Question 1 (4 marks)
Severe drought conditions in Australia contributed to very low levels of wool production, due to the shortage of animal feed. This low production drove up prices sharply in Australian wool markets. The price of raw cotton also increased significantly at that time, for the first time in many years.
Illustrate this observation with one demand and supply graph for the market for Australian wool and another demand and supply graph for raw cotton. Make sure that your graphs clearly show (i) the initial equilibrium before the decrease in the supply of Australian wool and (ii) the final equilibrium. Use arrows to indicate any shifts in the demand and supply curves for each market. Label your graphs fully and write an explanation of your work.
Question 2 (8 marks)
1) Discuss if Internet booking for airlines tickets has made the demand for Qantas flights more elastic or inelastic. (4 marks)
2) How can Qantas make the demand for its services more inelastic so that it can charge a higher price without worrying about losing sales (4 marks)?
Question 3 (8 marks)
1) What is the difference between diminishing returns and returns to scale? (4 marks)
2) Using a product of your choosing, identify the main fixed and variable costs of production.(4 marks)
Essay question (references needed)
Question 4 (20 marks)
Read the following article ‘Drought and low milk prices push dairy farmers to the brink’ published in ‘The Guardian’ on 23 February 2019 https://www.theguardian.com/food/2019/feb/24/drought-and-low-milk-prices-push-dairy-farmers-to-the-brink.
In this question, you are required to write an essay to discuss the low milk price issue. Your essay should centre around the following questions, and clearly address each of them.
1) Explain why the milk market is likely to be a perfectly Competitive Market and that a single farmer is not able to affect the market price.
2) Explain why a milk farmer still chooses to hang around and not to leave the industry in the short run even though he or she is suffering a loss.
3) Use graph(s) to explain that in the long run, the exit of some milk famers will lead to a rise in milk price.
4) Discuss the demand elasticity of milk. Can a consumer substantially increase his or her milk consumption when the price becomes lower?
5) Discuss possible measures or policies that can be used to help Australian milk farmers. Make sure that you comment on the price floor policy.
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