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Final_Exam_June_2007

# Final_Exam_June_2007 - THE AUSTRALIAN NATIONAL UNIVERSITY...

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THE AUSTRALIAN NATIONAL UNIVERSITY First Semester Examination (2007) MICROECONOMICS 1 ( ECON1101 ) Writing period : 3 Hours duration Study period : 30 Minutes duration Permitted materials : Non-programmable Calculators Part A questions should be completed in the script “A” book provided. Part B questions should be completed in the script “B” book provided. ECON 1101, Page 1 of 5

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Section A. Section A is worth 60 marks in total. Answer six of the following eight questions in the script “A” book. Each question is worth 10 marks. A1. Assume that the demand for champagne is much higher in summer than it is the rest of the year. Use an appropriate diagram to illustrate and explain how the impact of this demand variation on the price and quantity of champagne will depend on the price elasticity of supply. Provide some intuition about the price elasticity of supply as part of your response. A2. On Tobacoco Island people consume only two goods, tobacco and coconuts. The Tobacocon government is concerned that the people are not consuming enough coconuts and decides to provide a \$1 subsidy to try and increase coconut consumption. In order to raise the revenue for this, the government decides to implement a tax in the tobacco market. What combination of demand and supply elasticities in these two markets is likely to give the biggest increase in coconut consumption for the smallest deadweight loss in the tobacco market? Justify your answer by illustrating counter-examples as well. A3. Suppose that the world price for steel is below the Australian domestic price, but that the government requires all steel used in Australia to be domestically produced, and uses a tariff to achieve this objective. a. Use a diagram to illustrate the gains and losses in terms of producer and consumer surplus from such a policy compared with free trade. What is the associated deadweight loss? What about government revenue? b. What arguments could be used to support this government policy? What arguments could be used to oppose it? A4.
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Final_Exam_June_2007 - THE AUSTRALIAN NATIONAL UNIVERSITY...

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