Microeconomics Assignment First Semester 2018 Unimelb Unimelb Assignment

1455 words - 6 pages

Name : Low Kiing Seng
Student id : 972752
Part A
Part 1
Dairy Farmer Milk Producer
-Dairy cows
-Supplementary feed and fertilizer
-Raw milk
-Processing plant
Raising Cattle
Variable cost Fixed cost
increase at an increasing rate as the number
of cattle increase
remain constant over the output
Inputs Required
Name : Low Kiing Seng
Student id : 972752
Processing milk
Variable cost Fixed cost
Increase at a constant rate due to constant
marginal product which indicate a constant
marginal cost over the output
High and remain constant over the output
3) There are no barriers to entry at the individual farm level as all you need are cows to
produce milk. For processing level, there are high barriers to entry such as the huge capital to
build processing plant. In New Zealand, there will be more than 100 of firms at individual
farm level but there will only be one or two firms at processing level.
4) When the good supplied in the market is homogenous, the market is said to be a perfectly
competitive market. Therefore, dairy farmers will have no market power in the industry to
influence the price of the goods and is said to be a price takers .
5) Since it is a perfectly competitive market, it would be easy for new firms to enter into the
industry. The quantity will increase quickly when the price goes up as farmers ramped up
production by increasing their herds. However, when the price falls, it is expected to take a
relatively long time for the quantities to fall. This is because the farmers will not be able to
sell their cows easily and thus unwilling to leave the industry in short run.
Name : Low Kiing Seng
Student id : 972752
Part Two
6) China’s insatiable demand for ice-cream, infant formula and other dairy product leads to
an increase in the quantity demanded for milk. As a result, the demand curve will shift to the
right and causes the price of milk to rise.
7) The number of milk supplier in New Zealand and the rest of the world increase rapidly
between 2012 and 2014.
8) The price that Fonterra offered its farmers fell dramatically between February 2014 and
June 2015 is due to global overproduction of milk and weaker demand from China which
result in a lower price for milk.
Name : Low Kiing Seng
Student id : 972752
9) The changes in price force most dairy farmers to cut costs by reducing the size of their
herds, delaying capital purchase and letting casual staff go. The industry stay oversupplied
for a long period is due to the barriers to exit whereby farmers would not be able to sell their
cows and farms easily as the value of dairy cows and farms fall. Therefore it would be
rational for them to continue to supply milk as long as they are able to cover their average
variable cost.
10) The long run supply curve is upward-sloping as the quantity of land is limited.
Name : Low Kiing Seng
Student id : 972752
Part B
Tourism has become one of the fast-growing industry with the number of tourist
growing every years. In New Zealand, the tourism marketing slogan, 100% Pure New
Zealand, playing on the success of The Lord of the Rings and Hobbit movies, had attract
more and more visitors to the country. In 2016, 3.5 millions tourists made their way to a
remote little island with a population of 4.5 million only – roughly a 12% increase as
compared to the previous years. The main benefits of tourism are generations of jobs and
provide more competitions in the market.
One of the example is travel agency. Previously when there is trivial amount of
visitors, only one travel agency company is needed. Therefore, it is said to be a monopoly in
the market and has the market power to set price for the services provided . The price set by
monopoly will not be equal to the marginal cost, thus consumer will consume less of the
good than is economically efficient, creating something known as deadweight loss. However,
as the number of tourists increase and the lack of barrier to entry, more firms will enter into
the industry and increase the number of sellers in the market. When there are many sellers in
the market and goods offered by each and every sellers are homogenous, the industry will
move from a monopoly to a perfectly competitive market. This situation will remove the
deadweight loss and improve the society’s welfare which can be illustrated in the table 1.1.
Monopoly Perfect Competition Changes
Consumer Surplus A+B A+B+C+D+E +C+D+E
Producer Surplus C+D+F+G F+G+H -C-D+H
Total Surplus A+B+C+D+F+G A+B+C+D+E+F+G+H +E+H
MR=AR (perfect competition)
Diagram 1.1
Table 1.1
Name : Low Kiing Seng
Student id : 972752
Although there are many positive impacts of tourism boom, it does come at a cost. A
recent survey conducted by Tourism New Zealand found that about a fifth of locals think the
country is attracting too many tourists, with traffic congestion, overcrowding, insufficient
infrastructure and environmental impacts being the main concerns. Locals are competing
with tourists for holiday spots and campers are causing troubles by leaving behind rubbish
and human waste on conservation land. In South-East Asia, tourism surge lashes South-East
Asia’s beaches. Visitors to Bali were greeted with thousands of tons of rubbish and President
Rodrigo Duterte describe Boracay as a “cesspool” tainted by sewage dumped directly into the
sea. All of these are describe by economist as negative externalities which is illustrated in the
diagram below.
Tourists will only take into account of their private marginal benefit (the benefit they
gain from travelling to the destination) and their private marginal cost (the cost that takes into
account in making decisions to visit the destination), thus the equilibrium level of tourism
volume is Q*. However, from society point of view, equilibrium quantity Q* is inefficient as
it only take into account of the private marginal cost and disregards the possible external cost.
Therefore, in order to determine the efficient level of tourism volume, marginal social cost
should be considered as it represent the sum of private marginal cost and marginal external
cost. When the marginal social cost is considered, the socially optimum level of tourism will
be at Q**, where marginal social cost equals to marginal social benefit.
Unfortunately, parties to the tourism are unlikely to come to an agreement on the efficient
level of tourism, thus government intervention into the market is desired. Firstly, government
could use ‘nudges’ from behavioural theory to encourage consumers to change their
behaviour in an attempt to reduce pollution. For example, providing more rubbish bin may
encourage tourist to throw their rubbish into the bin rather than dumping it on the spot.
Alternatively, there could be a media campaign that focuses on the benefit of reduce, reuse
and recycle which could nudge tourist to cut down on waste.
Q** Q*
Tourist’s volume
Diagram 1.2
welfare loss
Name : Low Kiing Seng
Student id : 972752
Moreover, government may impose Pigouvian tax to correct the negative
externalities. By referring to the diagram 1.2, a tourism tax equivalent to the distance BC will
be imposed and this will reduce the amount of tourists to a socially desirable level of Q** and
eliminate the negative externalities represented by the triangle ABC. The tax revenue
collected by the government is equivalent to the area P**ADP and this revenue can be used
to compensate the losses suffered by tour companies and hotel due to cancelled room and
bookings. Moreover, national welfare can be improved if the tax revenue is use to improve
the infrastructure of the country.
However, tourists may not act in the same way as anticipated by the government.
Furthermore, care must be taken when determining the optimum level of tax so that the tax
levied will not reduce the amount of tourists beyond the optimum level causing tourist sector
to suffer more. Moreover, producer may shift to countries with lower taxes if the level of tax
is too high in one country. This will not reduce the negative externalities but instead creating
more problems such as unemployment.
In conclusion, nudge theory and Pigouvian tax reduce the negative externalities. It is
important for the government to evaluate cost and benefit before deciding which policies to
be implemented.
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Reference :


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