economic

PART A: QUESTION 1 CASE

Answer all nine parts of this question (i.e. a - i) in relation to this basic case of the market for second-hand Japanese cars in New Zealand:

 

Consider the annual demand and supply of second-hand Japanese car market in New Zealand, as detailed by the following demand and supply equations for this market. 

Note that price (P) is measured in dollars per car, and quantity (Q) is measured in the number of cars. 

 

The equations represent the demand and supply in the New Zealand second-hand Japanese cars market: 

Demand: P=10000-0.5Q

Supply:    P=1000+Q

1(a)

Based on the demand and supply equations in the case, find out the market equilibrium quantity and price.

 

Show your formulations and calculations. 

You can click the Σ (sigma) icon on the top panel to insert formulas. 

1(b)

Draw a demand and supply graph of the market for second-hand Japanese cars based on the above information, clearly indicating the axes, and the equilibrium quantity and price.

 

Draw your graph either on paper or computer, then take a screenshot or photo and upload it below: 

1(c)

According to the information provided in the case, and if each consumer only buys 1 car, what is the maximum number of buyers that are considering second-hand Japanese cars, regardless of price, in New Zealand?  Explain your reasoning in a few sentences.

 

You can click the Σ (sigma) icon on the top panel to insert formulas. 

1(d)

At what price is Total Revenue expected to be at its maximum level? 

1. Show your formulation and calculations, and explain. 

2. Use this information to find the price range for which demand is price elastic. Briefly explain your answer.

Note: price range means from a price $P1 to another price $P2.

1(e)

Second-hand cars are generally less fuel-efficient and therefore they can generate much heavier air pollution. Therefore, to discourage purchase of Japanese second-hand cars, the government sets a minimum price of $3500 per car. As a result, sellers can only charge prices at or above $3500 for every second-hand car from Japan.

 

Evaluate the possible outcomes of the policy.  Note whether you believe that the policy achieves the intended goal. Justify your answer.

1(f)

Draw and upload a graph to support your answer to  question 1(e) . 

 

Second-hand cars are generally less fuel-efficient and therefore they can generate much heavier air pollution. Therefore, to discourage purchase of Japanese second-hand cars, the government sets a minimum price of $3500 per car. As a result, sellers can only charge prices at or above $3500 for every second-hand car from Japan. Evaluate the possible outcomes of the policy.  Note whether you believe that the policy achieves the intended goal. Justify your answer.

1(g)

For the remaining questions, do not use the information you were given for questions 1 (e & f).

 

Assume that during a period when the average annual income levels of New Zealand families increased to a level three times as much as before (increased by 200%), consumers in New Zealand no longer bought any second-hand Japanese cars!  Instead, they bought new cars.

1. Based on this information, formulate and calculate their income elasticity of demand (using the simple percentage change formula).

2. How can we categorise second-hand car in terms of income elasticity of demand? Briefly explain.

You can click the Σ (sigma) icon on the top panel to insert formulas. 

1(h)

Suppose that Japanese cars are imported and sold by car dealers. Also, suppose two changes happen at the same time in this market:

· The government imposes a tax on importing second-hand Japanese cars,

· and a tax on petrol.

 

Briefly discuss how the taxes are going to influence the equilibrium price and quantity for Japanese car market in New Zealand.

 

(Note: for your analysis, assume that there are no other changes happening in the market, and only the tax is introduced by the government).

1(i)

Draw a graph to support your discussions in part 1(h); clearly label the axes, and all the key information, as well as the changes of prices and quantities. 

1(j)

Is the tax policy in part (h) of this question, likely to succeed in government’s objective of discouraging the use of imported Japanese second-hand cars? 

Referring to your answer in part (h) discuss why or why not.