This diagram illustrates the market for wheat in a hypothetical country, which is originally in equilibrium. a) How would a severe drought affect this market? Suppose the government wants to keep the price at P*. Why might they want to do this, and how might they achieve it? Suggest two policy instruments and explain how this would work. [7 marks] b) Suppose we are back at the original equilibrium. If the world price of wheat is at P', how will access to the international market affect the citizens of this country? [3 marks] Price EX P* P' Q* Quantity EXA This diagram illustrates a market for gym memberships in the fictional country called Straya. The unregulated equilibrium price and quantity of memberships is P and Q, respectively. Public health experts argue that too many of the citizens of Straya have a sedentary lifestyle, and advise the government to begin subsidising gym memberships in a bid to improve public health. a) Explain how this subsidy would affect producers and consumers. Who gains more and why? Comment on the price elasticity of demand for gym memberships (based on reason and the qualitative information provide here), and whether you think this policy likely to be effective. [5 marks] b) Comment on how this policy would affect social welfare and allocative efficiency. Is this a case of market failure or government failure? [5 marks] Price ($) p* P 13 C LL D to G E H EXA D Quantity