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BUECO5903 Business Economics Assignment Part A Sample

Instructions:

This assignment contains five questions. You are required to answer all five questions. This is an individual piece of assessment. Make sure your submission is an original submission; this means it must be the creation of the person submitting it. You are required to explain your reasoning and use diagrams where appropriate.

Due date: Your instructor will advise you of the submission date of this assessment task. Assignment to be submitted electronically in the drop box in your Moodle shell.

Question 1

Using a production possibilities frontier (PPF) diagram, determine how does the PPF change in response to the events describe below. Make sure to explicitly indicate what sectors you are representing, and what sort of assumptions each event implies (i.e., a neutral effect vs a sector-biased effect). The latter follows from your assumptions on the factor intensity of the sector you are representing.

a) A relaxation of policies allowing more foreign direct investment into the country.

b) Increasing the minimum wage level.

c) A decrease in expenditure on research and development.

d) An increase in the retirement age.

e) Government policies supporting the provision of services, without affecting manufacturing.

Question 2

For each of the events describe below, you are required to explain:

1. The market you are evaluating (e.g., labour market, automotive market, etc).

2. Does the event act on the demand side, supply side, or both sides of the market?

3. Does the event lead to a quantity or price change? Or does the event lead to a shift in demand, supply, or both?

Make sure to explain what sort of assumptions you are making on the elasticities of demand and supply (when plotting your demand and supply, describe whether you are assuming an elastic or inelastic demand/supply).

a) A concerted reduction in the total production level in oil markets.

b) The implementation of a minimum wage.

c) The implementation of subsidies to agricultural production in Australia

d) The implementation of a Carbon tax in the resources exploitation sector. A Carbon tax is charged according to the level of emissions of greenhouse gases in an economy.

e) The implementation of a new loan program to university students in the education sector

Question 3

Compare the impact of a recession that reduces consumer income by 10 percent on the consumption of durable goods and house rentals. Suppose that the income elasticity of demand for durable goods is 1.5 and the income elasticity of demand for house rentals is 0.3. Based on your response, make a policy argument to support through government funding either businesses or house rentals.

Question 4

Using a supply and demand analysis show first the labour market in equilibrium, and then show

a) the effect of a reduction in the demand for labour as a consequence of a pandemic.

b) The effect of a government subsidy to producers to restore the employment of labour.

Provide a diagram with clear axis details. Make sure to explain what sort of assumptions you are making on the elasticities of demand and supply.

Solution

Answer 1:

a.

Here, agricultural and service sectors are represented. Assume the economy produces good X which is capital-intensive in service sector and good Y which is labor-intensive in agricultural sector. Hence, more foreign direct investment will create sector-biased effect as the production of good X will increase keeping the production of good Y unchanged. This situation is drawn in the figure below:

Figure 1: Production Possibility Frontier: Sector-Biased Effect

b.

Again consider good X in the agricultural and good Y in the manufacturing industry. Good X is capital intensive and Good Y is labour intensive. For Assignment Help, Increasing the minimum wage level will help the industry to get more labourers for producing good Y while the production of good X will also increase but by a smaller rate (Arnold, Arnold and Arnold 2022). Hence, the situation implies sector-biased effect.

Figure 2: Production Possibility Frontier: Sector-Biased Effect

C.

Consider two industries, service and manufacturing industries are operating in the economy. As expenditure on research and development (R&D) declines, the service sector can increase its total production by conducting more research work. Furthermore, manufacturing sector can also increase its total production due to increasing R&D. Hence, the economy will experience a neutral effect on the PPF.

Figure 3: Production Possibility Frontier: Neutral Effect

d.

Suppose the economy has manufacturing sector and service sector. An increase in the retirement age will help both sectors to get a large number of skilled and experienced labour force. Hence, production in both sectors will increase and a neutral effect can be seen on the PPF.

Figure 4: Production Possibility Frontier: Neutral Effect

e.

The economy has both service sector and manufacturing sector. Government policies are implemented to support the provision of services though these do not influence manufacturing process. Hence, production in the service sector will increase keeping total production in manufacturing sector unchanged. Thus, a sector-biased effect can be seen on the PPF.

Figure 5: Production Possibility Frontier: Sector-Biased Effect

Answer 2:

A.

Figure 6: Change in supply in the oil market

The condition is based on the oil market. The concerted reduction in total production of oil will affect the supply side. Oil market has inelastic demand and supply. This is because, supply of oil cannot be increased suddenly and demand for oil does not change significantly with its price change. Figure 6 depicts the situation from where it is observed that equilibrium price will increase to P1 and equilibrium quantity will decrease to Q1.

b.

Figure 7: Change in supply in the labour market

The condition is based on the labour market. The implementation of a minimum wage will affect the supply side of labour if the wage rate will impose above the market wage rate. Labour market has elastic demand and supply. This is because, demand and supply of labour can be changed significantly by a small change in its wage. The condition of implementing minimum wage is shown in Figure 7. Here Wm is the minimum wage which is higher than market wage W0. Hence, an increase in labour supply by N1N2 are can be seen in the economy.

c.

Figure 8: Change in supply in the agricultural market

The condition is based on the agricultural market. The implementation of subsidies on Australian agricultural product will affect supply side. Agricultural market has elastic demand and supply. The implementation of subsidy will encourage farmers to produce more amount of agricultural products. Figure 8 depicts the situation where supply curve increases from S0 to S1. Thus, equilibrium price declines to P1 and equilibrium quantity increases to Q1.

d.

Figure 9: Change in supply in the Energy market

The condition is based on the energy producing market. The implementation of a carbon tax as per the level of greenhouse gas emission will affect the supply side of energy production. Energy market has inelastic supply due to the limited resource. The condition of decreasing supply of energy resource is shown in Figure 9. Here market price of energy increase to P1 from P0 and energy supply will decline to Q1 from Q0 due to imposition of carbon tax.

e.

Figure 10: Change in supply in the Energy market

The condition is based on the energy education market. The implementation of a new loan program will increase demand for education among university students. Education has inelastic demand as it is necessary for everyone. The condition of increasing demand for education is shown in Figure 10. Here market price of education increases to P1 from P0 and equilibrium quantity declines to Q1 from Q0.

Answer 3:

When income elasticity of demand becomes greater than 1 then it implies that the good is luxury item. On the other hand, income elasticity of demand less than 1 implies that the good is necessary item. For durable goods, the income elasticity of demand is 1.5 and income elasticity of house rental is 0.3. Hence, as per the given condition, durable goods are luxury items and house rentals are necessary items (El Shagi, Sawyer and Tochkov 2022). Thus, government needs to implement funding policy on house rents so that people can afford it easily.

Answer 4:

Labour demand curve has a negative slope showing an inverse relationship between real wage of workers and amount of labour. Labour supply curve is upward rising as it shows a positive relationship between real wage and amount of labour. The supply curve expresses a tradeoff between labour and leisure and hence it bends slightly at the upper portion.

 

Figure 11: Labour Market Equilibrium

a.

The impact of decreasing labour demand due to pandemic is shown in figure below:

Figure 12: Decrease in Demand for labour

Due to decrease in demand for labour, the real wage will also fall to W1 from We while amount of labour in the market will also fall to N1 from Ne.

b.

Impact of a government subsidy to producers for restoring the labour employment:

Figure 13: Increase in labour supply

Due to increase in labour, the real wage will also fall to W1 from We while amount of labour in the market will increase to N1 from Ne.


Answer 5:

a.

b.

Figure 13: MC, AVC and ATC Curves
 

References:

 

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