# Question 1 Production possibilities and gains from specialisation Nico and Lola work in a coffee shop. Nico can make 20 coffees or 16 sandwiches in one hour. Lola can make 30 coffees or 20 sandwiches in one hour. They both work an 8 hour day.

Question 1: Production possibilities and gains from specialisation

Nico and Lola work in a coffee shop. Nico can make 20 coffees or 16 sandwiches in one hour. Lola can make 30 coffees or 20 sandwiches in one hour. They both work an 8 hour day.

Their boss tells them to split their time equally between the two tasks.

• a) Use diagrams to illustrate the production possibilities for the two workers – one diagram for each worker. Mark each worker’s production point if they split their time evenly between the two tasks as instructed by their boss. Explain your diagrams.

Lola suggests to the boss that she and Nico may be able to increase their overall output if they both specialise; initially the boss is resistant to this idea, saying that it won’t work because Lola is the more productive worker.

1. c) What is the maximum number of coffees and sandwiches the two workers can produce? Compare this with the output if the two workers split their time evenly.

Question 2: Supply, demand, equilibrium and elasticity.

Café owners notice that dropping the price of a cup of coffee from \$5 to \$4.50 results in an increase in the number of cups of coffee they sell in a day from 30 to 32, assuming nothing else changes.

1. a) Based on this data, what is the price elasticity of demand for a cup of coffee? (Use the midpoint method, and show your workings). Is the demand for cups of coffee elastic or inelastic in this price range? Explain your answer.

As part of a turf war, drug lords in Columbia destroy large crops of coffee beans.

1. b) Use a diagram (see also part (c) below) to illustrate the impact of the turf war on the equilibrium quantity and price of coffee beans. How is a new equilibrium price established? ( Note: Do not use actual numbers for price and quantity; instead use symbols such as P1 and Q1; make sure you explain what these symbols represent.)

1. c) Given the price elasticity of demand you calculated for part (a), analyse and discuss who is likely to bear the greater impact of the changed price of a cup of coffee that results from the turf war – consumers or producers of cups of coffee? Use the diagram you drew for part (b) to illustrate and explain your answer.

1. d) Customers notice that not only has the price of a cup of coffee changed, but the price of cakes has decreased. Are these two things related? Explain your answer.

Question 3: Bananas and Apples: the impact of import bans This question is based on information from the following sources:

Bananas: Gigi Foster, 2018, ‘Paying an extra \$150 million a year to protect growers? That’s bananas!’, The Conversation August 9, 2018,
https://theconversation.com/paying-an-extra-150-million-a-year-to-protect-growers-thatsbananas-100520

Note: Gigi Foster was interviewed about the research reported on in this article in The Conversation; you may like to listen to this interview recorded by ABC RN Counterpoint. The link is:

Apples:
SBS News, updated 24 February 2015: ‘Australia cops it sweet on WTO apple ruling’ https://www.sbs.com.au/news/australia-cops-it-sweet-on-wto-apple-ruling

MAE101 text: Gans et al, 2018, case study on page 209, ‘Trade agreements and the World Trade Organisation’.

If you wish to read a summary of WTO dispute settlement process regarding New Zealand apples, go to the WTO website, DS367: Australia – Measures Affecting the Importation of Apples from New Zealand: URL https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds367_e.htm

The article by Gigi Foster published in The Conversation on 9th August 2018 summarises the impact of both cyclones and industry protection on the banana industry in Australia.

1. a) The article discusses an estimated welfare loss arising from banana import restrictions. Use a standard supply and demand diagram such as the one in Figure 9.4 of the text to illustrate and explain this welfare loss, including the impact on domestic consumers, producers and overall welfare. (Note your diagram should be conceptual – don’t use actual numbers). (Roughly 200 words).

1. b) The article identifies two reasons commonly given for protecting the banana industry. What are these? Does Foster agree or disagree with these arguments? Explain your answer. (Roughly 300 words).

1. c) The article refers to “rent seeking” by the banana industry. Explain what this means. (Roughly 200 words).

1. d) Critically analyse the differing arguments put forward and discuss. Do you think any changes should be made to the banana industry? (Roughly 500 words)

Read both the SBS news article on the Australia/New Zealand apple dispute, and the case study in the text book, identified above. Part of the World Trade Organisation’s role is to adjudicate trade disputes; in this case the dispute was around whether bans on New Zealand apples were necessary to prevent pests/diseases coming into Australia, or whether the bans were not backed by science, and were therefore simply trade restrictions in place for the benefit of apple growers

1. e) Why did the WTO rule against Australia in the trade dispute between Australia and New Zealand regarding the importation of apples from New Zealand to Australia? Do these arguments apply to the banana industry as well? Explain. (Roughly 300 words)

Conditions:

Over all 2000 words (flexible). In first year economics word limits are less important than concise and relevant descriptions and analysis of the models, diagrams and arguments presented. The word limit is a guide only and is not binding; deciding for yourself if you have answered the question fully, concisely and coherently is an important skill to develop. A relevant, concise and well explained answer will gain full marks. The words in any graphs/diagrams, tables, equations and the references do not count towards the word limit.

You must cite all ideas that are not your own. You should use the Harvard (name-date) referencing style within the text of your answer to cite any source you use, and then include the full reference at the end of your assignment. This means that, rather than placing a reference in a footnote, you should provide a reference of the source inside the text with the name of the author and the date of publication of the work cited. Example: Far from being the inventor of the idea of perfect competition, Adam Smith was in fact among the last representative of economists who saw competition as a dynamic process of rivalry (McNulty 1967). This means you are citing a 1967 article authored by someone called McNulty as the source of the idea in the sentence. You would then list that article in a list of references at the end of your paper: McNulty, P.J. 1967. A Note on the History of Perfect Competition, Journal of Political Economy 75: 395-399.

Importantly, do not just quote chunks of the text – you must express your answer in your own words.

• Harvard referencing

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