ECON10004: INTRODUCTORY MICROECONOMICS

TASKS FOR TUTORIAL 3

(Week beginning August 7)

TASK 1

Complete the following ‘comparative statics’ table with a ‘+’ to denote ‘increase’; a
‘-’ to denote a ‘decrease’; and ‘?’ where the relevant variable could either decrease or
increase or remain unchanged.

Change Equilibrium price Equilibrium quantity

traded

A decrease in demand -
An increase in demand +
A decrease in supply
An increase in supply
A simultaneous decrease in both ?
demand and supply
A simultaneous increase in both
demand and supply
A simultaneous increase in
demand and decrease in supply
A simultaneous decrease in
demand and increase in supply

TASK 2

1. The market for netballs is perfectly competitive. Which of the following is correct in
answer to the question, “The existence of excess demand (shortage) in this market would
cause:
a) A decrease in demand for netballs.
b) A decrease in the price of netballs, together with a decrease in quantity of netballs
demanded and an increase quantity of netballs supplied.
c) An increase in the price of netballs, together with a decrease in quantity demanded of
netballs and an increase in quantity supplied of netballs.
d) A decrease in the quantity of netballs traded.

2. The market for wine is perfectly competitive. An increase in the incidence of disease
in wine grapes, and an increase in the price of beer (a substitute for wine) occur.
(Assume that the disease destroys some grapes, but does not affect the quality of the
surviving grapes.) The effect on the market for wine will be:
a) A decrease in supply of wine, and a decrease in demand for wine.
b) A decrease in equilibrium quantity traded of wine, and it is not possible to say what
will happen to equilibrium price.
c) An increase in supply of wine, and an increase in demand for wine.
d) An increase in equilibrium price, and it is not possible to say what will happen to
equilibrium quantity traded.
3. Suppose that Australian and US dollars are traded in a perfectly competitive market.
Treat the price in this market as the amount of $US that can be traded for $1AUS
(referred to as the US/AUS exchange rate), and the quantity traded as the quantity of
$AUS traded. Suppose that the expected future profitability of US businesses decreases
so that the expected future return earned on owning shares in US businesses declines.
The predicted effect would be:
a) A decrease in the US/AUS exchange rate.
b) An increase in the US/AUS exchange rate.
c) A decrease in demand for $AUS in the US.
d) An increase in the supply of $AUS in the US.

4. Microchips are an input to computer hardware. Both microchips and computer

hardware are traded in perfectly competitive markets. An improvement occurs in the
efficiency microchip production. The effects on the markets for microchips and
computer hardware will be:
a) An increase in the equilibrium price of microchips, and an increase in the equilibrium
price of hardware.
b) An increase in the equilibrium quantity traded of microchips, and a decrease in the
equilibrium quantity of hardware traded.
c) A decrease in the equilibrium price of microchips, and an increase in the equilibrium
quantity of hardware traded.
d) A decrease in the equilibrium quantity of microchips, and a decrease in the
equilibrium quantity traded of hardware.

5. For the market for avocadoes suppose a demand function Qd = 10 – 2P + Y and a

supply function Qs = 2 + P + 0.5W where Q is quantity, P is price, Y is income and W
is an index of weather.
a) Suppose Y = 1 and W=2, specify the demand and supply curves, show them on
a graph, and derive the equilibrium price, quantity and producer revenue
b) Assess the effects of poor seasonal conditions, such that W = 1, on the market
outcomes P, Q and revenue. What is the effect of the poor seasonal conditions
on producer revenue?
c) Assess the effects of a doubling of income Y = 2 , W = 2, on market outcomes
TASK 3

Read attachment 1 (‘On your bike’, The Economist, 20 September 2008, p. 75). Use
the demand/supply model to answer the questions below:
a) What does the article describe as the main changes to demand for and supply of
bicycles?
b) How would you predict these changes would affect the equilibrium price of bicycles?
Does the article confirm your prediction?
c) The article suggests that the total quantity of bicycles sold has increased. What does
this suggest about the relative magnitudes of changes to demand and supply?
d) What does the text ‘Each market has its own idiosyncrasies…’ suggest is an important
determinant of demand in any country?

Attachment 1
On your bike
The Economist, 20 September 2008, p. 75
These are tough times for carmakers, many of which are labouring under high oil prices,
slowing demand and financial weakness. For makers of human-powered, two-wheeled
vehicles, by contrast, business is booming. Giant Manufacturing, the world’s largest
bicycle-maker, sold a record 460,000 units last month, and is heading for its best year
ever…

After a slow 2006, sales took off last year in Europe and America as fuel prices shot
up. Suddenly a bicycle seems like the remedy for many modern ills, from petrol prices
to pollution, and to the desire for better health. Each market has its own idiosyncrasies.
Europeans mainly use bikes for commuting, but have the habit of ignoring models made
explicitly for that purpose in favour of sleeker, faster models…Americans prefer off-
road BMX trail bikes. Taiwanese demand is led by racing-style bikes used for exercise.

Giant, as the largest producer, makes everything for every market. Its share price has
held up fairly well…despite dramatically higher costs for raw materials, notably
aluminium. Strong demand and a desire for better bikes have allowed bike makers to
pass higher material costs on to buyers. Since 2004 wholesale prices of bikes have
gone up by 23% in Europe, 45% in America, and almost 50% in Asia.