Question

The purpose of the Assignments is to assess the student’s ability to apply the economic concepts learned in each unit to practical problem-solving scenarios.

Instructions

Students are to complete the exercises in Word (or some other compatible word processor) and submit for evaluation.

Questions

1.       John was discussing the market for cocoa beans with his friend Kim. John said, "Ever since Venezuela announced that its cocoa harvest was its lowest ever in fifteen years, the price of cocoa beans has been rising and rising and people are buying more and more. I think the demand for cocoa beans must be upward sloping." Is John right? Briefly explain why or why not.

Table 1-2

Price per bushel	Quantity Demanded (bushels)	Quantity Supplied (bushels)
US$2	40,000	0
4	36,000	4,000
6	30,000	8,000
8	24,000	16,000
10	20,000	20,000
12	18,000	28,000
14	12,000	36,000
16	6,000	40,000

2.       Refer to Table 1-2. The table contains information about the wheat market. Use the table to answer the following questions.

a.       What are the equilibrium price and quantity of wheat?

b.       Suppose the prevailing price is US$6 per bushel. Is there a shortage or a surplus in the market?

c.       What is the quantity of the shortage or surplus?

d.       How many bushels will be sold if the market price is US$6 per bushel?

e.       If the market price is US$6 per bushel, what must happen to restore equilibrium in the market?

f.        At what price will suppliers be able to sell 36,000 bushels of wheat?

g.       Suppose the market price is US$14 per bushel. Is there a shortage or a surplus in the market?

h.       What is the quantity of the shortage or surplus?

i.         How many bushels will be sold if the market price is US$14 per bushel?

j.         If the market price is US$14 per bushel, what must happen to restore equilibrium in the market?

3.       According to the Australian Wool Innovation, severe drought conditions in Australia contributed to the lowest level of wool production in 50 years. This record low production has driven up prices sharply in Australian wool markets. Meanwhile, the price of raw cotton increased significantly for the first time in many years.

a.       Illustrate this observation with one demand and supply graph for the market for Australian wool and another demand and supply graph for raw cotton.

b.       Make sure that your graphs clearly show (1) the initial equilibrium before the decrease in the supply of Australian wool and (2) the final equilibrium.

c.       Use arrows to indicate any shifts in the demand and supply curves for each market.

d.       Label your graphs fully and write an explanation of your work.

Answer 1

(1) John is wrong. The demand crome is Still downward sloping. The reason that people are buying more and more cocoa even at increased price is because they know that there will be cacute Shortage of cocoa (due to poor harvest) in / coming days and the prices will eise even further . So people think that prices today is relatively lower than the prices in coming days. And it is due to this, that they are buying more and more cocoa at dising prices and not due to upward sloping demand curve.