QUESTION 1

Together with the use of supply-and-demand diagrams, explain the effect of the following events on the market for woollen jumpers in Australia.  (Assume ceteris paribus for each of the event).

(a)    The price of leather jackets falls
(b)    Hugh Jackman, a much admired Australian movie star, appears in a woollen jumper in his latest video
(c)    New knitting machines are invented
(d)    A rise in income, assuming woollen jumpers are a normal good.                                                      4 * 2 = 8 MARKS

QUESTION 2

Find the flaws in the reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the demand and supply curves.  Draw a diagram to illustrate what actually happens.
(a)    “A technological revolution that lowers the cost of producing a good might at first result in a reduction in the price of the good to consumers.  But a fall in price will increase demand for the good, and higher demand will send the price up again.  It is not certain, therefore, that an innovation will really reduce price in the end.”

(b)    “A study shows that eating a clove of garlic a day can help prevent heart disease, causing consumers to demand more garlic.  This increase in demand results in a rise in the price of garlic.  Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic resulting in a fall in the price of garlic.  Therefore, the ultimate effect of the study on the price of garlic is uncertain.”                                                                                             2 * 3 = 6 MARKS

QUESTION 3

The demand for new houses in Melbourne and Sydney have held up relatively well, compared to the other states in Australia.  However, in Melbourne, it is expected that by the end of this year the increase of new apartments into the market will far outstripped any increase in the demand for new apartments.  Explain, with demand and supply diagrams, the impact on price and quantity for new apartments.                                                                        4 MARKS

QUESTION 4
Assume the price of a good decrease from $10 to $8, leading to a rise in quantity demanded from 475 to 500 units.  Using the midpoint elasticity formula, calculate the price elasticity of demand for the good at this price range.  Explain why it is important for a business to estimate the price elasticity of demand for its product.                               4MARKS

QUESTION 5
a) It is assumed that all firms are profit maximisers.  Explain, with diagrams, the 2 approaches used to explain profit maximising behaviour of a perfectly competitive firm.
b) If a profit maximising perfectly competitive firm is making an economic loss, explain, with diagrams, the options available to the firm in the short run.                                                                                                               2 * 3 = 6 MARKS