Questions week 2

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Questions week 2

• Introductory Economics for the Treasury
• Dr. Paul Frijters

2

• 1. Why doesnt your local supermarket ask 100
  dollar for a bottle of milk, even though it is
  worth 100 dollars for some customers.
• 2. Is the demand for cigarettes elastic or rather
  inelastic? Why do you think so?
• 3. On whom does an externality occur if
• - I dam a river to keep all the water for my
  land.
• - I smoke
• - A company builds a bridge.

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• 4. Why does the government produce many things
  that lead to externalities, whilst it in
  principle can hire others to do so? Specific
  products to be discussed dikes, defense, police,
  street lights.
• 5. Give an example of an Australian private
  monopoly or oligopoly.
• 6. Suppose the social value of picking up a tin
  can from a park is 10 cents. Why is it unlikely
  that the government would offer 10 cents for
  every tin picked up from parks?

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Practical 1 Lemons and Lemonade

• A plant disease in South Australia damages the
  lemon crop. What happens to consumer surplus in
  the market for lemons?
• What then happens in the market for lemonade?
• Illustrate the answers with diagrams
• (hint think of changes in supply curves)

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Practical 2Changing Market for Computers

• The cost of producing computers has fallen
  substantially over the past decade.
• Use a supply-and-demand analysis to show the
  effect of falling production costs on price and
  quantity. What happens to consumer and produce
  surplus?
• Suppose the supply of computers is very
  inelastic. Who benefits most from falling
  production costs consumers or producers?