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1       Efficient output

Suppose the market of banana is perfectly competitive. The table below gives the demand and supply schedules for banana.

1. What is the maximum price that consumers are willing to pay for the 30th kilogram of banana?
2. What is the minimum price that producers are willing to accepts for the 30th kilogram of banana?
3. Is the output of 30 kilograms of banana a week an efficient output? Why/Why not?
4. What is the deadweight loss if only 30 kilograms per week are produced?
5. What are (i) the consumer surplus, (ii) the producer surplus and (iii) the social surplus if the efficient quantity of banana is produced?

(a)    As in Australia, legislation exists in USA to prohibit the sale of human organs for transplantation. Organs may only be donated. For example, about 8000 kidneys are donated each year, but there is considerable excess demand. The inevitable result of the law is that some patients die and at the same time it prevents those who supply organs (or their relatives) reaping their economic value. The quantity of kidneys supplied would be increased if a price was offered.  Economic research indicates that in a free market for kidneys, the USA market supply curve would be approximated by the following linear relationship:

Qs = 8000 + 0.2P

where Qs is the quantity supplied and P is the price of kidneys in dollars.

(i)      Plot this on some graph paper. If you don’t have any graph paper, just do it roughly. (Hint – this is not difficult – take any value for P, I suggest \$30,000 and compute the value for Qs. Plot this first point of your supply curve, remembering to put price on the vertical axis. Now take another value for P, I suggest zero and do the same as before. Joining the two points gives the market supply curve for kidneys.)

Similarly, the market demand curve for kidneys is estimated to be:

Qd = 16,000 – 0.2P

(ii)     Plot this in the same way on the same set of axes.

(iii)     What is the equilibrium price for kidneys? And quantity?

(b)     However, organ trade is banned and supply is constrained by legislation to the numbers donated.

(iv)     Draw this supply curve on your graph – remember, at any price supply is limited to 8,000.

(v)     Show on your graph the loss of producer surplus as a result of the legislation.

(vi)     Compute the value of this loss to suppliers.

(vii)    Show on your graph the net gain or loss to kidney recipients of the legislation and compute its value.

(viii)   Show the deadweight loss on your graph and compute its value.

(ix)     Is it likely that all recipients will obtain free kidney transplants in practice? If not, who will pick up a large part of the consumer surplus?

Clearly there are many issues involved in organ transplants apart from the economic ones, but the above example should illustrate to you that prohibiting the sale of organs imposes a cost on society that must be weighed against the benefits.

3       Coffee Tax

The table gives the demand and supply schedules for coffee. (The market for coffee is assumed to be perfectly competitive.)

(a)     If there is no tax on coffee, what is the price, and how much coffee is consumed?

(b)     If a tax of \$7.5 a kg is levied on the sale of coffee, how will the supply of coffee be affected?

(c)     What will be the price, and how much coffee will be consumed?

(d)     Who pays the tax?

4       How long will you wait?

Suppose that the demand and supply of petrol in Australia are as given in the table below.

PRICE              QUANTITY DEMANDED            QUANTITY SUPPLIED

(c/lt)                            (ML/day)                                     (ML/day)

80                                   8                                               24

75                                  10                                              22

70                                  12                                               20

65                                  14                                              18

60                                  16                                              16

_55                                  18                                              14__

(a)     What is the equilibrium price of petrol? And quantity?

Now suppose that a political crisis in the Middle East triggered a decrease in the supply of petrol by 8 megalitres per day at every price.

(b)     What is the new equilibrium price? And quantity?

To avoid consumer hardship from the decrease in the supply of petrol suppose that the government imposes a price ceiling of 60 cents per litre of petrol.

(c)     (i)      How much petrol will be demanded by consumers?

(ii)      How much will be offered for sale by suppliers?

(iii)     How much petrol will actually be sold?

(iv)     How much is the excess quantity of petrol demanded?

(v)     What is the highest price demanders are willing to pay for the last litre of petrol available?

(vi)     Consider someone who values petrol as in part (v). How long would such a person be willing to sit in line to buy 20 litres of petrol at 60 cents per litre, if the best alternative was to work at a wage rate of \$8 per hour?

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