TIMBER CRUNCH

The demand and the supply of timber for construction in Australia are given by

QD =120 - 20P

QS = 40P

We assume the market is perfectly competitive.

2.1. Compute the equilibrium price PCE and quantity QCE.

2.2. Plot on a graph: the demand curve, the supply curve, and the equilibrium price and quantity.

2.3: Calculate the price elasticity of demand and price elasticity of supply at the equilibrium price and quantity.

2.4. Calculate the producer surplus and consumer surplus in the equilibrium and illustrate them in a graph.

2.5. Due to Covid lockdowns, interstate transportation becomes difficult. Meanwhile, construction work is viewed as essential and therefore not affected by lockdowns. Use a demand and supply graph to explain how the lockdowns affect the equilibrium price and quantity.

2.6. After the equilibrium change in 2.5, the government introduces tax benefits for house renovation to stimulate the economy. As a result, there is an increase in construction projects. How do the tax benefits change the equilibrium in the timber market?

2.7. Bushfires are more likely to happen in summer. If a bushfire happens again in the coming summer, how would you expect it to affect the timber market?

2.8. Consider the setup in 2.1-2.4, and suppose the government introduces a subsidy of t=1 dollar to the buyers for every unit of timber purchased. Calculate the new equilibrium quantity, and use a demand and supply graph to explain how the subsidy affects the equilibrium price and quantity.

2.9. Calculate the deadweight loss caused by the subsidy in 2.8.

2.10. Given the subsidy in 2.8, calculate and illustrate in a graph the consumer surplus, producer surplus and subsidy expenditure.