is higher than the private marginal cost.

iii. Explain why the environmental damage from growing poppies causes a deadweight loss.

iv. Suggest a market-based policy that will eliminate the dead-weight loss and how it will achieve a socially efficient level of poppy production in Australia.

Question 9 -

Suppose a big noisy sports event is to be held at a public park in Launceston during December 2023. The event is estimated to contribute $360,000 in economic benefits, consisting of $160,000 in consumer surplus to those that attend and $200,000 in producer surplus to the firm organising the event. However, the sports event will also cause a $30 cost to each of the 6,000 local residents in the area in the form of excessive noise. Assume there are no other external costs or external benefits of the event. Assume that people who attend the sports event (the consumers) can not be contacted, taxed or be part of any bargaining.

a. Is it socially efficient for the noisy sports event to be held? Explain why or why not.

b. If the sports event and firm organising it had the right to excessive noise, would the concert be held? Explain who would be the "winners" and "losers" in this situation.

c. If the locals had the right to no excessive noise, explain a Coasean Bargaining solution that would allow the firm to hold the concert. Include in your answer why the firm would be willing to make any payment or offer and why locals would accept.

d. Suppose that it costs the firm $5 per local if they were to initiate contact with locals and make a payment or other arrangement. Alternatively, if locals initiate contact with the firm to make a payment or other arrangement it costs them $5 each.

i. If the locals had the right to no excessive noise, how much would it cost the firm to pay the locals $30 each? Would the firm be willing to and able to hold the concert in this case?

ii. Explain who should be assigned the property rights to the excessive noise to achieve the socially efficient outcome in this situation.

iii. Suppose now the people who attend the sports event (the consumers) can be contacted, taxed and be part of any bargaining, but any interaction with them will cost the firm, government, or locals $30,000. Provide and explain a solution that maximises social net benefits and has no "losers".