Posted: August 25th, 2015

Introductory Microeconomics.

Question 1
Read attachment 1. Assume that the markets for maize and petrol are perfectly competitive.
a) According to the article, name the three ‘headwinds’ faced by maize crop farmers. For
each one, explain whether it is the demand or supply curve for maize that is likely to be
affected. How is the equilibrium price and quantity of maize likely to change as a result of
these three ‘headwinds’? Explain using the demand/supply model.
b) How is Governor Branstad’s plan to promote the use of ethanol in vehicle fuel likely to
change the market outcome? Explain using the demand/supply model.
c) According to the article, why are petrol-refiners unhappy with Governor Branstad’s plan?
How will this policy likely to affect the equilibrium price of petrol? Explain using the
demand/supply model.
Question 2
Read attachment 2. Assume that the market for land is perfectly competitive.
a) According to the article, what is unique about the demand and/or supply curve for land in
the cities? Explain.
b) According to the article, what has happened to the demand and supply of land in recent
years? Has there been a shift in the demand curve? Has there been a shift in the supply curve?
What has happened to the value of land over time? Explain using the demand/supply model.

c) The article states that a land tax is unlike other taxes (which distort economic activity) in
that it cannot reduce the supply of land. Explain using the demand/supply model.
Question 3
Read attachment 3.
a) The article suggests that the government currently imposes a ceiling on the price of water
in California. Show, using the demand/supply model, how this would result in the problem of
scarcity of water mentioned in the article. How does this affect the welfare to society?
b) It is stated in the article that “markets and prices are an indispensable part of the tool kit to
combat scarcity.” Explain what this means. How can markets get rid of the scarcity of water?
Show what the equilibrium price of water would be if the price ceiling were eliminated.
c) According to the article, why is the government willing to maintain such low prices for
water instead of letting the markets function?
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d) According to the article, in addition to the scarcity problem, what other problems are
created as a result of the government’s policy?
Question 4
Read attachments 4a and 4b.
a) Using attachment 4a, analyse the decision to send one’s child to tuition classes from a
parent’s point of view. What is the marginal benefit of this decision?
b) Would a parent who reads attachment 4b change his/her view about tuition? According to
attachment 4b, what is the marginal cost of sending one’s child to tuition classes? Explain
how you would calculate the marginal cost. What is the marginal benefit?
Question 5
Read attachment 5. Assume that the market for sugarcane is perfectly competitive.
a) Consider the Chinese government’s decision to turn migrant workers from Vietnam away.
What is going to be the impact of this on the supply and equilibrium price of sugar in China?
How will this affect the welfare of Chinese sugarcane producers? Explain using the
demand/supply model.
b) The article states that China became a net importer of sugar in recent years. What caused
this change? How has this change affected the welfare of consumers and producers of
sugarcane in China? Show graphically using the demand/supply model with international
trade. (In answering this question, you can assume that in 1950s, the equilibrium price of
sugarcane in China was equal to the world price.
c) The article suggests that the Chinese government is helping the local sugarcane farmers by
imposing import tariffs. How will such a policy affect the welfare of consumers and
producers of sugarcane in China? What is the overall impact of the policy on the welfare of
society? Explain using the demand/supply model with international trade.
d) The article states that the government is also considering subsidies as a way to help the
producers of sugarcane. Suppose the government uses subsidies instead of import tariffs to
help the local farmers. Assume that China remains a net importer after the subsidies are
implemented. Using the model of demand/supply with international trade, explain how such a
policy will affect the consumers and producers of sugarcane in China. What is the overall
impact of subsidies on the welfare of society?

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