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Question 2: Answer the following questions – 20 marks
Elasticity of Demand and Supply, and Income
(a)When July’s income increased from $1500 to $1800 a week, she increased her demand for concert tickets by 25 per cent and decreased her demand for bus rides by 6 per cent. Calculate July’s income elasticity of demand for (a) concert tickets and (b) bus rides. Show your calculation. Are the concert ticket and bus ride income elastic or inelastic? Is the concert ticket normal good or inferior good to July? Is the bus ride normal good or inferior good to July? Explain. (4 marks)
(b)If a 7 per cent fall in the price of sushi increases the quantity of wasabi demanded by 5 per cent and increases the quantity of sushi demanded by 3 per cent, calculate the price elasticity of demand for sushi and the cross price elasticity of demand for wasabi respect to the price of sushi. Does the elasticity indicate that sushi and wasabi are substitutes or complements? (3 marks)
(c)The price elasticity of demand for domestic banana is –0.50. How much would the price of domestic banana have increased if the demand for domestic banana decreases by 5 per cent? However, this price rise increases the quantity demanded for imported banana by 3 per cent. What is the cross price elasticity of demand for imported banana with respect to the price of domestic banana? Does the elasticity indicate that domestic banana and imported banana are substitutes or complements? (3 marks)
Government Actions in Markets – Production Quotas and Subsidies
The table sets out the demand and supply schedules for rice in Japan.
(d)Explain what happens to the price and the marginal cost of rice, if the government sets a production quota of 1,500 bags a week. What happens to consumer surplus and producer surplus? Draw a graph and explain your answers. (5 marks)
Government Actions in Markets – Price floor
The table shows the demand and supply schedules for US wheat market. The US Farm Bill 2012 indicates that the domestic price of wheat will be set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. At the market equilibrium, 1,000 kilo tonnes (Kt) are supplied
(e)On a graph, explain how the price control in the US would change the consumer surplus, producer surplus, and deadweight loss in the domestic wheat market. In your explanation, compare and show the changes in surpluses and deadweight loss before and after the price control. (5 marks)