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College of Business BEO1105 Economic Principles.

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The written submission should reflect your understanding and application of the key concepts of market equilibrium. It is expected of no more than THREE pages including text and diagrams and adhere to the academic presentation requirements. Be concise and clear. Students are encouraged to work with each other to learn the relevant concepts; the submitted work must be of individual student’s own work. Students must answer both questions. Question 1 (10 marks) Explain each of the following using supply and demand diagrams. (a) When a cyclone hits Queensland, the price of bananas rises ...

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Question Preview:

The written submission should reflect your understanding and application of the key concepts of market equilibrium. It is expected of no more than THREE pages including text and diagrams and adhere to the academic presentation requirements. Be concise and clear. Students are encouraged to work with each other to learn the relevant concepts; the submitted work must be of individual student’s own work. Students must answer both questions. Question 1 (10 marks) Explain each of the following using supply and demand diagrams. (a) When a cyclone hits Queensland, the price of bananas rises in supermarkets throughout the country. (3 marks) (b) When iPhone 5 is released, the price of older model smart phones such as iPhone 4 falls. (3 marks) (c) When a war breaks out in the Middle East, the price of Petrol rises and the price of Toyota hybrid car rises. (4 marks) Question 2 (10 marks) The Australian government administers two programs that affect the market for cigarettes. First, media campaigns and labelling requirements aimed at making public aware of the dangers of cigarette smoking. Second, there is a tax on cigarettes. (a) With the use of a graph, explain how these two programs affect cigarette consumption and the price of cigarettes. (5 marks) (b) “A tax on cigarettes is a good way of raising tax revenue for the government.” Discuss. (5 marks)

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Solution Preview

When a cyclone hits Queensland, the price of bananas rises in supermarkets throughout the country. In case a cyclone hits Queensland, which is a large supplier of bananas, there will be an adverse impact in the harvest and banana production. This will suddenly reduce the supply of banana in the entire country and make the supply curve shift leftward. As represented below:

http://www.raybromley.com/notes/noteimages/equilibrium/decrsupplyeq.jpg

Source: (Bromley, 2007)

            With the leftward shift in the supply curve, demand remaining the same, the new equilibrium price would be at P2. This means that the equilibrium price of bananas will rise from P1 to P2.

  1. When iPhone 5 is released, the price of older model smart phones such as iPhone 4 falls.

            With the release of iPhone 5, many of the consumers who are likely to buy a smart phone would shift their demand to iPhone 5 from the older models of smart phones. With this, the demand curve for older smart phones will shift leftward, making the equilibrium price of older smart phones low. The graph below represents the same:

decrease demand

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