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QUESTION 1
The following is a set of hypothetical production possibilities for a nation
Combination bicycles Wheat
(Thousands of tonnes)
Production possibility Curve for nation A
i) Plot the production possibility for nation A
ii) What is the opportunity cost of the first 2000 bicycles produced?
The opportunity cost is 7000 tonnes of wheat
iii) Determine between which point the opportunity cost per thousand bicycles is highest
Point E
iv) Show what would happen to the production possibility frontier if nation A introduced an improved fertiliser that was used by its wheat farmers.
Use of improved fertilizer increases the capacity to produce more wheat therefore the resultant point will be outside the production frontier curve.
v) Explain how the production possibilities frontiers reflect the law of increasing opportunity costs (parts I to v are worth a mark each)
The law of increasing opportunity cost affirms that increases in the production of one commodity results to a corresponding rise in the opportunity cost of producing the other commodity (Lipsey et al. 1981 pp. 59-63). In this case a therefore increase in production of bicycles leads to the production of fewer quantities of wheat.
b) Compare the advantages and disadvantages of a planned economy and a free economy (300 words maximum)(5marks)
Advantages of free economy
In a free economy there is free buying as well as production alongside lowered business cycle. Consumers are at liberty to buy any product they wish. The supplier of the good can as well produce any product they prefer. Secondly the market price represents the equilibrium point of market demand as well as supply. In the liberal market the price of goods and services is regulated by the forces of demand and supply; hence there is no exploitation of consumers by sellers. Thirdly in a free economy the effort invested in an activity determines the level of benefit an individual receives (Sloman et al. 2014 pp. 162164).
Disadvantages of Free economy
Based on Sloman et al. (2014 pp. 162164) free economy has two main demerits and these are probability of the occurrence of market failure. There is also absence of the government intervention to take part in law enforcement activities that are essential to the enforcement of business contracts.
On the other hand planned economy has the following advantages: prices are well regulated and therefore everyone can buy goods and services. There is also minimal inequality of wealth no duplication of resources small cases of unemployment and efficient disposal of waste. However planned economy has the following demerits: it has no profit motive and there is time wastage in passing instructions
QUESTION 2
a) The Australian wine industry has prospered over the last two decades expanding rapidly into overseas markets. However in recent years it has faced some problems. Use demand and supply analysis to explain how these two factors (problems) stated below would affect the price and quantity of Australian wine.
i) There has been rapid increase in the Australian production of wine grapes
The rapid increase in the quantity of wine grapes in the market leads to decrease in the price level of the grapes hence reducing the revenue generated from the sale of grapes.
ii) New wine producers in China and India are producing good quality low cost wine(parts i and ii are worth 2 marks each)
The presence of many competitors lowers the amount of sales a company makes. In this case a cheap and higher quality wine from china and India lures more customers from purchasing relatively low quality Australian wine. Thus decrease in the level of demand and revenue subsequently (Henderson & McKenzie 1999 p.36).
b) In an attempt to support the Australian wine industry the government sets a minimum price. Do you think this is a good idea/ Explain your decision using graphs(6MKS)
This is a good decision since the price controls safeguards the Australian wine industry from unhealthy competition from its competitors based on variation in prices of wine grapes. The government will set particular price floors and price ceiling within which the industries ought to operate on (Henderson & McKenzie 1999 p.36).
In this diagram no company is supposed to sell bellow the equilibrium price E since the price floor is at point F hence lowering the level of competition in the market. In effect this will guarantee the survival of Australian wine industry (Mason & Buultjens 2015 pp.30-31).
QUESTION 3
A) Explain why a firm can make a loss and continue operating in the short run and under what circumstances it will shut down(3marks)
In the short run and firms under perfect competition generate economic gain a normal gain or loss. Economic profit occurs at p>ATC a normal gain as well as zero profit occurs at P=ATC and the loss occurs at PAVC the production of the firm is sustainable. At level P
The Reserve Bank of Australia
Treasury
Department of Finance
The Productivity Commission
The World Trade Organization
ABC News
Some newspaper sites may also be useful. For example the Australian Financial Review the Sydney Morning Herald the Australian the Guardian and other major newspapers. The editions around the time of economic policy announcements are especially useful.
You will also need to look closely at some recent budgetsthat are usually brought down in May (details can be found at http://www.budget.gov.au) and monetary policy announcements about interest rates can be found at http://www.rba.gov.au. The RBAs quarterly statement on monetary policy is also a very useful source of information on the economy and its status. If you find some good sources I suggest that you share them with other students on the Discussion Board.
Final examination
Exam period: TBA
Weighting: 50%of total marks for the unit
The final examination is scheduled for the end of the study period. Students will be fully advised during the study period as to when the exam will be held and the format it will take. The exam will be closed book.

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