AP1EE3 Autumn 2020: Week 7 summative assessment

Attempt all questions

Check list, please check each box to confirm, like this X

Honour code: This is all my own work, I may have referred to textbooks, lecture
notes, screencasts etc. as is permitted, but I have NOT discussed this with anyone
else, whether or not they are enrolled in this module
I have attempted all the questions and am using this document to type/draw my
answers.

I have NOT put my name on my test paper

I will leave plenty of time to submit by 1200 hours GMT on Friday 13 November

I understand that there are severe penalties in terms of marks deducted if I hand in
late, and that this is not under the control of my lecturer
If I have any personal circumstances that make it not possible for me to do this
assessment, I will contact Prof Robinson and student services with, where possible,
evidence, as soon as is possible

Some questions ask you to draw a graph. You can choose to do this in several ways. In
“Word” you can go to “Draw” and use the pens and draw freehand (wobbly lines will be
permitted) on the “graph paper” I provide below; you can draw with a trackpad; you can draw
the graphs on a separate piece of paper and take a photo with your phone; you can draw in
Excel and cut and paste the graph. If the graph is a little scrappy, you will not lose marks. If it
is very scrappy, you might lose marks.

1
Q1. A new product called TryME is being introduced to the market.

a. Using the data below plot the supply curve for the product, using the graph paper
below, or you are welcome to use Excel or a separate piece of paper and take a photo
of your graph and upload onto this answer sheet. [5 marks]

Price of TryME 0 1 2 3 4 5
Supply of TryME 0 2 4 6 8 10

No-one is quite sure what the demand will be, but a group of market researchers have done
some research and think that the demand curve is as follows.
Price of TryME 1 2 3 4 5
Estimated demand for TryME 8 6 4 2 0
b. Plot this demand curve on the same graph that you plotted the supply curve.
[5 marks]
c. For this supply and demand curve, what is the equilibrium price and quantity
demanded [5 marks]

d. The government is worried that TryME is causing social unrest and decides to ban the
product. There is no punishment for people who buy and consume “TryMe”, but those
supplying TryME, if caught, can be fined. On the same graph, show how the demand
and supply curve might shift in response to this ban, and the impact on the
equilibrium price and demand. Provide a brief and plausible explanation of your
answer. [150 words maximum] [15 marks]

e. Suppose that the government now realises that TryME is actually a health product and
wants people to consume more of it. It legalises TryME and launches an advertising
campaign. What is likely to happen to the demand curve. Provide a brief explanation.
[100 words maximum] [10 marks]

2
16 16

14 14

12 12

10 10

8 8

6 6

4 4

2 2

0 0
0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16

[Maximum available marks for Q1: 40] End of Question 1

3
Q2. Consider the figure below that shows supply and demand for rice, the key staple in a
small lower-income country. Prices are in dollars, and quantities are in tons. The country
cannot trade with other countries.
a. What is the equilibrium price and quantity for rice [5 marks]

b. The government is worried that the price of food is too high and so sets the price at 16
dollars per ton of rice.
How much rice is demanded by consumers at this price and how much is supplied by
farmers [5 marks]

c. Is there a surplus or deficit of rice? [5 marks]

d. In this situation, if the government keeps the price at 16 dollars per ton, what do you
think might plausibly happen over the following days and weeks. Explain your
answer.
[200 words maximum] [15 marks]

4
 50
48
46
44
42
40
38
36
34
32
30
28
Price ($)

26
24
22
20
18
16
14
12
10
8
6
4
2
0
0 2 4 6 8 10 12 14 16 18 20 22 24 26

Quantity ('000 tons)

e. A different government is worried that farmers are very poor and wants to support
them. This government decides to set a price of 40 dollars per ton for rice in the
country. Using the graph above, at this price how much is demanded by consumers in
the country, and how much supplied by farmers. [5 marks]

f. The government must buy all the rice at the price of 40 dollars per ton that the
consumers do not buy. What might the government do with this rice that it has
bought. What do you think the impact on food security might be in this country from
this policy and why. Explain your answer.
[200 words maximum] [15 marks]

[Maximum available marks for Q2: 50] End of Question 2

5
Q3. This question refers to the graph below. SCREENCAST 5
A country’s demand for wheat is given in blue below, and various possible supply curves in
orange. Just before harvest time, farmers anticipate a countrywide harvest of 8 million tons.
However, there is a bumper crop due to last minute rains and sun, and the actual harvest is 12
million tons.
a. Assuming that total harvesting costs do not change, and using the concept of
elasticity, explain why farmers might not actually be happy with this bumper crop.
[150 words maximum] [10 marks]

b. Now assume that again farmers just before harvest time anticipate a country-wide
harvest of 8 million tons, but this time there is a pest attack and the actual harvest falls
to 6 million tons. Again assuming total harvesting costs do not change, explain
whether farmers are better or worse off. [150 words maximum] [10 marks]

c. How might your answer change, if at all, depending on whether all farmers are
affected in the same way by the pest attack, or if some farmers are affected and others
are not.
[150 words maximum] [10 marks]

6
 50
48
46
44
42
40
38
36
34
32
30
28
Price ($)

26
24
22
20
18
16
14
12
10
8
6
4
2
0
0 2 4 6 8 10 12 14

Quantity (million tons)

[Maximum available marks for Q3: 30] End of Question 3

7
WEEK 5
Q4. The figure below shows Alex’s indifference curves with respect to clothes and food.
Alex has a budget of £80 that they can spend on clothes and food. Their indifference curves
are shown on the graph below. Suppose clothes and food both cost £10 per unit and that Alex
always spends all their budget and aims to maximise their utility.
a. Approximately how many units of food and how many units of clothes do they buy.
Show this on the graph [5 marks]

b. Suppose the price of clothes falls to £5 per unit, approximately how many units of
food and clothes does Alex now buy [5 marks]

c. Suppose the price of food also falls to £5, approximately how many units of food and
clothes does Alex now buy [5 marks]

d. Assuming the original price of food and clothes of £10 per unit, what budget would
Alex need to afford the food and clothes that they buy in part “c”. Explain your
answer briefly [100 words max] [5 marks]

e. If the country launched an advertising campaign to encourage people to buy food

rather than clothing, what on the graph might plausibly change and why? Explain
your answer.
[150 words max] [10 marks]

8
 16

14

12

10
Units of clothes

0
0 2 4 6 8 10 12 14 16

Units of food

[Maximum available marks for Q3: 30] End of Question 4