QUESTION 1

The market for bananas has the following demand and

supply functions
Qd = 10 – 2P + Y
Qs = 2 + P + 0.5W
where Q is quantity, P is price, Y is income and W is an
index of weather.
a) Suppose Y = 1 and W=2, specify the demand and
supply curves, show them on a graph, and derive
the equilibrium price, quantity and producer
revenue [7marks]
when y=1
Qd= 10-2p+1=11-2p
when w=2
Qs=2+p+0.5*2=2+p+1=3+p
Let Qs=Qd
Equilibrium quantity= 17/3
Equilibrium price = $8/3
Producer revenue= equilibrium
quantity * equilibrium price
=17/3 * 8/3=$15.1

b) Assume that production is negatively affected by

a cyclone. Generate a new supply function
accounting for the cyclone shock and assess the
effects of poor seasonal
conditions on the market
outcomes P, Q and revenue.
[4 marks]
As supply is affected by the
index of weather, when cyclone
occurs w decreases. There is a
shift in supply curve to the left.
Let w=-4
Qs’=2+p+0.5*-4=2+p-2=p
Let Qs’=Qd
Equilibrium price= $11/3
Equilibrium quantity= 11/3
Producer Revenue=P*Q= (11/3)*(11/3)=$121/9

c) Assess the effects of a doubling of income on

market outcomes [4
marks]

Doubling income, therefore y=2

Qd’=10-2p+2=12-2p

Doubling income shift in

demand curve to the right.
Price increases and quantity
increases.

QUESTION 2
Assume that the market for cotton clothing is
perfectly competitive. WeaveLand is a net exporter of
cotton clothing.
Assume that the world price for cotton clothing
decreases by $10 per unit, from WP1 to WP2, because
producers in SpinLand have developed a more efficient
way of producing cotton clothing. Suppose WeaveLand
continues to be an exporter of cotton clothing after
the change.

a) Use a graph and explain how this decrease in the

world price will affect the equilibrium outcome in
the market for cotton clothing in WeaveLand
 (indicate new price, new quantity supplied, new
quantity demanded, new exports). [9 marks]

As Weaveland is an exporter, its international

market price has to be greater than its equilibrium
price because they want to earn an income from
exporting. Originally at Pw1 its exporting is
between Qd1 to Qs2, however due to a decrease
in world price of $10 to Pw2, it has generated a
new export market from Qd2 to Qs1. This change
in the world price forces Weaveland’s supply
decrease and demand decrease from Qs1 to Qs2
and Qd1 to Qd2. Therefore, although its producer
revenue may decrease, however as Weaveland is
an exporting country in the global market, its
world price will not be lower than its domestic
prices as at the equilibrium point to ensure that
income is generated from exporting. This shows
an excessive surplus market.
b) How will the well-being of WeaveLand consumers
of cotton clothing and WeaveLand suppliers of
cotton clothing be affected? What is the effect on
total surplus in the market for cotton clothing in
WeaveLand? [6 marks]
 W1 W2 Chang
e
CONSUME A A+B+C+D B+C+D
R
SURPLUS
PRODUCE B+C+G+F+J+K+H G+F+J+H+I+K -B-C
R +I
SURPLUS
DWL D+E E -D
TOTAL A+B+C+G+F+J+K A+B+C+D+G+F+J+H -D
SURPLUS +H+I +I+K

When world price is at w1, consumer surplus has a

benefit of area A, at W2 there is a benefit of area
A+B+C+D, and there is a change from W1 to W2 of
+B+C+D.
Producer surplus at W1 has a benefit of area
B+C+G+F+J+K+H+I, and at W2 the area is
G+F+J+H+I+K, and there is a change of -B-C in area.
Dead weight loss when world price is at W1 is D+E,
and when world prices decrease by $10 to W2 is E.
There is a change of -D.
Total surplus at W1 is A+B+C+G+F+J+K+H+I, and at
W2 is A+B+C+D+G+F+J+H+I+K. And there is a change
of -D in total surplus.
As a result of the world change, total surplus loses
area D.

The c) government of WeaveLand announces that it

will introduce an export subsidy per unit of cotton
clothing exported by WeaveLand suppliers. The per-
unit export subsidy amount will be $10 per unit of
production that is exported to the international
market.
国家的 subsidy 往右移， 但是 world price 不变

Will the new subsidy (whose amount is equal to the

decline in world price) offset the effect of the
decrease in world price? Will well-being in WeaveLand
be the same as before the world price decrease?
Explain by calculating the change in consumer
surplus, producer surplus, and total surplus.
[10 marks]

d) Would domestic consumers in WeaveLand pay the

subsidy-inclusive price or internationally at the lower
world price, WP2? Does the government subsidise the
units of clothing sold to the domestic market?
[5 marks]

QUESTION 3
Assume that OzStan uses child labour in the
production of tennis balls. Given the following labour
demand and supply functions

Qd=10-4w
Qs= 2+¼ w
 a) Draw a graph of the labour market of tennis balls
[2marks]

b) At equilibrium Q* w*, are demand and supply price

elastic? [4marks]
At the equilibrium point.
Equilibrium quantity 42/17 and equilibrium price is
32/17.
dQD P∗¿
PED= dP
X
Q∗¿ ¿
¿

dQD
=−4
dP
32
17 −64
Therefore PED= -4x 42 = 21
17
PED is less than 1, therefore the demand and supply is
price inelastic.

c) A new policy is implemented with the aim of

reducing child labour wages. What type of policy
would be more effective: a demand-side (ban on
 child labour) or a supply-side policy (providing
monetary incentives for parents to keep children
at school)? Why? Explain your answer by providing
a hypothetical new demand and a hypothetical
new supply and calculating the new equilibrium
price and quantity traded. [9marks]

The new policy aims to reduce child labor wages.

Looking at the demand side, ban on child labor, it will
decrease labor, decrease demand and shifts the
demand curve to the left, those quantity decreases.
On the other hand, from a supply side, it is providing
monetary incentives for parents to keep children at
school, therefore, the supply curve shifts right, and it
increases wages and decreases quantities. Therefore
a demand side will be more effective, as the supply
side policy will increase child labor wage, which is
completely opposite to what the aim of the policy is.
New policy: Reducing child labor
A demand side (ban on child labor wages)
Decrease labor—— decrease demand —— shift demand curve to the left—— quantity decrease

A supply side (providing monetary incentives for parents to keep children at school)
Shift right————increase wages—— quantity decrease

A supply side